see "Why Income Inequality Matters" (Charles Wheelan, Ph.D., 1/10/07)
http://finance.yahoo.com/columnist/article/economist/19750?p=1

Dr. Charles Wheelan writes a column as “the Naked Economist” which I have only read a few times. But each time I have, he has either been wrong, and his recent piece on income inequality is no exception.

[To see the other articles I’ve written explaining why this particular Ph.D. was wrong, please see:
http://www.rossputin.com/blog/index.php/a?s=naked+economist&sentence=AND&submit=Search

And for those interested in a little more on a related subject, you can also read a prior blog posting of mine called “Be proud of wealth inequality”, although that is about inequality among countries, not within them.]

Wheelan spends much of the first half of his article positing that income inequality in the US is unacceptable (though he doesn’t come right out and say it) because it is closer to the inequality level of Brazil than many other countries are, and Brazil has a lot of crime and desperate people.

Wheelan gets close to the answer to his rather silly conclusion when he mentions that poor people “can turn on the television and see how the other half lives.” The obvious answer to a question about the importance of income inequality is not about information but about quality of life for the poor in the particular country. In America, with very rare exception, there is not abject poverty. The “poor” in America (and I put it in quotes because they would not seem poor to people in many other countries) have televisions, microwaves, cars, and many own their own homes.

The same is certainly not true in Brazil, where there is indeed desperate poverty. It is possible, if difficult, to go from the slum to success in America, and much more difficult to do so in Brazil (or almost anywhere else.)

In South American countries, there is a real tendency to vote for socialists who promise income redistribution. Such "politics of envy" are rarely successful in America, and outside of California and Massachusetts and African-American neighborhoods you rarely see elected officials take what are effectively socialist positions. Americans generally believe in the American dream.

So why would Wheelan fret about income inequality in America? And, I must say, he does it in such a half-hearted way that even his being wrong is hardly interesting. Given his prior writings that I’ve stumbled across, it is because his desire to be “good” leads him to liberal policy choices that anyone with an understanding of economics should know make no sense. (Indeed, they are likely to be destructive of the economic foundation of our country.)

Wheelan makes another mistake that a Ph.D. shouldn’t make when he falls for this argument:

“There's a very interesting strain of economic research showing that our sense of well-being is determined more by our relative wealth than by our absolute wealth.

In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.

Think about it: People would prefer to have less stuff, as long as they have more stuff than the neighbors.
The point -- and this is still a nascent field -- is that a nation may be collectively better off (using some abstract measure of well-being) with a smaller, more evenly divided pie than with a larger pie that's sliced less equitably. Reasonable people can and should argue about that.

It should be obvious to someone smart enough to get a Ph.D. that “relative wealth” and “absolute wealth” are hardly different, at least within any one country. If your level of “absolute wealth” seems high, but so is everyone else’s, prices will adjust to a level that makes that level of wealth have an average level of purchasing power. If your level of absolute wealth is low, but everyone else’s is lower, prices will fall (to the extent they can and still be profitable for producers) so that your wealth level buys you more stuff than others can buy. In other words, prices adjust to the wealth levels in an area so that absolute wealth and relative wealth become difficult to distinguish. Again, this is true within a relatively confined area, i.e. an area with similar demographics such as a small European country, or a county in the USA, etc. Therefore, it is entirely reasonable for people to be concerned with relative wealth rather than absolute wealth. It is not simply jealousy that would cause that concern, but the fact that people are smarter than Wheelan gives them credit for, even if they don’t know they are being smarter.

Wheelan then makes a half-hearted argument for socialism or near-socialism by hinting that we might prefer the income distribution in Sweden to that of the US. I say “hogwash”. Americans are blessed with the opportunity to create great wealth through hard work, brains, creativity, and luck.

What Wheelan suggests reminds me of something I’ve read a few times lately: “A fine is a tax for doing wrong. A tax is a fine for doing well.” Wheelan should keep his unjustified liberal guilt to himself. If he believes income should be redistributed, then he should give more of his own away to charity, as many of the rest of us do. Liberals aren’t particularly good at that, though; they prefer giving away someone else’s money.

I don’t know if the rest of Wheelan’s work is any better than the few pieces I’ve seen, but given that he gets fairly prominent placement on Yahoo News it makes sense that people like him and Krugman fill the minds of Americans who aren’t experts on economics with the worst sorts of Keynsian or even Marxist junk. Too bad Wheelan doesn’t have the courage to make a more interesting argument than this milquetoast junk he’s wasted readers time with.