Economic Inequality - does it matter?
One argument for why we should care is that income inequality causes economic collapses. The two peaks in income inequality line up nicely with 1928 and 2007.
But does inequality really drive recessions? This graph doesn't line up well with recessions in 1948, 53, 58, 60, 74, 81, 90, or 2001. Why does income disparity affect larger depressions/recessions, but not smaller ones? Would this relationship mean that nations with higher income disparities should have deeper recessions? Could it be, that the graph is only showing that the rich own most of the overpriced assets before the bubbles burst? Is the disparity driving the recession, or is something else driving both? I am skeptical.
Disappearing Middle Class
The story about a disappearing middle class is pretty standard now, but it doesn't seem to line up well with careful analysis. The middle class hasn't gotten poorer or stagnated. Thomas Cooley (NYU economist) explores this in good detail in a series of two consecutive articles. Many other economists agree. The amount of income isn't fixed, and the rich getting richer doesn't necessarily mean everyone else is getting poorer.
Last week, the CBO came out with a paper (PDF warning) on just this issue. In real dollars, no income bracket has seen earnings fall in the last 30 years. However, nearly all the gains have been concentrated in the higher percentiles of earners. So lower percentiles have seen their income shrink as a share of total income, but the purchasing power has stayed about constant and absolute standard of living has been rising. Total amount of income in the world isn't fixed, the the gains to the top 1% haven't come from the losses of others.
There is disagreement over these findings. Other organizations have reported falling earnings. The difference seems to be largely a result of selecting different deflators (the price index used), household income groupings, and whether or not to include fringe benefits (e.g. employer contributions to healthcare plans). The deflator is important because the CPI basket has expanded in the last 30 years to include many things that didn't exist 30 years ago (thus cannot be priced). So we have many different deflators, each with its own weakness.
How you count households matters too, because in the last 30 years we've seen a massive decline in married-couple households and an increase in no-spouse households for both genders. When two people live together, when do you count them as a single household and when are they two households (e.g. roommates) in the same house? So this stuff is tricky, and just citing numbers doesn't really convey any meaningful information.
Others have made the argument that larger income gaps are correlated higher crime rates, homelessness, and other bad things. This may be true, I don't know, but I haven't seen any data suggesting this is true.
I've also seen the argument that a huge gap makes a "fairness" argument. A bank CEO's labor surely isn't a million times more productive/valuable than a minimum wage laborer, right? Well, that's true, but wages aren't reflective of just productivity, they're also a function of scarcity. Very few people can do a bank CEO's job; a lot more can flip burgers. That's not to say CEOs aren't overpaid - the inbred relationship between boards and executives almost ensures they will be - but it is to say this kind of argument isn't reflective of how the world actually is.
Decreased Economic Mobility
One argument does hold some weight for me. Someone pointed me to an academic paper which reinforced previous findings that inequality increases efficiency and capital accumulation to a point, then at some point that when income inequality becomes large, it becomes more difficult to accumulate capital and efficiency suffers. Essentially, it is harder to get out of lower income brackets.
So the inequality problem isn't about rich people benefiting at the expense of the poor, it is about immobility between the groups. That theory makes a lot of sense to me, and it seems consistent with the flat growth of real income in all but the highest brackets. This is bad for a lot of reasons, but I think "fairness" is an appropriate reason to bring up here. Future prospects of higher income gets people to work harder and better. If people don't expect to "move up," so to speak, this can create permanent classes, instability, and general unfairness.
We Should Care
To me, economic immobility is a good reason to care about income inequality. I don't know what is causing the inequality - some have suggested higher levels of education and technology may be driving forces, others suggest corruption and graft - but that perhaps a topic for another post. I also don't know what the remedy is, again perhaps a topic for another post.