Kick the can down the road: A forgotten issue with targeting income inequality

Income inequality is a statistic, and a policy aim, that is all in vogue at present. And with good reason – people are interested in whether the society they live in is fair, and they see this measure as representing some level of unfairness.

This debate is difficult, and there are elements that can suggest some inequality is good and others that suggest such relative differences are corrosive to a society What is the cause of such things, and how this refers to the society people want to live in, is then an important debate we all need to have.

In both senses targeting income inequality is based on an idea of being concerned about relative differences – which makes sense, as if people have very different relative experiences or opportunities it could be corrosive to society, or at the very least can be seen as fundamentally unjust. Any defence of income inequality then relies on the idea that there are reasons why people earn different incomes – an 18 year old student and a 45 year old doctor have different incomes, and society views such a gap as just.

But what if everyone was the same and there was no luck in the world? In this case income inequality doesn’t come from people doing different tasks, or valuing leisure differently.

Here most people would agree that any income inequality is unjust – so it must obviously follow that policies that solely reallocate income and remove inequality are always good?

Surprisingly no!

Wait, what?

At the face of it these policies (if that is their sole function) should be good, as there is no reason for the difference.

But remember that a lot of what occurs when people are “similar” is competition for relative status, or relative position.  If everyone is the same in terms of characteristics they may be competing in terms of income to get that value from their relative status.

If there is any disparity involved in this competition – eg it involves a risky bet with regards to income, or people do vary in their ability to compete for relative income position – then this will generate income inequality (and higher incomes).

To Boris Johnson such competition is a good thing – but to us this sounds like a coordination failure!  These higher incomes and generated income inequality are a bad thing.

So could the solution to this coordination failure be to force incomes to be equal?  After all, even though incomes would fall they are due to a process of undue competition that is leading individuals to “sacrifice” non-income things.

Not necessarily, as this doesn’t change the urge for individuals to find a way to represent that they have relatively higher status – instead people will choose other ways to try to show they are better that aren’t associated with income (weird hobbies, job titles unnecessary forms of expenditure, arbitrarily grouping and group behaviour).  

And if people are choosing to compete for relative status in incomes instead of other things – or at least the social convention has evolved this way – it could be because this is the “most efficient” way to compete. As a result, the loss from the coordination game in income may be less than the loss in the coordination game from competing in terms of other attributes.

Why would people compete for status along other margins?

Conceivably, making incomes more equal may force people into WORSE coordination failures along other attributes of their life – the 1960s and 1970s may have had more equal incomes, but there was also significant tension regarding other characteristics, which could be indicative of this relative jockeying.

Imagine a rich person who is going to have most of their additional income taken and redistributed – they will use the endowment of time to do other things and ability to redistribute to charities that represent whatever they want to signal.

Furthermore, just look around your own life. Can you think of people who blatantly do a hobby solely so they can tell other people they are better than them at it? Can you think of people who are apt to signal their own worth through their political or social stances which you suspect aren’t truly genuine? Honestly, these coordination games are everywhere – as we are social animals who function in this way.

And in this way, the redistribution simply kicks the can of status competition down the road – it doesn’t solve it.

This is an issue I often see ignored in discussions even though the motivation for such targeting is based on the implications of relative differences. As a result, this perspective should be relevant for policy.

So how can we use this idea? We can’t “make” people give up status competition – that is not an option, and even it is was good luck separating the status component of someones house purchase from the consumption value of the house!

Ultimately it may make sense for policy to not “feed” issues of relative position – if people value relative differences such expenditures may do more harm than good. The goal then should be to treat people equally, which includes dealing with inequality in so far as it refers to inequality of the opportunities people have in life. 

At a personal level we can also see from this that injustice stems from our personal determination to be above others. Rather than only looking to policy, a big way to reduce status competition and ensure a more just world is to treat others equally to ourselves and to stop fixating on valuing ourselves relative to others – if we all did that, and asked it from those around us, we would make a difference. [Note: Systemic injustices do exist, and those are more about policy and institutions than plucky individuals ]