How Big of a Deal Is Income Inequality? A Guest Post

Retired neurologist William Bernstein is probably known for his investment books The Intelligent Asset Allocator and The Four Pillars of Investing. His two latest books, A Splendid Exchange: How Trade Shaped the World and The Birth of Plenty, deal with the history of world trade and economic growth, subjects he has agreed to blog about here.

How Big of a Deal Is Income Inequality?

by William Bernstein

A Guest Post

For nearly all of human history, the lot of the average person improved not at all. Then, about two hundred years ago, the material well-being of the planet’s inhabitants began to grow at about 2 percent per year.

Although this may not sound like much, it means that the life of a child is nearly twice as prosperous as that of its parent; over a century, the standard of living increases sevenfold. Today, per capita G.D.P. is higher in Mexico than in the world’s wealthiest nation in 1900, Great Britain.

The paradox of economic growth is that the same mechanisms that create great wealth –secure property rights and rule of law guaranteed by an independent judiciary — also give rise to great inequalities in its distribution. Private property provides a powerful incentive to produce wealth for oneself while simultaneously denying that same wealth to others. Wealth does trickle down to the rest of the population, but often not fast enough to avoid political strife and worse.

The reason for this is simple: if individuals cannot keep enough of what they earn then they will not produce. If, on the other hand, the most productive do keep what they earn, significant inequalities inevitably result.

Further, in a technologically driven world where an individual’s unique talents can be scaled up to an almost infinite degree, inequality increases dramatically.

For example, researchers Thomas Piketty and Emmanuel Saez calculated that between 1972 and 2006, the portion of income earned by the top 10 percent of the population rose by half; for the top 1 percent, meanwhile, it doubled; and it quadrupled for the top 0.1 percent. For the top 0.01 percent, it rose sevenfold. The current disparities are nearly identical to those of early 20th-century American robber-baron capitalism.

Economic libertarians argue that this growing inequality is unimportant: aren’t the poor of 2008 still far better off in terms of real income, health, life expectancy, and material comfort than even the richest citizen in 1900?

The fallacy of this argument is that human beings do not measure their well-being by absolute real income or longevity — but rather in relative terms. To paraphrase H.L. Mencken, a wealthy man is one who earns more than his wife’s brother-in-law.

Further, a growing body of research reveals that the social and medical costs of inequality are high. Here is the tiniest of samplings:

• Among both American states and Canadian provinces, homicide rates closely track income inequality, even after the absolute level of income itself is carefully controlled for. That homicide is not driven by poverty alone is demonstrated by Canada, where, because of aggressive redistributive policies, the poorest provinces have the lowest inequalities and also the lowest number of violent deaths.

• It is becoming increasingly obvious among obesity researchers that the primary underlying factors in this epidemic are social class and income inequality.

It is no accident that the U.S., with the highest income inequality among the world’s developed nations, also has the highest incidence of obesity and its attendant comorbidities: diabetes, hypertension, and vascular disease.

Obesity may also be the reason that the U.S., ostensibly the world’s wealthiest nation, ranks 29th in life expectancy, right behind Jordan and Bosnia. Those who think that these problems are primarily the result of voluntary lifestyle choices should reflect on the difficulty of providing a family of four with fresh fruits and vegetables on a minimum wage salary.

Worse, extreme income and wealth inequality alone may hinder growth. After all “respect for property rights” is really, in most cases, shorthand for “respect by the have-nots for the property rights of the haves.” If those on the bottom rungs do not feel that they are getting a fair shake, the very bedrock of our prosperity crumbles into social and economic apartheid as millions of Americans flee to gated communities, millions more are required to staff the burgeoning private security industry, and yet more millions fill our prisons.

This is likely the reason why supply-side economics fails in the real world. Cross national comparisons in developed nations, for example, show no correlation between tax rates and economic growth. Further, the “golden period” of growth in the years before 1973 occurred in an environment of higher tax rates than in the lower-growth 1980’s and 1990’s.

More ominously, several data sets now connect high national income inequality with low growth. Correlation is not causation, and clearly, much more research is called for.

But these data should give pause to those who are complacent about increasing income and wealth disparities, and who further believe that reducing the top marginal income-tax rates and eliminating the “death tax” leads to economic Valhalla.

Matt H

Stay in school, learn a trade or get a degree and work.

The people who will not educate themselves or work are on their own.

Quit stealing from me to give to those who will not work.


#153: Well put. Listening to all this Europe talk makes me want to vomit. Why do you think London gave Red Ken the boot and G.Browne will sonn be history. Replaced by Cameron. The SOCIALIST POLICIES EMPLOYED BY EUROPE OVER THE LAST 50 YEARS ARE STARTING TO IMPLODE.

I don't know why this is such a hard concept for people to understand. INCOME IS EARNED IT IS NOT DISTRIBUTED.DO NOTHING RECEIVE NOTHING.

Dale S.


Your ideas are pretty far from center, but I respect them, and the fact that you don't make things personal. Cheers and Happy Labor Day.


Hi Dale, thanks for the comments. I don't prefer to work FOR a cooperative, only WITH one/it. But not just ANY cooperative, it needs to be "Team Earth", the one single cooperative. If more than one cooperative exists, than differences in priorities will happen, and the two or many cooperatives will create borders and start competing over their controlled areas. (seen these days) I don't have a distaste for the law, but it has to be ONE common law... and that is "for the good of mankind/Earthkind".

One might ask "WHO'S opinion of 'the good of mankind'?" That's where egalitarian ops come into call. Everyone has a say, and that's decision by committee, a hugely slow operation, and I don't have that worked-out yet. We need smart people to help. Computers and networking will need to be used... (just like with World-Needs TV)... likely something similar to NASA's fault tree software used for shuttle accidents... where everyone is allowed to voice a concern and have it weighed and considered. That's a rough area of town, but it CAN be done. Laws... by the people of the entire borderless Earth-team. Sure there'll be folks who are in empowered law enforcement roles and administration roles... who COULD be called leaders and mentors... but they will all be given the exact same wellbeing, BY LAW, and strict law at that. To remind though, jails will be more school than cages. Just follow the basic rules of society within the USA military and its survival/supply system. Its a socialism that's done fairly well.... much like the USA public library system. Like books from the library, like vehicles and housing from the military, you just sign them out of the repository and become the custodian of such. Simple. No ownership. If there MUST be ownership, than ALL THINGS are owned equally by all living things on the entire planet. That way, we co-police each other from abusing Earth-materials-made things. The elderly/mentors/wisefolk... teach the youngsters... how to care for the Earth and its materials... and bad apples are sent to bad apple school.

And yes, currently, 18 year olds ARE forced to work/join, or they will starve and/or die of exposure. One HAS TO obtain greenpapers to use... to get survival supplies (or die)... thanks to competer's church rationing blockades (pricetags). And unfortunately, currently, 18 years olds who are not born set-for-life... will be working FOR and not WITH. Its easy to see the servitude festival running rampant in capitalism.

Instead of "choosing who you serve", how about total freedom from needing to obtain greenpapers (money) whatsoever? America claims to be the land of the free. I don't see it. Here in the USA, NOTHING is free, and we're all caught up in a rat-racing pyramid scheme. There's nothing free in pyramid schemes/economies. There's only non-set4life 18 year olds being forced to join a competer's religion, and a whole crapbucket full of "pay up or lose your wellbeing". I see nothing "free" in that, especially for those who want a sharing system instead of a competing system. One could ask... "What IS a producer?" Is that the first little girl who sat on beach sand and mounded it into a "sandcastle", then claimed it was "owned" and "hers" and put borders, guards, fences, and invented a monetary "serve the castle" slavecorp? Squatting is not owning... and in all actuality, nobody can "own" any Earth material whatsoever, and thus not own anything made therefrom. So what IS producing? Modifying Earth materials until it can be claimed as "owned" by something? That's certainly not Christian whatsoever. The original owner(s) and creators of Earth materials were NEVER consulted regarding selling and ownership, so its illegal to own Earth materials, right? (Speaking of laws unheeded).

Top-down? That's pyramiding again. Pyramids can't be farmed and are the cause of inequality. Try level grounds, egalitarian equality, and outlawing competing/one-upsmanship. It will work much better than the mess capitalism has made of the planet. Best regards.



It would be interesting to study the security cost to being wealthy - in terms of physical, financial, social, political - and contrast the cost-saving in a scenario where all others are wealthy enough not to resort to economy-related crime. It may encourage the wealthy to become the catalysts of the trickle down and narrow the inequality gap.

Dale S.

Free Marketeer:

I think you and I are both agree to limited wealth redistribution - I don't want to see anyone starve.

But where we differ from many on the left here is that we believe the ideal life for both individual and collective purposes is one of financial independence. This should be an individual's aim to either maintain or progress towards if they are on public assistance.

Several posts here seem to imply a distaste for holding the poor accountable for at least the same effort put forth by the middle class. There is no shame in requiring someone to work for their public assistance checks, just as there is no shame in requiring me to work for what I earn.

Free Marketeer

I take comfort in knowing, while ours is a mixed economy, it's still a meritocracy and that hard code socialists like anna will never see their dream of total wealth redistribution come to pass. Never. Live with that.

By the way, notice I didn't stoop to your level with the name calling and "please-look-at-me-I'm-smarter-and-more-educated-than-you" routine.

Dale S.


"in terms of intelligence and COMPASSION ANALISE things."

Given your atrocious (that means bad) grammar and spelling errors, (analise?) you are not worth anyone's time here.



I just read through all your posts. They are interesting to say the least. Although I do not agree completely with your doomsday scenarios, I do agree with the general direction. However, the problem with painting these scenarios is that there is no long-term effective solution for them outside of the already suggested: education reforms.

The more social policies we push, the more capital will leave the country and find regimes that embrace capitalism more. It is a privilidge to live in a first rate country. With that privilidge, you have to be tolerant of certain people with talent or just "being in the right place at the right time" being richer than you. I think of all the problems that we might have like extreme poverty (not by some US definition but by the international definitions of living under $1/day), we are pretty good relatively.

Rich people like being rich. Whether or not they deserve it is not up for you to judge. I rather them stay in the country and pay taxes rather then not have them at all and lose all tax revenue because of an intolerant tax regime.



#92: What do you mean by "probably?"

Isn't it just as likely that a man's wife's brother-in-law is her sister's husband?

Seems to me like those there are two choices (sister's husband or husband's brother) and that they are equally probable.



Remember that we cannot completely distinguish between genetics and environment, even in the twins test, because they both developed in the same womb. Developmental biology has learned a lot about how important a healthy mother is to the fetus and how this environment affects everyone throughout their life.



This isn't "Harrison Bergeron" that is being recommended.

You also forgot that the pathetically small amount of tax collection that you recommend would destroy society and the rich will suffer much more than the poor from that.


(From the post) "The fallacy of this argument is that human beings do not measure their well-being by absolute real income or longevity — but rather in relative terms."

- I disagree. If that's the case much more people would try to migrate to communist countries. The reality is the opposite. Absolute income level comes first, and then relative.

(From #34, Catherine) "Arguing why people are poorer or richer or whether they deserve to be so is beside the point. The point is that greater inequality drags the whole society down."

- I agree. When you are angry, you are angry. Rational or irrational doesn't matter. Though I believe in free markets, certain level of income redistribution might be necessary. The question is how. Wouldn't negative tax (Giving collected tax directly to the poor, not to the government programs) be a possibility? That could redistribute the income with smaller government.



OK, Free Marketeer. Let's see.

What I know and what I believe in:

- I know that Americans who were raised under some desks "the Russians are coming, the Russians are coming" know nothing, nothing, nothing.

- I know that I am highly and broadly educated

- I believe that societies with insane disparities (such as this one) are not only barbaric/unfair, but also unsustainable. I know, for example, that many ancient people knew more about societies than the present day Americans - look, for example, at a society of the jubilees, sabbaticals (the most important) and "widows and orphans" (complementary)

principles and compare with your "the rich are rich because they deserve to be rich."

- I believe that Social Democracy (which is in all industrialized countries) is the best model. Europeans learned their lesson from the collapse of the free market world (yes, friends - Hitler and Stalin were both the results) and decided to structure their societies in a way the ancients suggested - limit the power of the most ruthless, and protect the most vulnerable.

I am sorry, but I don't have patience and time to deal with right wing idiotic talking points.

I am surprised that you are pushing meritocracy again when Bush is still in the office. Most right

wing propagandists suspended this garbage during the Bush years ... for what seems to be an obvious reason.




Some of the motivation and psychology of the poor is really misunderstood. As an educator in a poor neighborhood, let me share some research done in this area.

Ruby Payne

She puts the finger on some important details left out of the discussion thus far. I see them everyday. First, these people are NOT less intelligent. They know how to work the welfare system, HUD, rent laws, law enforcement with the same efficiency you know your universoty politics and beaurocracy.

Second, the poor look at time differently. Now is what counts: how do I eat today? Where do go now to sleep? This mindset flies in the face of what most of us take for granted: invest in the future in something that pays off. Education means nothing because it doesn't help them now. Saving means that they cannot eat today.

Income distribution, even when artificially changed (note the trillions spent on free health care, food and shelter through government assistance and charity) does not change the plight opf the poor in the long term. Habits, and inherited rules for living will keep them in poverty no matter the amount of money given to them.



Correction to 101:

I meant, of course:

Shouldn't firefighters be paid more than CEOs?

(written before my morning coffee, corrected after - can you see a difference?)


Bravo Kirilius,

I am glad I return to ... see (a curious animal)

But, frankly, it's a waste of time.

Dennis, I am ignoring your post - I most certainly won't change my beloved style for a style of marching zombies.

Continue marching.

Free Marketeer

Anna, do you believe that socialism or some form of it is the way to go?

Replace the word income in income inequality with any other word. How about IQ inequality? How about street smarts inequality? Talent inequality, health inequality, and on and on.

Let's fix all those, too. Let's remove extra talent or incentive people have to use their talents. The solution to any injustices, real or otherwise, it to provide more opportunities for growth and F R E E D O M.

How about we get some tax equality? Everyone pays 10% to the feds and 5% to their state. It will fit on a post card. Consider that right now, most folks who pay taxes give up 30% to 40% of their income overall.


#73's post suggests that the manipulative can succeed--a "problem" that is "corrected" in many of the income inequality solutions provided by other posts creating rules of one sort or another to correct the problem.

The core issue is that a bizarre, arbitrary, and massively complex set of rules already governs our society (see the IRS tax code for an example). Compliance with these rules is administered by bureaucrats.

Bureaucrats are not trained to understand principles, but rather if their "rule" has been complied with.

Competing to get ahead in life are a bunch of lawyers and MBAs who understand the rules all too well.

Now, you have a $50-75k/year bureaucrat pitted against legions of much better compensated lawayers and MBAs. Who do you think is going to "win"?

The solution to inequality created by manipulation is NOT to create more rules. Rather, the solution is to create simpler principles by which to live, work, and pay taxes (etc).

If you need a reminder of the futility of creating more rules, please visit the DMV and try to get a driver's license unless you have both a utility bill and bank statement with your new address (this rule is administered with solemn reverence, as if possession of these two documents will guarantee that terrorists and other bad folks would never get a driver's license).

Sadly, the DMV example differs in no way from how government in general makes sure people follow the rules.

Consequently, attempts to create rules to prevent manipulation of stupid and complex rules only compunds an already untenable situation. After all, who would make sure that you followed rules preventing the manipulation of rules--The Department of Making Sure There's No Manipulation of Other Department's Rules?

To see the merit of the libertarian case (or at least the case of "lets have less government and not more") one should consider the alternatives:

1) create more rules that will only be manipulated (for supporters of this plan, please start by making the IRS code more complex, surely this will help).

2) create fewer, and more principle based rules (for supporters of this plan, fire the legion of government bureaucrats and hire professionals, trained to discern right and wrong--redeploying the bureaucrats into a productive part of the economy).

3) status quo (stop whining).



"Finally, I think it’s hilarious that so many americans think america is “collapsing”. I was born in south africa. You guys don’t know what collapsing even looks like.

— Posted by Rachael"

Well, Rachael. Some of us know a lot about "collapsing." Boy, do they know !!!!!!!!

They also know history and understand the causes, consequences, trends, results etc., including the causes, consequences. etc. of the changes in South Africa.

No, you don't give any answer to any question.

Have your considered studying history?