If you had a choice, which would you prefer?
- Earn $20,000 when the average in society is $25,000.
- Earn $18,000 when the average in society is $15,000.
In one Swedish study, selecting (the equivalent of) #2, more people preferred earning more than others, even if that meant earning less.
Where are we going? To good and bad inequality.
Economist Tyler Cowen has pointed out that U.S. median income earners have access to some of the best products. Think iPhones, Netflix, Facebook, Google, vaccines, antibiotics, mineral water. And yet FT columnist Martin Sandbu tells us that although median earners have more, they can feel that they have less because of positional goods.
Certain “positional” goods and services like homes and weddings and cars can generate images of inequality. Through the size of a home, the elaborateness of a wedding and the characteristics of a car, we can place ourselves in an imaginary status line-up. Believing this status line-up is counterproductive, Cornell Professor Robert Frank reminds us that between 1980 and 2007 the size of average new homes ballooned by 50 percent and the price of an inflation adjusted wedding almost tripled.
You can see why salary also can be a positional good.
Our Bottom Line: Good and Bad Inequality
So yes, while we have positional goods and services fueling negative images of inequality and cries for government intervention, I prefer to paraphrase what economist Branko Milanovic said In The Haves and the Have-Nots:
- Identify the cause of inequality. For example, determine whether income inequality increases or decreases as the economy grows.
- Identify the impact of inequality. For example, does inequality create positive or negative economic incentives?
- Identify the ethical implications of inequality. For example, are there good and bad ways to have ascended to affluence?
Only by looking at the causes, impact and implications of inequality can we decide when it is good or bad.