The Inequality that Matters

http://www.the-american-interest.com/article-bd.cfm?piece=907

An interesting article on income inequality. It argues that most people don't really care much about how much billionaires are making. They tend to compare themselves with their perceived peers. Moreover, the well being of an upper middle class family is not really that different from that of billionaires. They have most of what makes people happy without being billionaires.

The inequality that matters is within the top 1% of incomes. Most of this is centered in financial services. He offers an explanation of why bankers have extremely high incomes and he doesn't think that it serves an useful social purpose, but there is not much that can be done about it.

My problem with the analysis is that the concentration of wealth at the very top of the pyramid has a large impact on democratic institutions. This is apparent when we look at tax policy and how it has become less progressive since the 80's. Most economists also believe that incentives drive behavior. Many of our recent problems with the banking crisis as well as the dot.com boom and bust ( along with the Enron's and World Com frauds) had its roots in a simple risk/benefit analysis. The availability of outsized financial rewards for unscrupulous behavior caused otherwise honest people to do dishonest things.