Income Distribution “What Ifs”

A tweet from New York magazine writer Eric Levitz provides an opportunity for a quick point on how we ought to think about economics:

If income had been distributed as evenly over the past five decades as it was in 1970, the median full-time worker in the U.S. would now take home $92,000 a year (instead of $50,000), according to a new RAND study.

That is, if every income group had gone up proportionally, the median would be much higher.  That’s another way of saying that the people at the top have seen greater increases than those below them.

However, these sorts of “proofs” of systemic inequality skip over important points.  For one thing, the individuals in each group are not the same people.  This is true for families; we aren’t simply seeing the lift-off of a preexisting aristocracy.  It is also true of individuals; many of the people who were at the lower end of the distribution in 1970 are now at the higher end.

Inasmuch as the Baby Boomers would have been just getting out of college at the beginning of this curve, one must question the entire calculation.  A uniquely large cohort of Americans were poor back then and are now rich (or at least richer) simply as a function of their ordinary life cycles.

Two other important points get to the more-interesting mental experiments of “what if” counterfactuals.

First, if our society had changed things to ensure that income gains would be distributed evenly, would we have had as much absolute growth? Would the people who took productive actions and risks to get the most money have still done it if their reward were less and the baseline for doing nothing were higher?  If they had not, it would have reduced the growth for everybody.

Separately, what would an even, general increase in income do to the value of money?  If income growth falls on the population like morning dew, everybody has more money for the things that everybody wants, and it is reasonable to predict that the cost of all goods would rise to capture some of that additional wealth.

Competition between individuals and between goods and services pushes down prices where they can go down and drives up innovation, as new people strive to claim whatever excess wealth there is in the system.  Comparative inequality is therefore inevitable in a healthy system.  The only question is whether the benefits to everybody are greater than what they otherwise would have seen.

Even accepting a utilitarian, progressive view of economics, if exponential growth at the top produces a doubling of wealth in the middle, that is preferable to an alternative in which the middle saw half the growth.  Beyond just money, if this competitive system makes necessities cheaper while introducing new innovations that make our lives better, that is just more justification for the unequal distribution.

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