What do egalitarians care about?
2008-05-21 · Original WordPress address
I dunno, but if its "capabilities" or equality of opportunity then tracking income inequality between various income percentiles is the wrong measure to concern themselves with.
Income is a flow. Its tenuous. Its dynamic. It does not determine the size of your budget set; it does not determine your capabilities or opportunities.
If you doubt this, talk to Dell about the new computer I just bought on credit ((I know, I know... Cash flows are very irregular for grad students and I got a good price on the computer with zero interest)). Talk to the Bank where I took out my student loans.
If you care about the size of budget sets, then you care about lifetime income (and access to the credit market, but I don't think this is a problem in the U.S.). This is because if someone has earning potential (let's say they're a college student or they're just starting their career) then lenders will loan them money, even if they have low income today, because the lenders know their earnings, and thus their ability to pay the lenders back, will increase over their lifetime.
Is current income at least a good measure for lifetime income? Nope. Early in careers, there's little correlation between current earnings and total lifetime earnings ((see this paper for a nice discussion of the issues involved in measuring lifetime income. They use some really, very cool Swedish data to estimate the relationship between current income and lifetime income.)). This picture shows the ratio between current and permanent income (annualized):
So, why do egalitarians seems to care so much about (current) income inequality dynamics?