A growing number of political leaders consider wealth inequality to be a major economic and social problem. They complain that wealth is being shifted to the top at everyone else’s expense.
Is wealth inequality the crisis that some people believe it is?
A new Cato study examines six aspects of wealth inequality and discusses the evidence for the various claims being made. Here are some findings:
- Wealth inequality has risen in recent years but by less than is often suggested. Faulty data from economists Piketty, Saez, and Zucman are behind many exaggerated inequality claims. Furthermore, wealth estimates overstate inequality because they do not include the effects of social programs.
- Wealth inequality tells us nothing about poverty or prosperity. Inequality may reflect innovation in a growing economy that is raising overall living standards, or it may reflect cronyism that causes economic damage.
- Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created innovations that benefit all of us. The share of the wealthy who inherited their fortunes has declined sharply in recent decades.
- Cronyism is one cause of wealth inequality which may have increased as governments have expanded subsidies and regulations. Some countries with high levels of wealth inequality also have high levels of cronyism or corruption.
- The growing size of the U.S. welfare state has crowded out or displaced middle-class wealth-building, and thus likely increased wealth inequality. Some countries with large welfare states, such as Sweden, have high levels of wealth inequality. Numerous presidential candidates want to expand social programs, but that would likely increase wealth inequality.
- Wealth inequality has not undermined U.S. democracy despite frequent claims to the contrary. Research shows that wealthy people do not have homogeneous views on policy and do not have an outsized ability to get their goals enacted in Washington.
Wealth inequality by itself is not a useful metric, but the underlying causes should be considered. U.S. wealth inequality has risen modestly, but mainly because of innovation and growth that is raising all boats. Policymakers should aim to reduce inequality by ending cronyist programs and removing barriers to wealth-building by moderate-income households.
The new study by Chris Edwards and Ryan Bourne is here.
This article first appeared at the Cato Institute.
Chris Edwards is the director of tax policy studies at Cato and editor of www.DownsizingGovernment.org.