Economic inequality as a major American problem has been overstated

Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.

Furthermore, more-educated groups show greater income inequality than less-educated groups. Uneducated people are more likely to be clustered in a tight range of relatively low incomes. But the educated will include a greater range of highly motivated breadwinners and relaxed bohemians, and a greater range of winning and losing investors. A result is a greater variety of incomes. Since the United States is growing older and also more educated, income inequality will naturally rise.

...income is not the only — or even the most — important measure of inequality. For instance, inequality of consumption — the difference between what the poor consume and what the rich consume — does not show a significant upward trend (Dirk Krueger and Fabrizio Perri, “Does Income Inequality Lead to Consumption Inequality?” The Review of Economic Studies, January 2006). Consumption, of course, is not an ideal indicator of well-being; a high or steady level of purchases may reflect growing debt, and the ease of buying a big-screen TV does not reflect a comparable ease in buying good health care.

...Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations. (See the symposium in Journal of Happiness Studies, December 2005.) American society offers good opportunities for people to be happy, even if not everyone becomes rich.

If we look at leisure, from 1965 to 2003, less-educated groups experienced a bigger boost in free time than more-educated groups (Mark Aguiar and Erik Hurst, “Measuring Trends in Leisure: The Allocation of Time Over Five Decades,” Federal Reserve Bank of Boston Working Paper). In other words, the high earners are working hard for their money and perhaps they are having less fun.

So matters are not as bad as the critics have suggested. The dollars in our bank accounts are one measure of societal value, and it hardly seems fair that the very wealthy should receive more and more. But for the rest of us, life on the ground is not so terrible. Income and wealth inequality measures, taken alone, provide a misleadingly pessimistic picture.

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview?