Sharing the Burden of Hard Times

PRINCETON – The economic gloom that shrouded the world in 2008 has led many to ask whether the apparent prosperity that preceded it was real. We know that in countries as diverse as China, India, Russia, and the United States, the number of billionaires soared. More generally, the top 1% of the population prospered. But the gap between the rich and poor widened, and at least in the US, the incomes of the poor and the middle class stagnated.ampnbsp;

No wonder that many are now skeptical about taxpayer-funded schemes to bail out banks, insurance companies, and even automakers. Is this just another case of politicians making sure that, even in hard times, the wealthy elite that supports them will once again do better than everyone else?

But, in assessing the benefits achieved by economic growth, it is a mistake to focus on whether the income gap between rich and poor widened or narrowed. If a person’s annual income increased from $300 to $500 that may be enough to lift him out of extreme poverty, and will make a huge difference to his welfare and that of his family. If, at the same time, the income of a person earning a million dollars increased by $100,000, the income gap will have widened. But since $100,000 doesn’t make that much difference to the welfare of a person earning a million dollars, the gap in welfare will have narrowed.

I believe that we shouldn’t really be focusing on inequality anyway. We should give priority to reducing unnecessary suffering. So the right question to ask is this: did the economic growth of recent years make the poor better off?