Does anyone care about distribution?

AS THE discussion over Thomas Piketty’s new book has expanded, the argument has occasionally been made that concern about inequality is essentially an elite phenomenon. Rich folks in rich cities are devouring and debating the Piketty book, while the rest of the rich world goes on about its business, more worried about jobs and wages than distribuition. Is that right?

Paul Krugman noted in a recent blog post that readers seem much more enthusiastic about his inequality columns than those on let’s-boost-growth macro pieces. Tyler Cowen responds:

I see the inequality issue as having high salience for NYT readers, for Democratic Party donors, and for progressive activists. It has very little salience for the American public, especially with say swing voters in southern Ohio or soccer moms. Unlike in Singapore or South Korea, where the major concentrations of wealth are pretty hard to avoid for most people, American income inequalities are well hidden for the most part.McLean is one of the wealthiest towns in Virginia, but if you drive through the downtown frankly it still feels a bit like a dump. I’ve never wanted to live there, not even at lower real estate prices. You don’t stumble upon the nicest homes unless you know where to look. Middleburg is wealthier yet, but it has few homes, feels unreal, and most people don’t go there anyway. If they do, they more likely admire well-groomed horses and still read Princess Diana biographies. They are not choking with envy over the privileges of old money rentiers, and there is no Walmart in town to bring in the masses (who probably would not care anyway).
And in a follow-up post he reports on survey data suggesting Americans are not particularly concerned about inequality. So what do we think?

Well, other surveys suggest Americans do care about inequality, are growing increasingly worried by it, and want government to take action to reduce it. On the other hand, survey data seems to show that Americans worry less about inequality relative to residents of other economies, despite the fact that America is more unequal. So I think there is something to the salience comment Mr Cowen makes, but that it we should not necessarily be encouraged by the phenomenon.

Americans do seem to care more about inequality in places like central cities. Whether that is because rising inequality is simply more obvious there or because the rise of the rich seems more clearly to come at the expense of the poor I can’t say. But gentrification fights are often bitter, and it is in big cities that Americans are increasingly electing governments with mandates to address inequalities (a point Mr Cowen makes), with New York City’s Bill de Blasio the most prominent example. Given this experience it is hard to argue that Americans are somehow naturally immune to distributional concerns.

I don’t quite agree with the argument Mr Cowen seems to make, that suburbs are the means through which America masks income differences. Gaps are less obvious in suburban settings than in central cities, but they’re still pretty clear and often divisive, especially where public schools are concerned. The big pressure-release valve in American society is its overall metropolitan geography.

The Bureau of Economic Analysis recently provided a very nice tool to help explore this phenomenon. It computed state and metropolitan prices levels, thereby allowing a comparison between nominal and real incomes around the country. Digging through this data a few things stand out.

The first is that income gaps between metropolitan areas are simply staggering. Personal income per person in the San Francisco metropolitan area (the richest large metro) is $66,591. In Riverside (the poorest large metro), income per person is less than half that at $31,900. Taking smaller metros the difference is bigger; Bridgeport, Connecticut’s personal income per person is $81,068, to $22,400 in McAllen, Texas. So one way America defuses its inequality problem is by separating the rich from the poor by hundreds of miles.

This separation comes with its own advantage, however, as the real personal income data make clear. Rich metropolitan areas, like rich countries, have higher price levels than poor ones. Most things, from housing to haircuts, cost more in San Francisco than they do elsewhere in the country. And after adjusting for different price levels, America’s metropolitan income distribution is considerably more compressed. Real personal income per capita in the San Francisco metropolitan area drops to $52,105. McAllen’s real income rises to $25,008. One of the main ways America addresses inequality is through geographical filtering of its population into high and low cost areas, which compresses the real income distribution.

An important question is whether or not we should applaud this outcome. On the one hand, it seems like a grand thing. Workers can boost their real incomes simply by moving to cheap cities. Surely that’s preferable to taxing the rich and redistributing the proceeds!

Maybe, but maybe not. There is still a tax here; people living in cheaper cities earn lower nominal incomes, which suggests they are less productive (in the same way that India’s price level is much lower than America’s because productivity in sectors producing traded goods and services is much lower). This is true even after controlling for the composition of the labour force; the issue is not simply that workers are separating by productivity (though that is some of what is going on). Lower productivity levels may translate into stunted career opportunities, less mobility, and lower growth potential across the economy. There is a fiscal cost, as well; people pay taxes on their nominal incomes, so this sort of filtering means that America’s fiscal capacity is smaller than it could be.

There are also negative effects in rich cities. Living costs there are high in large part due to limits on housing-supply growth. NIMBY action creates an artificial housing scarcity and allows landowners to capture rents (economic ones). That distorts behaviour and shifts the gains from growth toward landowners; the high cost of living effectively taxes worker incomes and redistributes the proceeds toward those who own property. America pays a price for sweeping inequality under the rug in this fashion.

This sort of dynamic is also important to keep in mind when people begin arguing that what really matters is living standards. You can raise living standards for many workers while also reducing their wages and productivity (so long as wages fall less than housing costs). And however much we might wish to rule out the possibility, it is clear that there are cases in which raising living standards may necessarily mean addressing distributional concerns.

It’s also not clear that the greater salience of inequality in central cities is a bad thing. In places like New York and London, it is creating intense public pressure on governments to provide more housing. That’s bad news for those most interested in New York and London property as an asset class. But it will be good for most everyone else. -R.A. | LONDON, http://www.economist.com/blogs/freeexchange/2014/05/inequality?fsrc=scn/tw/te/bl/ed/doesinequalitymatter