Tuesday, February 06, 2007

Minding the Gap

In his latest Yahoo! Finance column, Charles Wheelan asks, "If we succeed in raising the incomes of the poor, does it matter if incomes at the top are rising even faster, making us a more unequal society overall?" In fact, many people care less about the absolute value of their earnings and consumption than they do about how much they earn and consume compared to their neighbors. Wheelan also points out that two very different approaches to income inequality can pose a similar threat to economic prosperity. One society's insistence on equalizing incomes can stifle economic growth, just as another's disregard for a rapidly widening gap between rich and poor can hamper growth as well. Read Wheelan's column to find out more.

Discussion Questions

1. According to Wheelan: "If the gap between rich and poor gets too large, and if those at the bottom feel they have no meaningful route to the riches at the top, then the fabric of society will fray, or even come unraveled entirely." Income inequality alone will not necessarily contribute to violence and disorder. What role does income mobility—the extent to which people move up and down the income scale—play? The New York Times has an interesting interactive graphic that offers a glimpse of income mobility in the United States.

2. "You have money spent on guarding stuff rather than making stuff." According to the World Bank study Wheelan cites, how does crime in Brazil impact economic growth? According to Wheelan, Brazil suffers not only from income inequality, but also from a lack of income mobility. How strong of a role do you think these factors play in Brazil's problems with violent crime? In what way does social disorder divert an economy's resources away from investment and the production of goods and services?

3. How do income redistribution schemes—taxing higher-income people and transferring the revenues to lower-income people—affect work and entrepreneurial incentives? What about economic growth?

4. What does a Gini coefficient measure? What does it mean to say that Brazil has a Gini coefficient of .58 and India has a Gini coefficient of .33? What do Gini coefficients tell us about the experience of the United States between 1970 and 2005?

5. Cornell economist Robert Frank asked Americans which world they'd rather live in: World A, where they earn $100,000 and everyone else earns $85,000; or World B, where they earn $110,000 (a 10% increase in purchasing power compared to World A) and everyone else earns $200,000. Which world did the majority of Americans prefer? Which would you prefer?

6. In thinking about economic policy, what question does philosopher John Rawls ask us to answer behind a veil of ignorance? In answering the question, would you think only about income inequality? What other factors might you consider?

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  • At 5:16 PM, March 02, 2007, Anonymous cloe said…

    In my opinion, I prefer the world A.There isn't an accurate formula of the rich and the poor, it's a relative concpet and doesn't have an absolute boundary.We find ourselves richer by the comparison with others. Therefore, in world B, we won't deem ourselves in advantage though the paid has increased.


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