Ezra Klein’s remarks on inequality led to a pretty rich discussion, for the most part, disagreeing with his proposition that inequality isn’t the defining challenge of our time. His response today is great, making a clear – and agreeable – case that full employment is the most urgent problem facing policymakers today. The problem, I think, is that this still conflates importance with urgency and that which implies the former most certainly does not so the latter. Most of his recent post is correct. Unemployment is depressing median wages and absolutely nothing is more important right now than job creation.
But I want to focus on another, somewhat tangential, part of his post. Ezra writes:
Within the general rubric of “inequality,” income inequality gets a whole lot more attention than wealth inequality. But wealth inequality is much more concentrated and, in various ways, much more dangerous for the social structure. In particular, it’s wealth inequality that really ossifies social mobility.
The children of the top one percent only occasionally manage to match their parent’s incomes. But they often receive massive inheritances that grow over time, installing them atop the economic ladder and giving them a political reason to fight like hell against progressive tax policies (the Walton family is a good example here). And this kind of inequality doesn’t have any of the salutary benefits of income inequality: Massive inheritances don’t make people work harder. They give them a reason to never work very hard at all, and to try to influence public policy so they never have to work hard in the future, either.
I’ve written something along the same lines before, but have revised my belief that wealth inequality is an important signal. I’ll first detail why I think wealth is not too important before noting some reasons why it might be in the future. For one, wealth inequality has almost always been bad and – unlike income inequality – is not showing significant deterioration. In fact, the richest one percent actually saw a decline in their power over the Clinton boom:
Of course, the wealth Gini is at any given moment in time “worse” than the income Gini, but that’s like comparing apples and oranges. To consider why think about how wealth and inequality thereof accrues: savings and investment. At any arbitrary level of income inequality, wealth inequality will increase, with a higher propensity to save among the rich as the first order effect (and capital gains as an important feedback).
It’s pretty shocking how static wealth distribution has been, then, given the increasing income inequality. It’s difficult to argue then that wealth inequality – which is hardly a changing feature, unlike income – actually matters for political process in the way Ezra suggests. As disgusting as the Walton family’s politics might be, they have if anything only ossified the existing wealth inequality, without any first order effect on income (as Ezra points out, why should useless trust fund babies care about income taxes when they aren’t actually doing anything productive enough to earn seriously). Arguing that it is important that wealth inequality ought to be more important by arguing that wealth inequality engenders policies to protect wealth inequality is begging the question.
A focus on wealth also obscures monetary policymaking. Quantitative easing almost certainly increases wealth inequality, though there are good reasons to believe it improves income inequality (which over the long run would decrease wealth inequality… as you can see the interplay and economic dynamics are complicated to say the least) through a tighter labor market. In fact, one reason why monetary policy over the past decade did not increase wealth inequality as much as it could have is America’s expensive, pro home ownership programs like interest deductions and guaranteed loans.
In a freer real estate market – one that many economists agree would be more efficient and fraught with less moral hazard – it is likely that homes ownership would be more concentrated, with much of the middle class renting from the rich. The easy money policies of the early and late 2000s, then, would have increased wealth inequality that much more. But that would not mean anything, and should not be the basis for any policy action.
On the other hand, some important things are changing and wealth inequality may be more important in the future. As Piketty and Zucman document in a must-read paper, the wealth-to-income ratio in rich countries has increased substantially over the Great Moderation challenging conventional economic wisdom that this ratio is constant over time and reflecting lower population and productivity growth coupled with higher savings.
However, their data is a lot less remarkable for the United States, where population growth is relatively robust, and savings low – the ratio has increased though not markedly so. Still, in an age of automation and increasing capital shares, the increasing ratio could become an important economic issue.
Ultimately, though, capital income is still income. The return of wealth is not as much a reason to worry about wealth inequality but for capital tax parity with income – something progressives worried about income inequality have long advocated.
The importance of wealth inequality boils down to this. It is difficult to argue, as I think Ezra does, that this matters in and of itself because wealth inequality has historically been around as high as it is, and few would have suggested this is a problem a few decades ago. Suggesting that high wealth inequality begets more wealth inequality is not just assuming the conclusion (that this is bad) but also is not empirically guaranteed (though I am less convinced of this, data show that the 1%/median wealth ratio has increased substantially).
The arguments that wealth inequality matter for other reasons go back to some form of income inequality, usually distribution of capital gains. These are central to debates about inequality of all stripes. Wealth is not at all irrelevant, though. Flows matter more than stocks but when we as a society realize that deeper safety nets and education for the poor are important, we’ll tax the flow of inheritance every year instead of income which is scarce relative to the flow of wealth.