You won’t hear it from politicians, but economic inequality is on the decline.
You won’t hear it from politicians, but economic inequality is on the decline.
T he national inequality debate is asking the wrong questions. Pundits are cheering a recent Congressional Budget Office (CBO) report showing a decline in income inequality in the United States, but focusing on the mathematical ratio between high and low incomes distracts from more important questions: How are low-income people actually doing? Are they becoming better off in absolute terms? Effective poverty-fighters focus on real people, not ratios.
The headline finding of the CBO report is a decline in the country’s Gini coefficient, which measures how evenly income is distributed on a scale from zero to one. A value of zero represents identical incomes for everyone, while a value of 1 represents one person earning all the income and everyone else earning nothing. In 2023 — the most recent year with available data, discussed in the CBO report — the Gini coefficient in America after transfers and taxes was 0.418. This is down from 0.442 in 2021. That puts the U.S. in the highest quarter or so among OECD countries.
Contrary to its reputation, the U.S. has a highly progressive tax code and a large welfare state. According to a different dataset from Our World in Data, taxes and transfers moved the U.S. Gini coefficient from 0.51 to 0.39 in 2024.
Medieval France and Italy were very unequal, with Gini coefficients estimated to have been around 0.70. Modern dictatorships with entrenched elites, such as Russia and North Korea, also have high inequality, though they do not publish reliable data.
The rich and powerful in these societies got that way through force and through political connections, which are a zero-sum game. In liberal democracies with relatively free markets, by contrast, most people must earn their money honestly through positive-sum trade. Entrepreneurs have to offer people things they value. In these societies, measures of inequality ought to count for very little.
According to a well-known 2004 study by Nobel-winning economist William Nordhaus, entrepreneurs capture only about 2 percent of the value they create. By that estimate, for someone like Jeff Bezos to capture $1 billion in value, roughly $49 billion would accrue to customers, employees, shareholders, and suppliers. Unlike feudalism or socialism, market-based wealth is positive-sum. That’s a pretty good deal ethically and materially. In market-based societies, Gini coefficients are a question of aesthetics, not of well-being. For example, Michigan Senate candidate Abdul El-Sayed recently said, “I’d rather have an economy that makes 1,000 millionaires than 1 billionaire.”
This statement is fine as an aesthetic preference. But that is different from making as many people as possible as well-off as possible. Each productive billionaire creates numerous millionaires through the wealth their ventures create. SpaceX’s IPO created about 4,400 new millionaires, for example. That’s part of the reason why, in the United States, there are currently about 28,000 millionaires for every billionaire.
Ethically, what is important is not relative poverty, but absolute poverty. Do people at the economic bottom have enough to live in comfort and dignity? Are they becoming wealthier over time?
Data from the St. Louis Federal Reserve’s FRED database find that people at the economic bottom are indeed becoming wealthier. This shows another problem with obsessing over inequality.
Many people have low annual incomes but plenty of saved wealth, such as retirees. Many younger people with children, mortgages, and student debt have higher incomes but little wealth, or even negative wealth. The important thing is that they all have a decent standard of living that improves over time, regardless of how their situation affects the Gini coefficient.
In inflation-adjusted dollars, the bottom 50 percent of households had about $700 billion of wealth in 1989. Since then, it has more than doubled to $1.7 trillion.
Progress has a funny habit of disappearing into the background once people get used to it. For example, walk into your kitchen and open the refrigerator. A century ago, American households were only beginning to adopt them. By the 1940s, more than 80 percent had one. Today, refrigerators are so ordinary that few of us would think of counting them as evidence of rising living standards.
Yet refrigeration did far more than make life convenient. It made food safer and expanded access to meat, dairy, fruits, and vegetables. For lower-income households, keeping food fresh longer also meant losing less of a limited budget to spoilage. Refrigeration also played an important role in medicine by enabling the safe transport and storage of vaccines.
The CBO’s finding of declining inequality could be good news for Americans. But the story is more complex. A more relevant question is whether the decline comes from tearing down high earners, or from building up wealth and opportunities for people at the bottom. The long-run trend is good, but it is not guaranteed to continue.
The Trump administration’s embrace of tariffs, industrial policy, and government equity in private companies could potentially increase the Gini coefficient, as it makes zero-sum cronyism more appealing to market actors than the positive-sum entrepreneurship that underpins economic growth. No matter the effect on inequality, however, Americans of all income levels will pay for such redistributionist schemes through lower living standards.