Arnold Kling thinks trends in inequality are less important than trends in rates of return:
I have an uneasy feeling that the people who are arguing over whether inequality is increasing are asking the wrong question. I think that the economic issue is where are rates of return increasing and where are they decreasing.
For example, is the rate of return to rent-seeking increasing? Is that rate of return to corporate politics and back-stabbing increasing? Or is the rate of return to executive experience and sound judgment increasing?
Is the rate of return to risk-taking increasing? For that matter, has risk-taking increased, with a result that there are more winners and more losers?
Has the return to education increased, or has the return to ability increased?
A new paper by education economist Eric Hanushek, "The Role of Education Quality in Economic Growth," argues that the returns to cognitive skills are especially important:
The role of improved schooling, a central part of most development strategies, has become controversial because expansion of school attainment has not guaranteed improved economic conditions. This paper reviews the role of education in promoting economic well-being, focusing on the role of educational quality. It concludes that there is strong evidence that the cognitive skills of the population - rather than mere school attainment - are powerfully related to individual earnings, to the distribution of income, and to economic growth. New empirical results show the importance of both minimal and high-level skills, the complementarity of skills and the quality of economic institutions, and the robustness of the relationship between skills and growth. International comparisons incorporating expanded data on cognitive skills reveal much larger skill deficits in developing countries than generally derived from just school enrollment and attainment. The magnitude of change needed makes it clear that closing the economic gap with industrial countries will require major structural changes in schooling institutions.
It should be noted that while inequality has been increasing in the United States for a long time, world inequality (individual inequality) is probably decreasing, because of strong economic growth in developing countries. Since world inequality has long been a much greater problem than inequality within the wealthy West, this is a very good trade-off.
A counter-intuitive but important point to make here is that it is possible for inequality within countries to increase everywhere in the world at the same time as world individual inequality increases. If the US poor get poorer, that doesn't necessarily increase world inequality at all, since they're still much richer than the African poor or, indeed, probably than the median human being. Likewise, if affluent Indians or Africans or Chinese get richer, they're only catching up with the US middle class. Wealth and poverty can be redistributed across borders while the shape of the worldwide distribution of income remains the same.
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