Measures of income inequality tell us nothing about the living conditions of the poor, their health and their access to economic opportunity. Income inequality can easily increase in societies in which everyone, including the very poorest individuals, is becoming better off. Conversely, a reduction in inequality can be associated with deterioration in the living conditions of the less well-off members of the society, says Dalibor Rohac of the Adam Smith Institute.
The received wisdom about the effects of inequality on social outcomes appears to be largely flawed. For example, there is no convincing link that would enable us to associate high levels of income inequality with the financial crisis of 2008. By those standards, that crisis should have occurred at a different time and also in different countries.
Sometimes, rising income inequality can be symptomatic of underlying institutional problems. The growth of executive remuneration in the financial industry, for instance, cannot be dissociated from a cozy relationship which has long existed between policymakers and bankers. The implicit guarantees to the banking sector have led to excessive risk-taking and leverage, translating into high bonuses in good economic times and bailouts in bad economic times.
Focusing on income inequality rather than drivers of poverty, obstacles to economic opportunity and systematic injustice obfuscates what works and what doesn’t in the realm of economic policy, and ultimately harms the poor and the vulnerable.
Source: Dalibor Rohac, Does Inequality Matter? Adam Smith Institute, June 2011.
For text: http://www.adamsmith.org/files/Does_Inequality_Matter_ASI.pdf
For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17
First published by the National Center for Policy Analysis, United States
FMF Policy Bulletin/ 05 July 2011
