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Inequality and Its Discontents

Former US President John F. Kennedy famously proclaimed that “a rising tide lifts all boats.” In a growing economy, the absolute well-being of those near the top and the bottom are positively correlated, so the most important policies to pursue are those that promote strong economic growth and full employment.

STANFORD – Inequality has been seizing ever more of the public’s attention in recent years, reflected everywhere from papal encyclicals and economic tomes by French socialists to technical academic debates and the demotic language of politicians and pundits. The health and economic effects of the COVID-19 pandemic have further elevated these concerns.

But which aspect of inequality should we be worried about? There are inequalities of opportunity and inequalities of outcome; there is overall inequality, and there is inequality at the tails of the distribution. Should we be more worried about absolute or relative positions – mobility or stability? What is really more important, the distribution of the economic pie or the level and growth of living standards?

In China over the past four decades, inequality has soared, even as hundreds of millions of people have been lifted out of abject poverty. In the United States today, after-tax per capita GDP is 50% higher than in less unequal Denmark and Sweden, where higher taxes fund huge welfare systems. Among the American states, California has the highest poverty rate once one adjusts for its 20% higher average household size and 15% higher cost of living.