What problems might inequality cause? What else might cause them?

October 11, 2011 § Leave a comment

The “Index of Health and Social Problems” in The Spirit Level has been rightly derided as silly. Even if you believe that inequality has an effect on everything from imprisonment rates to mental illness, there’s no reason to believe that inequality works in the same way for all variables. The authors make the case that inequality harms everyone, and that’s perhaps plausible for mental illness. But are the rich in a unequal society more likely to be imprisoned than the average person in an equal society? Evidently not. Within a country, your position in the distribution is hugely important. Differences between countries might matter as well, but it’s a lot harder to attribute these to a particular factor or set of factors.

A major confounding variable would be level of government spending. Now, one could argue that government spending itself reduces inequality not only by direct transfers, but implicitly, since the benefits of, say, a public health service are spread more or less evenly, while the costs are not if taxes are progressive. But that’s not the argument The Spirit Level is trying to make — it’s trying to say that income inequality in itself causes these things. The problem is that government spending and income inequality are highly correlated, and from a set of 20-something countries, you’re not going to have enough data to get small standard errors for the effect of each. And that’s without considering any of the dozens of other variables that could have notable main effects.

Looking at data below the country level may help. But the set of causal relationships that hold at state level may not be the same as the set that hold at the country level. Now, if you had data for subregions of a variety of countries, you could build a Big Bad Multilevel Model of Doom. It would be even better if you had individual-level data. But if you don’t, then although additional data is not to be sneezed at, it doesn’t resolve the fundamental problems.

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