Why Rising Income Inequality in the United States Should Be a Nonissue--Posner
Becker explains the rising income inequality in the United States persuasively; I would add only that as society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying inequality--which is very great--between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck. Public policies designed to reduce income inequality, such as highly progressive income taxation and middle-class subsidies, are likely to reduce the aggregate wealth of society, and therefore should not be adopted unless rising income inequality is a social problem.
Is it? That depends, I think, on average income (and hence on the wealth of society as a whole), on whether incomes are rising (at all levels), and on the particular way in which the income distribution is skewed. The higher the average income in a society, the less likely is inequality to cause envy or social unrest. The reason is that, given diminishing marginal utility of income, people who are well off do not have a strong sense of deprivation by reason of their not having an even higher income. If, moreover, their income is rising, they are more likely to derive satisfaction from a comparison of their present income to their former income than to be dissatisfied by the fact that some other people‚Äôs incomes have risen even more. In my book Frontiers of Legal Theory, ch. 3 (2001), I present empirical evidence supporting a positive correlation between political stability on the one and average, and rising, income on the other hand.
It is true that progressive taxation and other income-equalizing policies are found in rich rather than poor countries. But that is partly because poor countries lack the governmental infrastructure for administering complex policies and partly because these societies have powerful social norms of equality. Studies of peasant societies find that "black" envy is widespread in them--that is, if your neighbor has a nicer barn than yours, you'd prefer to burn it down than to exert yourself to build an equally good barn. "White" envy, in contrast, better described as emulation, promotes economic growth.
As for the way in which a society's income distribution is skewed, if, though average income is high and rising, there is a very small, very wealthy, upper class, a tiny middle class, and a huge lower class, the society is likely to be unstable. Because the majority of the population will not be well off, and the upper and middle classes small, there will be few defenders of the existing distribution.
The United States has a high average income, incomes are rising for most groups in the population--though more slowly than for the wealthiest--and most of the population is middle or upper class. It is therefore not surprising that rising income inequality has not generated noticeable social unrest or calls for return of heavy progressive taxation. Moreover, when nonpecuniary income is taken into account, there is less inequality than the income statistics suggest. In a democratic and rights-oriented society such as the United States, all citizens have a bundle of equal political rights (to the vote, to the free exercise of religion, to be free from unreasonable searches and seizures, and so forth), which are a form of income, and equal political duties, which are a form of expense. Rich people as well as ordinary and poor are prosecuted for crime, and, as in the recent spate of corporate scandals, often punished very heavily.
What is more, income statistics do not record the enormous secular improvement in the quality of products and services, and hence in the utility that purchases confer on consumers. Think only of the extraordinary improvements in the quality of automobiles, medical care, and electronic products. Americans whose income has not increased faster than the rate of inflation are nevertheless living far better than they used to live. They know this and it is one reason they are not clamoring for income redistribution.
A cultural factor that reduces the social tensions that might otherwise arise from a sharp and rising inequality of Americans' incomes is that the United States, unlike the countries of Europe, has no aristocratic tradition. There is no suite of tastes, accent, bearing, etc., that distinguishes the rich in America from the nonrich. The rich have more and better goods, but they do not act as if they were a "superior" sort of person, refined, well bred, looking down on the average Joe. The rich play golf, but so does the middle class. The middle class follows sports, but so does the upper class.
Finally, rising income inequality in the United States is due in part to increased immigration, since immigrants, legal as well as illegal, tend to work for lower wages than citizens. Immigrants do not, however, compare themselves with wealthy citizens, but rather with the much lower wages they could expect to earn in their countries of origin. Rather than immigrants envying wealthy citizens, many citizens are hostile to poor immigrants!
The "problem" of income inequality should not be confused with the problem of poverty. The first, I have argued, is, at least in the United States at present, a pseudo-problem. Poverty is a genuine social problem, because by definition it signifies a lack of the resources necessary for a decent life. It is only tenuously if at all related to income inequality, since one could have zero poverty in a society in which the gap between the income of the worst-off members of society was huge--imagine if the poorest person in America earned $100,000 a year and the wealthiest $1 billion.
The more competitive and meritocratic a society, the more intractable the problem of poverty. The reason is that in such a society the poor tend to be people who are not productive because they simply do not have the abilities that are in demand by employers. It is unlikely that everybody (other than the severely disabled) can be trained up to a level at which there is a demand for his or her labor, and so there is likely to be an irreducible amount of poverty even in a wealthy society such as ours, unless we provide generous welfare benefits--which will discourage work.