Question

Martin Feldstein - Poverty not Inequality. How would you summarize his idea of inequality and what is your opinion on it is?

Answer 1

The distribution of income has become increasingly unequal during the past two decades. A common reaction in the popular press, in political debate, and in academic discussions is to regard the increase in inequality as a problem that demands new redistributive policies. I disagree.

I believe that inequality as such is not a problem and that it would be wrong to design policies to reduce it. What policy should address is not inequality but poverty.

The difference is not just semantics. It is about how we should think about the rise in incomes at the upper end of the income distribution. When professional economists think about economic policies, they generally start with the principle that a change is good if it makes someone better off without in making anyone else worse off. Not all policies can be evaluated in reference to the Pareto principle. There are policies that make some people better off while making others worse off. The desirability of such a policy depends on how much the gainers gain, how much the losers lose, and the initial income and circumstances of the individuals involved. But that difficult evaluation is not my concern here. I am interested only in evaluating changes that increase the incomes of high--income individuals without decreasing the incomes of others. Such a change clearly satisfies the common-sense Pareto principle: It is good because it makes some people better off without making anyone else worse off. I think such a change should be regarded as good even though it increases inequality.

The real problem on which national policy should focus then is not inequality but poverty. I have in mind the incomes of those in the bottom decile or quintile of the income distribution. After discussing the problems of measuring poverty, I will consider three possible sources of poverty - unemployment, a lack of earnings ability, and individual choice - and what can be done about them.

Of course, measuring the incomes of the lowest income group is not a simple task. Cash income overestimates the number of the poor. A broader measure that includes in-kind benefits like health care and housing suggests much less poverty. There is also a problem in classifying someone as poor if his income is only temporarily low.

More generally, sociologists who have actually studied the poor directly and spoken with them about their living conditions have been puzzled by how the poor could live on so little income. Those who have gained the confidence of the poor discover the answer: the underground economy. The true incomes of many of those with very low measured incomes are actually higher than the data indicate. Such individuals do not report their total income since doing so might reduce their eligibility for cash and in-kind transfers.

This is a major problem for studies of the incomes of the poor. Careful studies of income distribution are most reliable when they look at the wage distribution of the middle classes, an unfortunate fact since the most interesting questions are about the very poor and the very rich, for which data are simply not very good.

A separate issue that plagues attempts to measure trends in poverty and in income levels more generally is the difficulty of measuring changes in the cost of living. These measurement difficulties should make us cautious about attempting to assess changes in the extent of poverty over time. Nevertheless, poverty today is a real and serious problem in the United States and other countries. I will thus consider three sources of poverty and the policies that might be directed to counter them.