Income Inequality: Too many causes to ignore

A recent article in the New York Times tackled the issue of income inequality and suggested that it had been growing over time and that it was now "too big to be ignored". (Click here for article)

We will acknowledge that income inequality has been increasing throughout the world. What we take exception to is the following paragraph:

"Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear. "

First, there are many causes of income inequality. While all men (and women) are created equal ... that is only under the law ... not in economics. We all have different endowments. Some are tall, some are fast, some are intelligent, some are born into wealth, some are lucky. Income equality would first require equality at birth.

Second, not everyone has the same tastes. Personally, I greatly value my leisure time, so I am on the backward bending portion of my labour supply curve. Steve Jobs apparently has a labour supply curve that is always positively sloped. Surprise!! He earns more than I do. Income equality would require that everyone has the same tastes and behaves in exactly the same way.

What is unfair is to suggest that Steve Jobs should pay higher taxes to support me, just because we view leisure diffferently.

Third, welfare measures used to create income equality on a moral basis often rely on the assumption of diminishing marginal utility. And by that argument, the utility lost from a $10,000 decrease in income when income is at $2 million is less than the gain in utility from a $10,000 gain in income when income is $10,000. And therefore, society is better off when we take $10,000 from a rich person and give it to a poor person. The problem with this argument that, while it is true that a person values $10,000 more when they have $10,000 than when they have $2,000,000, we have no way of examining utility ACROSS individuals. No one, to my knowledge, has ever suggested that utility functions are cardinal, only ordinal. We can say that individual A gets more utility from two hotdogs than one, but we cannot say that A gets more utility from hotdogs than person B.

Redistribution of income always makes one person worse off. In that sense it cannot be a Pareto improvement, and that is the way most economists measure the welfare effects of social policy. And that is the reason we leave it to philosophers to argue the point.