Incomes and Inequality: What the Numbers Don’t Tell Us

Tyler Cowen has a new column up in the New York Times:

While there is little doubt that the gap between the wealthy and everybody else has widened in recent years, the situation is not as unfair as some of the numbers seem to imply.

Much of the measured growth in income inequality has resulted from natural demographic trends...[O]lder people have had more time to experience rising or falling fortunes.

Furthermore, more-educated groups show greater income inequality than less-educated groups... Since the United States is growing older and also more educated, income inequality will naturally rise.

The $50,000 earner still enjoys most of the conveniences of the modern world. Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness.

Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations... American society offers good opportunities for people to be happy, even if not everyone becomes rich.

So matters are not as bad as the critics have suggested... life on the ground is not so terrible. Income and wealth inequality measures, taken alone, provide a misleadingly pessimistic picture.

What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.

Read the whole thing.

Don Boudreaux and Arnold Kling share their responses. Also, be sure to read Cowen's post on income vs. consumption inequality.