Becker on Inequality

by F.

The World Institute for Development Economics Research (WIDER) released its report on wealth inequality a couple weeks ago, causing a flurry of stories in the mainstream media, a few of which I’ve linked to previously. Gary Becker responds to the stories by pointing out that world income inequality is decreasing, and income inequality is just as important as wealth inequality, if not more so.

What’s the difference? As The Economist notes, “income is the flow of money a nation or household receives in a year; wealth is the stock of assets it has accumulated over its life so far, minus its debts.” Becker says that wealth inequality “is one component of inequality, but it is by no means the major determinant of inequality in wellbeing.” When considering income inequality,

the income data show a sizeable decline, not increase, in world income inequality since 1980. This is mainly but by no means entirely due to the remarkable rate of growth in incomes in two quite poor nations, China and India, which contain about 37 percent of the world’s population. Studies also show that both the number of and the fraction of the world’s population who live on either $1 or $2 of income per day has fallen quite sharply during the past 25 years, again partly due to China’s and India’s growth.

And when we look at “real income” broadly (including “wellbeing”), things seem to be getting better:

World inequality in health among countries has declined greatly since 1960 when measured by life expectancy at various ages, even though the AIDS epidemic in Africa has largely eliminated the gains in life expectancy in that continent after 1970. Inequality in “full” income among countries has declined much more rapidly than inequality in per capita GDP since 1960, where the growth in full income is defined as the sum of the growth in GDP plus the value placed by individuals in different countries on the improvements in their life expectancy–

Note that this is world income inequality. In the United States, income inequality is increasing:

Income inequality within the United States and many other countries has indeed grown a lot since 1980, in part due to much greater returns on education and other human capital, and in part due the somewhat related growth in incomes at the upper end…. This widening inequality appears to be largely due to technological and other changes, such as globalization, that have increased returns to persons with more education and other human capital, including high-end abilities.

What can be done about United States income inequality, according to Becker?

America should do a much better job of providing a way for able young persons from more disadvantaged backgrounds to finish high school and go to college–the past 25 years have been devastating for persons with little education. This is not an easy problem, but head start and related early childhood programs seem to be effective, legalization of drugs would reduce the temptation for inner city youth to drop out of school to sell drugs, and I also support greater competition among schools.

If nothing is done, we may end up like Brazil, according Paul Krugman. In a piece in Rolling Stone, he warns about rising inequality in the US:

Today, we’re completely out of line with other advanced countries. The share of income received by the top 0.1 percent of Americans is twice the share received by the corresponding group in Britain, and three times the share in France. These days, to find societies as unequal as the United States you have to look beyond the advanced world, to Latin America. And if that comparison doesn’t frighten you, it should.

The Economist, using OECD and World Bank numbers, disagrees, noting that America is nowhere near Brazil (yet).