Wednesday, September 15, 2010

Milanovic on caring about inequality

Just a brief note to recommend an excellent essay by Branko Milanovic, "Why We All Care About Inequality (But Some of Us Are Loathe to Admit It), published in Challenge, Vol. 50, No. 6, November/December 2007, 109-120. (I find that every issue of Challenge, published by M.E. Sharpe, Ltd., has something stimulating in it.)
  Milanovic's article deserved to be cited in Ch. 9 of The Economics Anti-Textbook, where we criticize Martin Feldstein's misuse of the Pareto Principle when he makes the claim that we should not care if growth takes the form of increases in income for the rich and nothing for anyone else. Milanovic also finds Feldstein's claim totally unconvincing. He points out that it's an empirical fact that people care about other people's income, particularly the income of those who have more than they do, and that economists have to deal with that.
  It is pointless condemning this as envy, as Feldstein tries to do, and in any case, as Milanovic notes, the concern for what others have is also connected to judgments about fairness and justice and feelings of self-worth. (One can imagine Professor Feldstein's annoyance if all of his Harvard colleagues got a bonus added to their salaries and he got nothing.)
  Milanovic's makes some interesting comments about how he's found that many economists seem to be averse to research on inequality. Poverty, ok, but inequality, no. For example, "[i]t seems far better to focus on impoverishment than on inequality" writes Anne Krueger.
  Milanovic notes that when he started working on inequality, he was not popular because he lived in a communist country where inequality was not supposed to exist, although it did. Then when he lived in capitalist societies, he was no more popular: "rich people (and their supporters) similarly tended to object to the topic. They felt that any inequality that existed was right, since in their view every income was fine, just, and necessary, almost God-ordained -- market having taken over the role of God. Empirical studies were superfluous. The studies could merely sow trouble and discord and possibly lead to questioning of the existing social order."
 He then nicely shoots down the claims of those economists who claim that we should be concerned about poverty, but not about inequality. He writes: "To say that one cares about poverty means that his welfare function is affected by everything that happens below some arbitrary income level where the poor dwell, ..., while any income change above it (except if it affects his own income) leaves him indifferent." An implausible claim about actual welfare functions. Economists like Feldstein try to reinforce the argument with ethical claims that it's good to be concerned about the poor, but morally reprehensible to be concerned about other's incomes above the poverty line and certainly above one's own level of income.
  He suggests that economists who make these kinds of arguments are really trying to deflect attention away from inequality. "The concern with poverty is a price that the rich are willing to pay so that no one questions their incomes."