by Ervan Darnell
Summary: Wealth inequality is often used as a philosophical yard stick, but its statistical significance is misleading and its assumed social significance mis-measures real value in life.
Wealth inequality alone is often cited as a social and political problem (for example, by the Urban Institute [4]). While there might be a perception problem, there is much less of an economic problem. There are several reasons why wealth inequality, versus income inequality, is a poor metric:
Sample bias: The U.S. wealth-GINI is 0.85[3] (The GINI is the standard economists’ way of measuring inequality, ranging from 0.0 to 1.0). It is higher than most Western countries, but even so it’s lower than Sweden’s of 0.88. Sweden is often taken by the left as an example of a welfare-state to be imitated. Sweden’s high GINI is mostly because of immigration. But, then again, the U.S. also has high immigration. It’s worth looking at this more closely: The GINI is computed in (oh say) 2023 upon existing residents, not counting people in other countries (obviously). Then, a large cohort of poor people immigrate and are counted in the GINI in 2024. That’s a biased comparison because the divisor has changed. If you want to compare how well an economy works you should compare the same cohort of individuals (including the would-be immigrants in year 2023 against 2024). So, the first problem is that the GINI is not a static measure of how the same cohort of people is fairing (in fairness the U.S. would likely have a higher GINI than many European countries after discounting recent immigrants).
Leveraged: The after-tax income-GINI was recently 0.44 [2]. That’s half the wealth-GINI. Consider this simple scenario: Bob earns $100K per year. Alice earns $120K. They both spend $100K/year (and they both rent). Alice saves $20K. After 10 years, Alice’s wealth is many times higher than Bob’s. But Alice is only 20% wealthier than Bob in terms of real consumption. That is, the wealth-GINI is a leveraged version of the income-GINI. The income-GINI is a proper measure of one’s welfare as it reflects one’s consumption/lifestyle. Advocates will often quote the wealth-GINI only [4]. Anyone who does that is being deceitful.
Consumption, not wealth: Consider a second scenario, Bob is a playboy surgeon earning $400K/year. He spends it all on luxury living and saves nearly nothing. Carol is a prudent lawyer also earning $400K/year, but investing fully 1/4 of it. Their wealth inequality in 10 years is (oh say) 10 to 1. This is not a leveraging effect, it’s merely a difference in preference. The “wealth inequality” argument looks at this data and finds fault in the economy, or with Carol morally, for this huge wealth disparity between them. But, there is no fault. Indeed, Carol’s higher wealth is not a detriment but a benefit! That is, Bob is consuming more resources, e.g. the ton of steel for his second Porsche, which could be used for other purposes, and represents a larger resource diversion from society than Carol, who is putting the money back into investment, which generates more productivity that helps others. In fairness, there is a complex debate regarding consumption versus investment, but the point here is the same: the wealth disparity does not necessarily measure any actual disparity, it only measures a time preference for when income is consumed.
The above are ways the reporting of wealth inequality are deceptive. There is real inequality for a variety of reasons and they are worth thinking about, but the last point is a reason not to automatically view it as as problem:
Inequality of wealth is not inequality of value: “Fairness” (more so than compassion) is instinctual. There is a famous experiment where Capuchin monkeys get angry when one is paid a grape and the other a cucumber for the same job (it’s worth watching here). This instinct leads to seeing wealth inequality as an injustice. But what might be true in a family or small group is not necessarily true in the wider economy. There are extractive economies where inequality is indeed an injustice, for instance North Korea. But in a free market this is not the case, both parties to a transaction benefit even though there is wealth inequality afterwards. Robert Nozick gave us the counter-example: Start with 1 million people all with $100K. Among them arises a very talented singer, whom everyone else buys $10 of music from. The singer now has $10M and everyone else has $100K. The wealth disparity is now 100 to 1, yet everyone is happier for this outcome. In the actual economy, an example[1] is that software automates processes and the few people who wrote (or own) the software get a lot of benefit because the software can be infinitely replicated for almost nothing, instead of a larger group of people performing the process in some less-efficient manual way. But, the net result is an increase in productivity that makes us all richer even though the measured wealth disparity increases. Thus, wealth disparity can reflect more net satisfaction in a world where talent is not equally distributed.
Wealth inequality in isolation is a misleading measure of any problem with the economy and should be discounted, especially when separated from income disparity.
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[1] e.g. this study by MIT.
[2] CBO 2021 analysis.
[3] Wikipedia
