Weighing Social Equality vs. Income Inequality

If there were no war in Iraq, what would be the big political issue right now? Several polls show that the second biggest issue on people's minds is economic inequality.

"When I graduated from college, the average corporate CEO made 20 times what the average worker did," said Sen. Jim Webb (D-VA) in his response to the president's State of the Union Address. "Today, it's nearly 400 times. In other words, it takes the average worker more than a year to make the money his or her boss makes in one day."

Webb warns that growing inequality means the death of the middle class and the destruction of America's backbone. Rep. Barney Frank (D-MA) echoed this idea.

"There are people, I guess, who don't care about inequality as a moral issue," Frank said. "I do."

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Perhaps it's not that surprising that Democrats speak against inequality. But recently, it has been Republicans talking about the issue. Just last week, President Bush — for the first time in his presidency – addressed the wealth gap.

"The fact is that income inequality is real," President Bush told an audience in New York. "It's been rising for more than 25 years."

And this week, long-time Republican Ben Bernanke, the chairman of the Federal Reserve, said inequality could pose a threat to the economy's dynamism.

So, it looks like inequality will be a big part of the public debate from now until November 2008.

A 'Good Kind' of Inequality?

Before this issue heats up, it's probably worth considering the work of the University of Chicago's Gary Becker, a Nobel Prize-winning economist who has thought a lot about inequality and says it's not always a bad thing.

"I think inequality in earnings has been mainly the good kind," Becker says. "I strongly believe it's been mainly the good kind."

How could inequality be anything but bad? According to Becker, good inequality gives more rewards to people with more education, more skills and a greater ability to create value in the world.

"If you're in an environment where knowledge counts for so much, then if you don't have much knowledge, you're going to be a loser," Becker says.

Becker knows the statistics. The rich are getting richer and the poor are falling further behind. But, he says, that's mostly because the better off have more education. And he says that gap is creating the right incentives. Poor people are learning that to get ahead, they need to get more skills. And the more skilled the workforce is, the better the overall society does. And that's good, Becker says, even if some people are left behind.

"Well, it's unfair," Becker acknowledges. "The accident of birth, the accident of the genes we have, the accident of parents we have: It is unfair."

But, Becker asks, what can the nation do about the inequalities of parents and genes? "Unless you think you're going to start switching babies around across families, as Plato recommended," he jokes. "You can't do that."

Arguing Against the Dangers of a Fairer Economy

Becker says it's dangerous for the government to force the economy to be fairer. Programs that take money away from the rich to give to the poor, Becker argues, mess with incentives. High-school kids may not be as motivated to go to college. Some college students might decide the cost of a higher degree isn't worth it. Over time, the United States could end up with a workforce that's not as highly educated, not as skilled. The country might not be as competitive. The economy might not grow as fast.

Not all economists agree with Becker. Robert Solow is another Nobel Prize winner.

"I don't think inequality is a great thing," Solow says. "I think the contribution of inequality to civilization and progress is pretty damn small."

Solow, a professor emeritus at MIT, says Becker tends to ignore bad inequality, the kind that comes from inherited wealth or racism — or corporate CEOs who aren't held accountable.

"There are a lot of sources of inequality, a few of which pay for themselves economically for the society at large," he says. "But a lot of them don't at all. They're more or less a blot and aren't doing a lot of good."

Solow says that lately, the United States has been growing in the bad kind of inequality, the kind that breeds resentment, even despair, among the less well-off. It is a despair that could hurt the overall economy.

So on this question of inequality, Becker and Solow disagree. But they — and almost all economists, left, right or neutral — do agree on one basic point: The best thing for the nation and everyone in it is if young people listen to that old public service announcement: stay in school.

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