Good Inequality

In recent years, it has become common for many political leaders to say that economic inequality--the growing gap between the few who are very rich and the many who are very poor--is the greatest political problem for the United States and many European countries.  Two years ago, Thomas Piketty's Capital in the Twenty-First Century became a best-selling book warning about the growing economic oligarchy in the leading capitalist countries and recommending that the only solution was a redistribution of wealth through confiscatory tax rates of 80% to 90% for the wealthiest.

There has been little attention, however, given to one important point raised in Piketty's book: "Inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it" (19).  As one can see in Piketty's book, he thinks the inequality that he sees in the advanced capitalist countries is not justified, because the very wealthy haven't really earned their wealth, and those in the lower classes have no opportunity to improve their condition.

But is that really true?  Is it true that economic inequality shows a rigid class structure, in which those at the top stay at the top, and those at the bottom have no chance to rise?  Or is there a lot of mobility, with people moving up and down the class structure?  If there is such mobility, wouldn't that be a good form of inequality?

In fact, there is a lot of evidence for such mobility.  Economists who study this have shown that over 50 percent of Americans will be in the top 10 percent of income-earners for at least one year in their lives.  Over 11 percent of Americans will be among the top 1 percent of income-earners (people making a minimum of $332,000 per year) for at least one year in their lives.  94 percent of the Americans who join the top 1 percent group will keep that status for only one year.

Moreover, the factors that explain higher household incomes among Americans are not fixed over a lifetime, and they are to some degree a matter of personal decisions, which means that people are not forced to remain in one income bracket for their whole lives.  American households with higher than average incomes tend to be households where the members are well-educated, in their prime earning years (between the ages of 35 and 64), working full-time, and are in stable marriages.  Households with lower than average incomes tend to be households where the members are less-educated, outside their prime earning years, unemployed or working only part-time, and they are likely to be unmarried.

A large part of the growth in economic inequality among Americans over the past 40 years has been a result of assortative mating:  college students marry people they have met in college, and then form two-income households with the higher income levels correlated with higher education.  These "power couples" are then in a position to help their children become successful, because their children will inherit the good genes of their parents as well as the good environments of rearing the parents provide.  Since high educational achievement is correlated with high IQ, and since the higher paying jobs in a highly technological and mentally challenging economy require higher intelligence, what we see here is the emergence of what Charles Murray has called a "cognitive elite."  So if we really wanted to reduce economic inequality, we would have to prohibit intelligent and well-educated people from marrying other intelligent and well-educated people.

Consequently, people can raise their chances of becoming wealthy by getting a good education, by getting married to other well-educated people, by getting lots of professional work experience, and by forming two-income households.  When people do this, they create economic inequality.  But this is good inequality.

Some of my posts on Piketty, Murray, and economic inequality can be found here, here, here, here, here, here., here, here., here., here, here., and here.