There’s an old story about a person who died crossing a stream with an average depth of only six inches. Sure, most of the stream was shallow, but parts of it were deep enough to drown them. Just as the depth of the river varies, so do incomes. Just as you can drown crossing a river that is on average shallow, you can fall into poverty even in a country in which average incomes are high. Understanding the economic risks we face requires understanding income inequality and poverty. As we’ve seen, our high average incomes mask large differences in income, wealth, well-being, and opportunities. Moreover, these inequalities have been rising.
Inequality, poverty, and redistribution are central issues underlying many of our public debates. As a voter, an employer, and a community member, you will be a participant in these debates. This chapter has isolated three key factors that shape your views about redistribution.
First, the logic of redistribution is that it can raise total well-being by redistributing money to the folks who can benefit most from it. While nearly everyone agrees on this basic logic, there’s a spectrum of views about how important it is. If you think people at the bottom of the income distribution are barely getting by, and so are likely to benefit a lot from an extra dollar, then this provides a powerful argument for redistribution. But perhaps you think this argument isn’t so convincing. After all, the bottom of the U.S. income distribution still has a high material living standard compared to much of the world. And remember, any dollar we redistribute to a needy family comes out of some other family’s budget. The higher the marginal utility of an extra dollar to the families being asked to give up income, the weaker the case for redistribution. You’re now an informed player in this debate: You’ve seen the actual data on the distribution of income. So where are your views along this spectrum?
Second, redistribution occurs via a leaky bucket. The costs of redistribution—the leakage—exists because redistribution also distorts incentives, reducing work effort. Again, there’s a spectrum of views about how leaky the bucket is. If people respond strongly to these distorted incentives, then the bucket is extremely leaky. But perhaps people are only vaguely aware of these disincentives, or financial incentives aren’t the key factor motivating people to work hard. If so, the bucket may not be that leaky. So far empirical studies haven’t fully resolved this debate.
And third, your views about redistribution will depend on your values, not just how much you value fairness, but also which concepts of fairness are most important to you. Some perspectives on fairness lead to a greater emphasis on redistribution, and others suggest less. How much weight would you put on equality of outcomes, versus equality of opportunity? And even if you subscribe to equality of opportunity, there’s a spectrum of views about what that means. To what extent are we all born with an opportunity to succeed, or do income disparities create unequal opportunities, which need to be redressed? Or consider the role of hard work versus luck. How much do income disparities reflect luck—the inherited privilege of the rich, and the bad luck of the poor—versus hard work? Are the processes that lead to economic disparities fair?
There are differences of opinion in how to answer each of these three questions. But don’t let that controversy distract you from a broader truth: Nearly everyone agrees that the right analytic framework for analyzing redistribution involves asking: (1) How large are the benefits of redistributing income to those who most benefit from it? (2) How large are the costs due to the leaky bucket? And (3) How fair is this redistribution? Now that you’re equipped with this analytic framework, and also a good sense of the data, it’s time to draw your own conclusions. Think hard—these issues shape important choices that you’ll face in your family, your work life, and your community.