More Great Stuff by Scott Winship on Income Inequality

Scott Winship of the Brookings Institution has another great article about inequality. He starts with a useful visualization of what inequality at the very top looks like and how it varies depending of what your starting point is:

Imagine that income corresponds to altitude and that we put the top one percent’s poorest household on the top floor of Dubai’s Burj Khalifa-the world’s tallest building. Its occupation of the 160th floor, 1,900 feet up, would correspond with a pre-tax income of $600,000 in 2010. Question: where would the richest household in the bottom 98 percent — the one at the “98th percentile” — end up? With $350,000, it only would be on the 93rd floor-three-fifths of the way up the building, and 67 floors below the household at the 99th percentile. The household at the 90th percentile would only be on the 35th floor, and the median household-the one right in the middle of the income distribution-would be on Floor 13. In other words, the gap between the median household, which had about $50,000 in 2010, and the 98th percentile is not dramatically greater than the gap between the 98th percentile and the 99th percentile. Maybe Occupiers should have organized around the banner of “the 98 percent.”

Here is the illustration:

Then Winship asked whether we should care. He explains that while there seems to be little downward mobility at the top (basically, if you are super-rich, well, you stay super-rich), the inequality may be aesthetically unpleasant to some, but there “is little compelling or consistent evidence showing that such extreme inequality — as against, say, European levels or the lower American levels of the 1960s — actually harms the middle class or poor.” This of course doesn’t mean that inequality is desirable, either, but there aren’t obvious or substantial negative effects.

He concludes:

When the numbers are correctly measured, compensation paid to average workers has kept up with increases in the value of what they produce. The very rich receive much of their bounty in the form of capital gains, dividends, and stock options that depend on the rise and fall in the value of investments, as determined by a global economy of savers. These windfalls reflect one part financial market exuberance (irrational or not, hardly a conspiracy among the rich to take from the rest of us) and one part gains from deferred receipt of income-the cost of getting people to loan out their money when there’s a risk it won’t come back.

In the end, we may think these incomes are simply too high-like knowing pornography when we see it. That’s a normative judgment; liberals who want to make an empirical case actually have to do so.

The whole thing is here, and this is Winship’s testimony on inequality, mobility and opportunity before the Senate Budget Committee back in February.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, ...