post by Bill Gardner
Suppose you were a government policy maker, you had $1 to spend, and you wanted to reduce inequality. What would you do?
You could send the dollar to somone earning below the poverty level. In a sense, putting cash in someone's hands is the best way to reduce inequality. That person knows better than you what they most need, so it would seem likely that they would spend it in the way that best improves their well-being.
What I would do, however, is spend it on a program that improves the health and school-readiness of children in impoverished families. For example, I would increase access to pre-school education, support programs that improve elementary schools, or fund programs to help expectant mothers stop smoking. In a sense, this is inefficient, because a lot of my dollar will be consumed in paying the professionals who run these programs. So why do it my way?
The question to ask, in my view, is "inequality of what"? Transferring money through welfare and a progressive tax system is the best way to reduce inequality in what citizens can buy, at least right now. That's a good thing. But you will have to make the same transfer next year, because earnings will be highly skewed toward the rich again. Moveover, we are looking at a future in which the returns to low-skill employment will increasingly decline, increasing the inequality of earnings.
My view is that it makes better sense to decrease inequality in the human capital that people bring to the job market, and investment in early child development is the best way to do that. This should help equalize what people can earn. And because human capital can be inherited, this will effect what their children can earn. Finally, by increasing the average level of human capital, it should raise the earnings of the children of the poor. Increasing the total population stock of human capital will have spillover effects that make all of us more productive, and make the pie bigger for everyone. Of course, we can't just invest in early childhood. Even an optimal program of investments in early child development will leave considerable inequality, so investments in disadvantaged children are not perfect substitutes for transfers. But they are where I would spend the marginal dollar.
Most importantly, equality is not, in my view, primarily about wealth and income, but rather about human capabilities, about what you can do and who you can be. Cash can help you expand the space of what you can do and who you can be. However, having more social and cognitive skills and mastering more of your culture is an increase in capability. This is what we should seek above all to equalize.