Inequality Is Not the Problem

When people ask me about whether basic income addresses inequality, I tend to punt on the question. I explain to them that basic income solves the problem of how to provide spending money to consumers. I remind them that there are important problems that basic income doesn’t solve.

Specifically, basic income does not address inequality. It takes nothing from the rich. It merely gives the poor better access to the economy’s resources. If we have the resources to end poverty, which we do, then basic income ends poverty.

Everyone can get behind ending poverty, but inequality is a more contentious issue. The truth is that I don’t think inequality is an issue worth addressing—at least not the way it’s usually talked about. I care about how poor the poor people are, not how rich the rich people are. I feel that the issues of income inequality and wealth inequality are largely irrelevant to human prosperity.

This position is somewhat unpopular among my left-leaning friends. So it made for an interesting discussion when our Boston Basic Income discussion group talked about inequality on June 28th.

To prepare for the discussion, we listened to a 2017 Freakonomics Radio episode entitled “Is Income Inequality Inevitable?”

I spent last week in Davos being asked nonsensical questions like, “How do we kill inequality or remove inequality?” And I’m not sure that inequality is the right concept. It has so many sides to it and so many causes and so many effects, that focusing exactly there doesn’t seem to be the right thing. In fact, I just got something from some social organization today, which said, “We define inequality as stagnant wages”—which is a very odd definition of inequality. Inequality is about, to some extent, the dispersion.
— Sir Angus Deaton | “Is Income Inequality Inevitable?”
Freakonomics Radio

The definition of the word “inequality” has become so diluted that it now serves mostly as a vague complaint for activist causes to rally around. A common moral thread running through this political unrest is the idea that the rich are enjoying their privilege at the expense of the poor. The sentiment is understandable, if misguided. It’s easier to inspire a movement when there’s an enemy to fight. If poverty is nobody’s fault, it’s hard to know where to start.

In their bestselling 2009 book, The Spirit Level, Richard Wilkinson and Kate Pickett try to make the case that inequality, rather than poverty, is the primary determiner of humanity’s most damaging health and social problems.

The problems in rich countries are not caused by the society not being rich enough (or even by being too rich) but by the scale of material differences between people within society being too big. What matters is where we stand in relation to others in our own society.
— Wilkinson & Pickett | The Spirit Level | p. 25

Of course the problems are not caused by the society as a whole not being rich enough. They’re caused by individual people not being rich enough. This book’s analysis reflects exactly what you would expect to see if absolute poverty (of the individual) were to blame. But Wilkinson and Pickett choose their data set in such a way that absolute poverty is confounded with income inequality.

They decide only to look at 23 of the richest countries in the world. Naturally, we should expect these countries to have similar levels of average income. To understand why this decision is a mistake, see the below diagram comparing three hypothetical countries that all have the same level of average income, but different levels of inequality.

Inequality confounded with absolute poverty

The horizontal axis plots the population by income percentile. The vertical axis plots their income level. The dotted line is the poverty line. The size of shaded area below the poverty line is the level of absolute poverty in that country.

Which country would you rather live in? Obviously the one with less absolute poverty, right? It’s a no-brainer. If this book were called Poverty is Bad, then it wouldn’t be claiming anything controversial.

To measure the effects of inequality while controlling for the effects of absolute poverty, we must compare countries that all share the same level of absolute poverty. This requires that we allow the countries’ average incomes to vary.

Inequality controlled for absolute poverty

Now which country would you rather live in? Which country would you rather be poor in? There’s some research that suggests poor people in poor areas can be less unhappy than poor people in rich areas. But is the answer to make everyone poor? I don’t think so.

Real-world countries usually achieve greater equality by redistributing money from the rich to the poor. If, instead, they just gave money to the poor without taking from the rich, we would likely see many of the same positive social and health outcomes, but much less reduction in inequality. That’s what basic income gets us. Wealthy countries have the capacity to provide more for people.

Political power, on the other hand, is not something we can just produce more of. In an ideal world, we would like political influence to be more evenly distributed among the people. But no amount of taking money away from the rich will give more agency to the poor. Basic income, on the other hand, gives people more freedom to be civically engaged. We can also do a better job of regulating the use of money in politics.

If rich people are using up resources that could be better spent addressing poverty, then that’s a problem we should address. But as long as rich people being rich isn’t somehow causing poor people to be poor, I’m happy to let inequality slide.