Chapter

Comments: Alicia H. Munnell

Editor(s):
Ke-young Chu, Sanjeev Gupta, and Vito Tanzi
Published Date:
May 1999
Share
  • ShareShare
Show Summary Details

Amartya Sen has written a sweeping overview as an introduction to this important Conference on Economic Policy and Equity. Although the conference organizers framed the issues in terms of the inequality of income, and also of consumption and wealth, Sen asks why the discussion of equity always gets mired in these concepts. Perhaps, he suggests, because economic policy can directly influence the distribution of income. But income inequality can give a very misleading picture of the inequities in different societies. Full information on equity would require some aggregate measure of the ability to live a healthy and successful life. Constructing such a measure, however, would involve impossible quantification and arbitrary weightings.

Instead of focusing on income distribution or trying for a single measure, Sen argues for elaborating the diversity of deprivations. He compares relative deprivation in two very poor parts of the world—India and sub-Saharan Africa—and notes that the nature of the deprivations requires very different responses. Even for industrialized countries, he contends, income inequality is not a useful measure for comparing well-being. If the condition of African-Americans is characterized by their relative incomes, they seem quite well-off compared with citizens elsewhere. On the other hand, if their condition is described in terms of mortality, access to health care, or ability to gain quality education, they look significantly worse-off. Similarly, comparisons of income inequality between the United States and European countries do not account for differences in unemployment rates, obscuring the deprivation associated with not having a job.

My background is the U.S. economy and I would like to use that framework to focus on three questions that relate to the issues raised by Sen. The first is the question of inequality: How much do we really care about inequality? The second relates to mobility: If people spend only a few years in the bottom of the income distribution and then move on to happy and successful lives, do we have to worry about what happens down there? And the third pertains to economic policy: Does Sen’s employment example suggest that macroeconomic policy is as important as microeconomic policy in addressing equity issues?

Inequality

The 1997 U.S. Economic Report of the President had a whole chapter devoted to “Inequality and Economic Rewards.” It was a conventional and competent piece of analysis. The theme was a familiar one: President John F. Kennedy said 35 years ago that a rising tide raises all boats, and that appeared to be true for a while; rapid economic growth led to large increases in incomes for all members of society and reduced inequality. Beginning in the late 1970s, this broad tide of equalizing growth turned, and the gap between rich and poor began to widen. The shift in the distribution of income had many sources, but basically new technologies reshaped the economic landscape. Education became the fundamental fault line running through the workforce. Demand for high-skilled workers soared, while demand for the less skilled shrank. In 1979, a male college graduate earned 39 percent more than a man with a high school degree. By 1993, that gap had increased to 80 percent. In short, growing inequality in earnings has been viewed as a major problem.

This week’s edition of The Economist (June 6, 1998) focused on a different aspect of inequality in the United States. It looked at the superrich—those who have made fortunes through entrepreneurship or simply through the tremendous run-up in the stock market—and claimed that the unrich are anxious and resentful of the superrich, and the superrich are not doing enough to assuage these feelings. More and better philanthropy is the answer, they claim. Finally, we have the blockbuster movie Titanic, which has elevated class warfare to a level not enjoyed since Karl Marx.

In short, income and wealth inequality has gotten more than its share of press in the United States in the past 10 years. But is inequality really what we care about? I do not think so. Personally, I am not concerned that Bill Gates makes billions of dollars, or that Wall Street barons are earning fortunes, or even that the occasional CEO receives millions for driving his company into the ground. The excesses at the top are in some way the price of a vibrant and productive economy. To the extent possible, some of the more outlandish results can be tempered through income and inheritance taxes, but I do not lay awake at night focusing on the growing gap between Bill Gates and the average bloke.

I am concerned about the well-being of the poor and the near poor. This tends to get tied to questions of distribution in an environment of slow economic growth. If total earnings grow by only, say, 1 percent, and all those gains go to the top 40 percent, then the poor suffer. As a result, distributional concerns and concerns about absolute levels of well-being merge. But if the economy were growing rapidly and the circumstances of the poor were improving, then, even if the wealthy were making greater gains, growing inequality would probably not be an important concern.

Thus, I agree with Sen’s reluctance to embrace income inequality as the major measure of equity. Not only are the other measures of deprivation important, but it is unclear to what extent inequality per se is terribly important. In other words, do we really care that the wealthy are X times richer than the poor, or are we more concerned about how and why the poor are being deprived of basic functional needs such as nutrition, education, and medical care?

Mobility

The second point is that our concern for what happens at the low end of the income distribution has to be related to how long people stay there. For example, if the bottom 20 percent of the income distribution were populated exclusively by the young, the temporarily unemployed, or the retired, it could be viewed as a place where people stay for only a short time and not as a major problem. On the other hand, if the same people are there year after year, then what happens to this group is of much greater concern. The other way to make the same point is that in evaluating equity or economic well-being, lifetime experience is more important than the results produced by a single snapshot.

The United States has traditionally been viewed as a land of opportunity, where individuals can make their way no matter how humble their origins. Although the reality has always fallen short of the ideal, the United States is characterized by a fairly high degree of mobility; people at the bottom of the income distribution do indeed move upward. For example, roughly one-third of those in the bottom quintile have moved out after five years.

Although the United States has considerable mobility, a significant number of people do remain in the bottom of the income distribution for an extended period of time. Moreover, the ability to move up the income scale is not enjoyed equally by all groups in the population. For example, African-American male workers do not share fully in the general pattern of mobility. Thus, when thinking about issues of equity, it is important to focus on individuals who are more likely to remain poor all of their lives.

In short, mobility is an important factor to consider when assessing equity issues. The United States is a highly mobile society, but immobile enough to make developments in the bottom tier a major source of concern. For countries with less mobility than the United States, the welfare of those with the lowest incomes should matter even more.

Parenthetically, for those concerned about income inequality, a high level of mobility is not sufficient to offset an increase in the inequality of earnings. To the extent that the disparity in wages worsens, workers need to move up the income scale at a faster rate to offset this disparity. But mobility in the United States has not increased. Thus, a given level of mobility is not sufficient to alleviate concerns about rising income inequality.

Macroeconomic Policy

For the third point, let me turn from equity considerations to those of economic policy. I would like to argue that macro policy is as important as micro policy in addressing deprivations. Sen has shown the necessity for microeconomic reforms to improve literacy, nutrition, and health. But good macroeconomic policy is important as well to keep the economy operating at capacity.

I agree fully with Sen’s argument that to be without a job is a serious deprivation, even if the government provides money to sustain consumption. Being able to work and support oneself and one’s family is an absolute prerequisite for self-respect. Even those whose income loss is cushioned by savings and unemployment insurance suffer when unemployment strikes. A man’s place in any work-oriented society has often been defined by his job and the same can be said increasingly for women. In the United States, being forced into idleness has a devastating psychological impact. High unemployment has been linked to increased incidence of crime, psychological disorders, and divorce.

Unemployment also has a very real impact on an individual’s future earnings. Accumulated work experience is a valuable asset. Unemployed workers not only cease to accumulate experience, but also find that their skills begin to rust. With less human capital, workers are less productive when they are reemployed. Even short periods of unemployment can be damaging. Employers value a steady employment record when considering applicants, and a worker who has been frequently laid off will lack this record of reliability. For the nation as a whole, the economic costs of unemployment are very high. When the economy does not generate enough jobs to employ all those who are willing to work, potential goods and services are lost forever. The losses can be enormous.

To date, Western Europeans appear to have accepted high levels of unemployment with equanimity. But the burden of this unemployment is increasingly concentrated on the young. Students are completing their courses of study with little chance of full-time employment. The pattern has become demoralizing. The only solution is to have monetary and fiscal policies consistent with economies operating at a high level of activity. Thus, although good micro policies are necessary to ensure an equitable society, sound macro policies are equally important.

Conclusion

In conclusion, Professor Sen has provided a wonderful introduction to this conference. In the process, he has made a convincing case that the topic is difficult and complicated. No single measure can capture the concept of equity. The distribution of income provides only limited information. Access to health care, education, and nutrition is equally important. I would argue that mobility is also a factor to be considered. And when thinking about equity and economic policy, macroeconomics is as important as microeconomics.

    Other Resources Citing This Publication