This ain't no banana republic

by Will Wilkinson

Economist
November 19, 2010

Nicolas Kristof's latest column on income inequality is an excellent example of the sort of confusion and laziness that moved me to write a very long and widely ignored paper promoting greater clarity and rigour on the subject.

Mr Kristof begins by assuming what ought to be argued. He refers to America's "rapacious income inequality", by which I take him to mean that our level of inequality has been caused by rapacity. Was it? Mr Kristof should show his work.

He writes that "the wealthiest plutocrats now actually control a greater share of the pie in the United States" than in many Latin American countries, where income inequality has recently declined. Are America's wealthiest people really "plutocrats"? Can you tell whether a country is a plutocracy or a "banana republic" just by looking at the Gini coefficient? The answer is: No, you cannot. Despite all our inevitable complaints, America is a relatively healthy and functional democracy. Perhaps Mr Kristof noticed that Meg Whitman, a billionaire, failed to take the governor's mansion in California, despite spending more of her personal fortune on a political campaign than anyone in history. In a plutocratic California, the state's fourth wealthiest person wouldn't have to win an election to rule.

There are many possible causes of a high level of income inequality. The historically most typical cause is the concentration of political power in the hands of a predatory elite. This is the main explanation for the typically high levels of Latin American income inequality. This is not the main explanation for the high levels of income inequality in the United States and Great Britain. The main explanation for widening income gaps in wealthy, advanced liberal democracies is a complicated combination of (1) increasing economic returns to the acquisition of high levels of skill; (2) low supply of highly-skilled workers relative to demand; (3) changes in the way executives are paid, and in the norms governing executive pay; (4) technology-driven magnification of top rewards in "winner-take-all" or "superstar" markets; and (5) relatively low political demand for higher levels of progressive redistribution. Unlike expropriation and monopolisation by ruling elites, none of these causes of rising inequality are particularly objectionable in their own right. In a plutocratic California, it bears pointing out, the state's fourth wealthiest person wouldn't have become such by running a company that creates immense consumer surplus by dramatically lowering the transaction costs of selling goods to a large market.

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