Yesterday, NPR had a short segment on income inequality. The growth of income inequality has triggered some very passionate debate on both sides of the political aisles. I don’t think much of the debate has been very productive. While there isn’t any doubt that income inequality has increased in the last 20 years, I am having a hard time understanding why this matters so much. Are we worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged? We shouldn’t. It may be aesthetically annoying, but it doesn’t impose any actual costs on anyone as long as the pie is not fixed. As we have seen during the last recession, when the pie shrinks, even the top 1 percent takes a hit.
Now I would feel very differently if I thought that higher income people are getting wealthier because of their political connections, corruption and other dirty trick, we should not get overly agitated about inequality. But by all accounts, and more the most part, it isn’t the case. I would also probably be bothered if we had data showing that this large increase in wealth at the top has a net negative impact on society. But again, it’s not the case.
However, as you know, I have been arguing that those who care about inequality perse won’t be able to address it by making the tax code more progressive. A more progressive tax code without changes in the way we spend taxpayers’ dollars (on the middle class rather than the poor) wouldn’t address inequality.
What I think we should care about, however, is income mobility. According to Scott Winship at The Brookings Institution income mobility while not enough is