Not sur-prisingly, last week’s column on income inequality drew a great deal of moralizing comments. I am not sure it is helpful to connect moral principles directly to economic decisions about income. No matter whether you are angry or disappointed at rich people or poor, the simple fact that individual choice makes most of the difference in income is just that, a simple fact. Calling rich people greedy and poor people lazy is intellectual indolence. It is happiness and a meaningful life we mostly all pursue, and income probably matters little in that.
No economic facts are likely to steer the policy debate away from income inequality. This is mostly because today’s discussion is simply a convenient way to change the subject from other policy failures. The grown-up discussion we should be having is not about income, but consumption inequality. That won’t happen because the facts here do little to incite anger and division.
Income tells us how much you earn, not how much you consume. Well-being is determined from how much you benefit from that consumption, not how much you earn.
Not surprisingly, government anti-poverty payments mostly target consumption. There are hundreds of these programs, the biggest of which are Medicaid, SNAP (formerly food stamps) and TANF. The costs of these programs run in excess of $60,000 per family in poverty. So, a single woman with two kids who makes $20,000 is eligible to consume about four times her family income in federal and state benefits. Now these programs are poorly managed, and this family would be far better off with a check for half that amount. Still, it is pretty obvious that a progressive tax system and generous benefits to the poor flatten inequality in consumption. There is more to the story, though.