Pie Sizing and Slicing

A January 9, 2007 piece titled Why Income Equality Matters by Charles Wheelan, Ph.D., writing as The Naked Economist on Yahoo! Finance, is a fascinating read, especially in light of the current credit crunch and bailout and the upcoming elections.

I’m particularly intrigued by this part:

There’s a very interesting strain of economic research showing that our sense of well-being is determined more by our relative wealth than by our absolute wealth.

In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.

Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.

The point — and this is still a nascent field — is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that’s sliced less equitably.

This point, according to Wheelan, constitutes one of two reasons to be aware of income inequality in the US, the other being that “Income inequality doesn’t motivate anything good when there’s no hope of sharing in the pot of gold”.

I don’t see how one could argue against the latter point. As to whether the nation would be better off with a smaller, more evenly divided pie, to me it intuitively makes sense. As Wheelan points out, those in even the most impoverished US households “can turn on the television and see how the other half lives”.

In the upcoming election one of the many contrasts between the two major party presidential candidates relates to the probable respective effects on income inequality. Princeton political scientist Larry Bartels, in his book Unequal Democracy: The Political Economy of the New Gilded Age, summarizes the major parties’ track record:

Under Democratic presidents, poor families did slightly better than richer families [at least in proportional terms], producing a modest net decrease in income inequality; under Republican presidents, rich families did vastly better than poorer families, producing a considerable net increase in income inequality.
[hat tip Everything Language and Grammar]

Indeed, one need only compare Barack Obama’s tax proposal to John McCain’s to predict income inequality would increase in a McCain administration. So if this issue is important to you, whether because of the likely overall effect on the nation’s collective well-being, your sense of fairness, or other reasons, direct your support to Obama.

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