Inequality: How Much Is There and Is It All Bad?

Abstract

This article is an attempt at providing a better perspective on the debate over inequality. First, it claims that inequality is increasing, but not as much as many claim. In fact, the increase is modest and badly measured. Moreover, inequality is well below the levels observed prior to the 20th century. Secondly, it claims that inequalities must be decomposed between "good", "neutral" and "bad" inequalities. "Good inequalities" result from individual preferences and have no perverse impact on economic growth. "Neutral" inequalities relate to changes in family size, demography and marriage patterns and they have no moral implication whatsoever, as they merely exhibit changes in economic structures. "Good" and "Neutral" inequalities create no "social malaise". The "bad" inequalities are those that are socially noxious because they result from impairments in the capacity of individuals to make choices. Thirdly, this paper argues that a large share of the "bad" inequalities stem from government policies that push down the left-tail of the income distribution while pulling up the right tail. Although there are inequalities from birth, these are much costlier to combat than inequalities resulting from government intervention.

Keywords: Inequality, Public Choice, Political Economy

JEL Classification: D63, J21, J3, K2