Optimism: Vol 1 Inequality

I’ve just finished reading Matt Ridley’s excellent book, “The Rational Optimist.” Ridley evaluates technological progress, human history, and many current socioeconomic problems in a hardnosed, analytical manner, but comes to rather cheery conclusions. Ridley is even optimistic about the hardest problems, like poverty in Africa and climate change. Now, he’s not saying "everything is fine". He does not deny the severity of our socio-economic problems. His point, rather, is that there is cause for optimism because there are improvements on the horizon.

I’m an optimist too, although not about everything. That got me thinking: what socioeconomic trends am I optimistic about, and why? One issue that people seem to be down about, lately, is economic inequality. I see why, but I'd like to explain why i'm an optimist on this issue.

The OWS people are very pessimistic about inequality. They cite some pretty harrowing statistics about middle class stagnation, the gains made by the “richest 1 percent” over the last 30 years, and the higher costs certain goods such as health and education.

I can’t share this pessimism. One reason is that I’m not so convinced about the middle class stagnation thesis. Don’t get me wrong, I’ve seen some of the numbers. But I also know a little bit about the way that they are calculated, and the difficulties there; and I’ve seen some alternative estimates. For example, once you include benefits from taxation, non-monetary benefits (like employer provided healthcare), the inequality picture changes quite a bit.

Second, some people argue (convincingly, IMO) that the CPI overstates inflation. There are some reasons for this, but basically, when you look at a basket of goods now and compare it to one gathered in 1970, price doesn’t capture quality. So, if inflation is lower and the quality of goods available is higher, the overall standard of living picture improves for the middle class.

Third, there are some statistical artefacts in inequality calculations based on “households.” For example, as households break up due to divorce rates, this affects the picture just because the size of the household shrinks. But if you take into consideration the size of households, the picture changes and looks a little better.

Fourth, some of the observed inequality in the American political system is due to demographics. A lot depends on whether you're married, in the prime of your working life, and educated. This type of inequality is far more innocuous than the systemic inequality that the OWS people are protesting.

Finally, inequality stats that you see are snapshots. They do not tell us anything about mobility. It doesn’t mean that the same people are in the same categories. Studies that track people over time (called panel data) show that there is significant movement between classes.

So, while there is clearly inequality, I do think that everyone, in general is better off than they were 30 years ago. I think proper readings of evidence show this to be true. (I’m not an expert, but the experts certainly don’t agree, so I’m going with what I understand) As a very last point, I also have no problem that Sidney Crosby, Bill Gates, or the founders of Google make a lot of money. There is a market for what they do. Some rich people deserve to be rich. Others don’t. Here I’m thinking of the guys in finance who shoudl be out of business but continue to get huge bonuses because of government bail outs, tax exemptions and subsidies etc…

One final thought about the language of the issue. People often complain about the “distribution of wealth” or that one group has too large a “share of the wealth.” But this language doesn't make much sense. Wealth isn’t shared to begin with. It is not distributed by anyone (except when the government taxes people). It is created. It does not make logical sense to complain that the founders of MS have too large a “share of the wealth” because there was no “shared wealth” to begin with. That wealth was created by the innovation and the subsequent commerce and trade.

Instead of inequality, societies should be more concerned with the condition of the poor, the bottom 10 percent. And once again, while there is much room for improvement, I find reason for optimism in the fact that over time, both globally and within the developed West, the poor are getting richer.