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Why income inequality isn’t always a bad thing

Marketplace Staff Jan 12, 2011

Why income inequality isn’t always a bad thing

Marketplace Staff Jan 12, 2011


Jeremy Hobson: The CEO of Barclay’s bank is on the hot seat this morning in London. He’s taking flak from lawmakers over his multi-million dollar bonus. Big banker bonuses might make you angry but they worry macro-economists.

That’s because if the rich are getting richer while the poor are getting poorer, there’s going to be serious income gap.

World Bank economist Branco Milanovic has just written a book called “The Haves and the Have-Nots.” He joins us now from Washington. Good morning.

Branko Milanovic: Good morning.

HOBSON: Let’s start with the United States. You write that income inequality here in the U.S. reached its trough in the late ’70s but it has been climbing ever since then — why is that happening?

MILANOVIC: Basically the one explanation is that there has been a change in technological progress, which actually puts much greater emphasis on high level of skills and the ability of people to work with very expensive capital. So the premium for skills has risen, and consequently, the gap between those who have skills and those who don’t has increased.

HOBSON: You might say that the countries that don’t have as big of a problem with income inequality are Communist countries like China. But you write that, in fact, “economic leveling” — as you call it — leads to stagnation and ultimate decline; that it’s not so great to have perfect equality across the board.

MILANOVIC: Inequality is like cholesterol. I mean, you have good inequality, that would an inequality which would lead people to take risks, to actually work harder, to study more in order to make more money. But there is also bad inequality, that’s an inequality which actually cements the acquired position, which doesn’t let poor people acquire education if they don’t have money and so on.

HOBSON: As you’ve been writing this book, you’ve obviously spent a lot of time focusing on income inequality. As you look at the United States, what do you see for us going forward — are we going to become more unequal when it comes to income, or less?

MILANOVIC: I actually believe that the U.S. has now reached a point where actually it has to go down in terms of income inequality. It would tend to reduce top incomes.

HOBSON: Rich people are not getting richer — they’re getting a little bit poorer?

MILANOVIC: Yes, they’re getting a little bit poorer. Of course the poorer people — also people who are unemployed — get poorer as well. So it’s not an ambiguous thing, but on balance, I think actually the crisis tend to actually reduce wide inequality.

HOBSON: Branko Milanovic is the author of the new book, “The Haves and the Have-Nots,” about income inequality. Thank you so much for your time this morning.

MILANOVIC: Well thank you very much for having me, it was a pleasure.

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