University of Chicago economist John Cochrane has written one of the most unique and insightful perspectives on inequality in his blog, The Grumpy Economist.  Read Why and how we care about inequality in its entirety.  It is about 6 pages long.


I’ve been reading Piketty, Saez, Krugman, Stiglitz, the New York Times editorial pages to find the answers. They all recognize that inequality per se is not a persuasive problem, so they must convince us that inequality causes some other social or economic ill.

Here’s one. Standard and Poors economists wrote a recent summary report on inequality, (earlier post here) perhaps as penance for downgrading the US debt, and wrote

As income inequality increased before the crisis, less affluent households took on more and more debt to keep up–or, in this case, catch up–with the Joneses….In Vanity Fair, Joe Stiglitz wrote similarly that inequality is a problem because it causes

a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means….trickle-down behaviorismAha! Our vegetable picker in Fresno hears that the number of hedge fund managers in Greenwich with private jets has doubled. So, he goes out and buys a pickup truck he can’t afford. Therefore, Stiglitz is telling us, we must quash inequality with confiscatory wealth taxation… in order to encourage thrift in the lower classes?

If this argument held any water, wouldn’t banning “Keeping up with the Kardashians” be far more effective? (Or, better, rap music videos!) If the problem is truly overspending by low income Americans, can we not think of more directed solutions? For example, might we not want to remove the enormous taxation of savings that they face through social programs?

Another example. The S&P report moved on to a new story: Inequality is a problem because rich people save too much of their money, and poor people don’t. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now the problem is too much saving, not too much consumption. We need to forcibly transfer wealth from the rich to the poor in order to overcome our deep problem of national thriftiness.

I may be bludgeoning the obvious, but let’s point out just a few ways this is incoherent. If Keynesian “spending” and “aggregate demand” are the problems behind low long-run growth rates – and that’s a big if – standard Keynesian answers are a lot easier solutions than confiscatory wealth taxation and redistribution. Which is why standard Keynesians argued for monetary and fiscal policies, not confiscatory anti-inequality taxation, until the latter became politically popular.