The View from Mars: The Missing Debate on Income Inequality in America

Andrew Oswald and
Andrew Oswald Professor of Economics, University of Warwick
Carol Graham

August 6, 2003

A visitor from Mars recently landed in Washington, D.C. He knew a bit about economics in Mars, as he was doing his PhD there, but he knew nothing about the United States. As he read the newspapers, he concluded that budget deficits do not matter in the U.S. the way they do in Mars. Why else, then, would the country go from having record budget surpluses to record deficits in just two years? He also concluded that inequality does not matter in America. Why else, then, would the U.S. Congress pass a $350 billion tax cut that so clearly benefited those with the most money so much more than everyone else?

But as the Martian looked further, he got quite confused. First of all, he kept running into homeless people. Why was the government giving so much money back to people with big mansions when these people were living outside? Then he tripped on a homeless person sleeping on the sidewalk and hurt his ankle. He tried to get treatment at the hospital, but he was asked for an insurance card. When he tried to purchase an insurance card, he found that it was unaffordable. “Don’t worry”, he was told, “there are 41 million Americans just like you—they don’t have health insurance either. They just postpone getting medical care. It’s the American way.”

“Odd”, thought the Martian, and he asked where he might get some in-depth advice on economics (and also on getting better health care). Not surprisingly, he was directed to the Brookings Institution. There, his confusion increased. He had just concluded that inequality did not matter. Yet a group of economists at Brookings—including ones that had won the Nobel Prize, and even the Martian knew what that was—were discussing the relationship between inequality and health. Even more odd, these economists were using broader measures of well being, such as happiness, rather than just standard income measures.

The Martian could not resist and sat in on the conference. And he learned a number of things about inequality in America—and the rest of the world—that he had not read in the newspapers. He learned that Americans tolerate high levels of inequality because of strong faith in their prospects for upward mobility. This belief persists even though the evidence suggests that mobility rates in the U.S. are no higher, and are possibly even lower, than they are in other OECD countries. Meanwhile access to good schools—which is strongly linked to upward mobility—is increasingly stratified in the United States.

The Martian then learned that despite this belief, Americans notice income differences, and concerns about them can lead to perverse economic behavior, such as spending excessively to keep up with the Joneses. “Aha”, thought the Martian, “that must be why they are giving tax cuts to the very wealthy: so that they can spend more to keep up with their neighbors.”

Related to this, he learned that rank is very important to human well being. Job rank is a key predictor of how long someone will live after they retire. Rank also matters in the workplace, and job satisfaction not only hinges on absolute wage levels, but also on how much people earn relative to the average in their workplace and on their rank in the pay hierarchy. “Maybe income differences do matter, then,” thought the Martian.

The Martian also learned that human well being matters to health and to earnings as well. Healthier people are happier, but happier people are also healthier and more likely to earn more money in the future. Yet happiness matters more to future income for those with less income, while money matters more to future income (and happiness) to those with more money. “Aha,” thought the Martian again. “Maybe they are giving tax cuts to the rich and increasing inequality because money seems to matter more to them.”

But then the Martian learned that countries with more inequality have lower life expectancies, and that citizens in more equal societies, like Sweden, live longer. A recent National Academy of Sciences study finds that the inadequate medical care received by the uninsured in the United States translates into a poorer quality of life and a shorter lifespan. The study calculated the “hidden costs” of lack of insurance in terms of lost wages and benefits and in the value of what would have been a better quality of life and a longer lifespan. For each uninsured person, these costs are between $1,645 and $3,820 per year, and at the national level they are between $65 and $130 billion per year.

Being a good economics student, the Martian began to think about the trade-offs of the tax cuts. “If health matters so much to happiness, and happiness matters to health and to earnings, then why don’t they use some of that $350 billion to offset the costs of the uninsured?” he thought. “And then maybe I could even get my ankle fixed.”

But only a Martian would think of that…