Inequality and Declining Marginal Utility

The good life

The good life

Will Wilkinson advances a number of argument in his recent Cato paper “Thinking Clearly About Inequality” including one that’s pretty question-begging. This point, however, seems valid:

You can see leveling in quality across the price scale in almost every kind of consumer good. At the turn of the 20th century, only the mega-rich had refrigerators or cars. But refrigerators are now all but universal in the United States, even while refrigerator inequality continues to grow. The Sub-Zero PRO 48, which the manufacturer calls “a monument to food preservation,” costs about $11,000, compared with a paltry $350 for the IKEA Energisk B18 W. The lived difference, however, is rather smaller than that between having fresh meat and milk and having none.

The upshot is that tracking the growth in inequality of wealth and income may be overstating the growth in actual inequality of human welfare.

At the same time, the point here is that the marginal utility of money income declines as it grows. This is also a strong argument for believing that redistributing money from wealthy or high-income individuals to the poor or to public services will be welfare-enhancing. The difference, in welfare terms, between a Sub-Zero refrigerator and an Ikea refrigerator is much smaller than the difference in welfare terms between having health insurance and not having health insurance. So a surtax on high earners that goes to finance expansion of health coverage to the working poor is making people better off. In that case, when we look at statistics indicating skyrocketing income inequality we’re seeing evidence of inefficiency that can be rectified through the policy process.