Asking the right questions on inequality

A recent Congressional Budget Office report finds that inequality in America has declined slightly in recent years. Over at National Review, my colleague Avery Schreck and I argue that this distracts from more important questions such as what living standards are like for low-income people and how to raise them:

According to a well-known 2004 study by Nobel-winning economist William Nordhaus, entrepreneurs capture only about 2 percent of the value they create. By that estimate, for someone like Jeff Bezos to capture $1 billion in value, roughly $49 billion would accrue to customers, employees, shareholders, and suppliers. Unlike feudalism or socialism, market-based wealth is positive-sum. That’s a pretty good deal ethically and materially. In market-based societies, Gini coefficients are a question of aesthetics, not of well-being. 

It’s easy to get outraged over inequality, which is why so many people do. But if the goal is to reduce poverty, the main moral issue isn’t the mathematical ratio between high and low incomes. It’s making sure low incomes are as high as possible, and that they grow over time.

Instead of thinking about poverty in relative terms, it does more good to think in absolute terms. And in that, there is great comfort in the post-1800 wealth explosion that has raised living standards 30-fold since 1800. That long, slow process might not make the news, but it is lifting people out of poverty every day.

Read the whole thing here. See also Iain Murray’s and my 2016 CEI study on a similar subject, “People, Not Ratios.”