Reckoning With Inequality

CAMBRIDGE – When it comes to the rise in economic inequality since the 1970s in the United States and some other advanced economies, it doesn’t really matter which measure of income distribution we choose: They all show the increase. And, while many competing explanations have been proposed, we do not need to agree about causes to concur on sensible policies to address the problem.

There are many ways to measure inequality. Each can tell us something different. Many Asian countries’ recent economic success has reduced inequality by some measures (for example, a big fall in the poverty rate), but not by others (the high-low range has increased). In the US, however, all measures of inequality have pointed in the same direction since the turn of the century, reflecting the fact that the benefits of economic growth have gone almost exclusively to those at the top. The share of income received by the top 0.5% has reached 14%, where it was in the 1920s.

Normally, one would think that diagnosing the cause of such a fundamental shift would be a necessary step in prescribing a cure. In that case, one might be discouraged by the over-abundance of plausible explanations that have been offered and the difficulty in choosing among them.

Thomas Piketty’s Capital in the Twenty-First Century emphasizes what he sees as a very long-term trend arising from a high return to capital, which causes inherited wealth to accumulate at a faster rate than earned income grows. Piketty’s book, published in 2013, did much to put inequality back on the agenda of American economists. But most researchers believe that the sources of widening US inequality lie primarily within earned income, rather than arising from the difference between earned income (wages and salaries) and unearned income (return on capital).