Avik Roy ponders the poor state of the inequality debate

Avik Roy explains in the latest issue of Forbes why the current debate over income inequality misses the mark.

Let’s step back and stipulate that it’s a noble and worthy policy objective to expand economic opportunity for those who least have it. But here’s the thing: The way we talk and think and write about economic inequality is, shall we say, impoverished.

Nearly all the debate about inequality centers on income. We talk about the average income of those in the top percentile of annual earners in the U.S., say, and how that figure has increased or decreased over time. But the distribution of annual income tells us very little about how low-income people fare.

Focusing on income—while ignoring the impact of taxation and transfers—prevents us from understanding how existing efforts at redistribution are mitigating the degree of income inequality in society. Kevin Hassett of the American Enterprise Institute has shown that in the U.S. transfer payments as a percentage of gross domestic product have increased from 6% in 1970 to 12% in 2008. As a result, the share of goods and services consumed by the bottom income quintile, as compared to the top quintile, has remained relatively constant.

The second problem with focusing on income is that income is not the same thing as wealth. For example, a young doctor living in San Francisco who immigrated to the U.S. from Cambodia may be making six figures, but he’s using a good chunk of that money to pay off his student loans, his tax bills and his rent. Our doctor is a HENRY: a High Earner who’s Not Rich Yet.

The third problem with overemphasizing income inequality is that it ignores the degree to which high cost of living drives inequality. In a place where housing and food are cheap and plentiful, lower incomes can provide a sustainable living. Not so in places where these basic goods are costly, like New York City and the typical European capital. What’s the biggest driver of the high costs of goods and services? Bad government policy: restrictions on housing stock, agricultural protectionism, costly labor regulations and the like.

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