Thursday, September 16, 2010

Straw Man Argument About Inequality

Commenting on numbers that again reflects that America has much higher income inequality than others while also showing that many other countries have similar median income and most OECD countries have higher income for the poorest 10% of the income distribution, Ryan Avent says that this disproves that "prosperity requires an unequal distribution".

But few, if any, people really argue that high inequality in itself is something which necessarily promotes (much less is an absolute requirement for) prosperity. The argument that is made with regard to for example tax policy is that government attempts to reduce inequality through fiscal redistribution and many other means reduces growth.

This doesn't mean that other factors (like for example Norway's large oil assets) can't compensate for it. Nor does it mean that low inequality will damage growth if low inequality is caused by for example limited differences in skills in the population or the absence of asset price bubbles or other government interventions that benefit the wealthy. What is damaging to growth is if redistribution efforts weaken incentives for wealth creation.