How dare you have more stuff than me

Since the Democrats roared back into Congress this November, there's been a lot of chatter in cyberspace about America's income inequality, and what to do about it. I've been somewhat dismissive of this topic in the past, arguing that growth is more important (if I get a new couch, who cares if you get two new couches). But that doesn't mean that I think inequality is not an issue at all. In fact, my basic political maxim is that if people care about something, it's important by definition.

So let's talk about inequality for a minute.

The Economist's blog, "Free Exchange," tends to pooh-pooh inequality much more than I do:

All but the most hard-bitten libertarians believe that wealthy societies have an obligation to keep their poorest members out of extreme poverty, provide basic social services, and educate the young. In most countries the better educated and higher skilled workers are rewarded more for their work, but is this really bad? As a society, should America and Britain strive for a Scandinavian ideal of equality, or maintain the belief that if you work hard it is possible, and even admirable, to become very rich?...

[However, inequality] certainly can breed discontent, particularly if some people feel that they are being shut out of the American dream.

I think this last point is a bit too important to be dismissed with a single sentence. The human tendency to compare ourselves to our neighbors is strong, as is the emotion of resentment - "How dare that guy have more stuff than I do when he doesn't work any harder." Now, we can sit here all day and say "Well, suck it up, don't begrudge your fellow man his success," but one eternal truth of humankind is that rationality never completely conquers emotions, and emotions can be devastatingly powerful.

And resentment born of too much inequality can spark a pernicious backlash. In rich democracies, it can lead to protectionism that ends up hurting everyone; in poor democracies, the election of "leftist" demagogues; and in non-democracies, armed revolution and the deaths of millions.

So the Economist's bloggers may be cavalier about inequality, but those of us who recognize the human nature of economic agents are rightfully concerned.

But what exactly to do about inequality is a much trickier issue. Despite its dismissive tone, the Economist presented some good ideas:

Rather than worrying about how rich some American workers are getting, the focus should be on giving everyone a an equal chance to be successful. This might mean making the tax code less regressive by expanding the earned income tax credit, eliminating tax subsidies to the rich, and improving access to quality education. Filling that last tall order should keep everyone too busy to worry about Paris Hilton's yacht.

I think this basic concept is very sound. Equality of opportunity won't insure perfect equality of outcomes (duh), but it will tend to reduce inequality by letting people's natural abilities take precedence over the advantages or disadvantages of their social position. This is the basic principle of the American economy, and I think we've strayed too far from it.

That said, there are a lot of other ideas out there. Matt Yglesias, who cares a lot about inequality, wonders if the Fed is adding to the problem by raising interest rates whenever "labor costs" (i.e. real wages) go up. Kevin Drum agrees. Of course, the alternative would be for the Fed to keep interest rates low at all times, allowing inflation to rise, which might not necessarly be a good thing.

Others think unions are the answer. I've always been a bit wary of unions, because I can't shake the feeling that they contributed heavily to the death of the American auto industry. On the other hand, that might not be a typical situation.

The important point to remember, when we're considering inequality, is that it's a problem but it's not the biggest problem out there. It's fairly easy for people to slip from thinking "Inequality needs to be addressed" to thinking "Capitalism inherently creates inequality, and therefore we should curb capitalism wherever we can." It is true that any functioning market is going to create disproportionate profit for some businesspeople (even as plenty of others fail), but the answer is not to just go out and stop all the markets from functioning.

That's why I believe that increasing opportunity for the people on the lower rungs of the socioeconomic ladder - primarily through better education, urban improvement, and lower taxes for the poor - is a lot more effective than decreasing opportunity for those at the top. Those two things are not one and the same, because the economy is not just a zero-sum game of the poor against the rich to see who can grab the most cash.

Resentment may be the reason we should worry about inequality, but we can't let it creep into our own policy decisionmaking.

Note: I realized, belatedly, that Larry Summers recently wrote an article basically saying everything I just said, but more clearly.