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Wednesday, August 21, 2002

Economic Inequality of the Growth of a Middle Class?-There's an interesting paper by Columbia U's Xavier Sala- a-Martin (check out the eyeballs on his home page) on world income distribution (grab your Acrobat) that has been discussed by Virginia Postrel and Mickey Kaus late last week. Don't feel bad, Ms. Postrel; I've had two semesters of econometrics and much of the jargon flies over my head-I'm not sure I knew that stuff back in 1992 when I was taking graduate econometrics. Suggestion: skip the jargon and look at the purdy pick-tures in the appendix. The most telling comes in figure 4a on page 53, where he looks at world distribution of income. Over the decades, the number of poor people decline and the number of more middle-class people increases. Only in the Nigerian kleptocracy (2i page 50) are people getting poorer over time, as poverty decreases in every other country. The US chart (2c-page 45) shows the working-class side of the curve improving a little and the affluent side of the curve improving a lot. India and China (page 44) saw a large increase in their incomes, getting rid of a lot of their dirt-poor population. My thought is that income growth, not income distribution, is the key to development. If a policy is making everyone better off but some more better off than others, it is better than a policy that has smaller but more-even economic growth. If given a choice between a policy that made the poor half 20% better off and the affluent half 50% better off versus a policy that made everyone 10% better off, only a person obsessed on equality would choose the second option. Thus, arguments about income distribution are looking at the wrong questions. If a policy helps both the rich and the poor, it isn't bad, for economics need not be a zero-sum game, as the graphs seem to show. Rising tides may not lift every boat, for some boats aren't seaworthy. However, working towards general economic growth will be a better poverty-fighter than grand governmental welfare schemes.

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