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Friday, February 3, 2017

The Key Difference between India’s Inequality and America’s

In poor countries, inequality is much more consequential.

Back in the 1960s, progressives talked a lot about poverty. Now they talk a lot about inequality (which perhaps helps to explain the rise of Trump.) This post was triggered by a comment Alex Tabarrok made, after his recent trip to India:

Inequality as measured by a standard Gini index is actually lower in India than in the United States. As measured by what you can see, however, inequality is very high. It’s easy to step out of a Louis-Vuitton boutique and over a child sleeping in the street.

I’d like to discuss this by first referring back to a post I wrote comparing house prices in Oklahoma City and Manhattan:

I went to Zillow, and randomly pulled off an ad for a 2800 sq foot condo in Chelsea–this one priced at $11 million. And here’s a random 2600 sq. foot condo in Oklahoma City, priced at $260,000. The NYC unit is more tastefully designed by NYC standards, but the OKC unit is more luxurious by OKC standards.

This is admittedly an extreme example, but I think it gets at an important difference between India and America. America has more inequality in a mathematical sense, but India probably has more in a quality of life sense.

The resident of the OKC condo has pretty much the same access to modern conveniences as the wealthy NYC resident. They both have modern appliances, cars, cell phones, etc. Access to health care and education. Perhaps the New York resident goes to expensive entertainment whereas the OKC resident goes to Friday night high school football games. (Stereotype alert!) Or the NYC restaurant scene may be more sophisticated, and expensive. But in a purely physical sense, life is not too different, despite the enormous gap in income.

The 10-fold income gap between a comfortably middle-class OKC resident and an affluent New Yorker is mostly just a state of mind.

Of course when you get to the bottom of American society, especially homeless people, then the gap in living standards becomes much larger. But that’s exactly my point. In America, the 10-fold income gap between a comfortably middle-class OKC resident and an affluent New Yorker is mostly just a state of mind. It’s not even clear who’s happier. That same income gap in India could be the difference between adequate food and chronic hunger pains. Or could lead to a lack of even the most basic medical care. Or a lack of housing that keeps the rain out. Or a lack of AC on very hot humid days. In low-income countries, inequality is much more consequential, which is why India looks like it’s more unequal than the US, whereas in a mathematical (Gini) sense it is more equal.

All this is just a roundabout way of saying that what really matters is (absolute) poverty and unemployment and too many people in prison and too few kidney disease sufferers getting transplants, etc. etc. These are the issues that progressives need to focus on. They are also the issues that utilitarians should focus on.

If you don’t believe me, I challenge readers to scroll down through all the pictures in this link, and then come back here and tell me what’s wrong with my argument.

Sorry people, “Struggling middle-class Americans” is a completely phony issue. By all means, make the tax system more progressive. But let’s not kid ourselves that middle-income Americans are “suffering” on the basis of their income levels. If they are suffering, it’s probably due to bad physical health, bad mental health, or an extremely stressful situation with a family member, friend, co-worker, or legal adversary.

Republished from EconLog.

  • Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.