Inequality and the Veil of Ignorance

America's income gap is much debated. But a new paper — invoking the famous "veil of ignorance" theory of philosopher John Rawls, who is much beloved on the left — suggests it may not be as dramatic as many believe. The paper suggests that global inequality, not inequality within advanced nations, is what should concern the adherents of this theory as they make policy.

We talked with the paper's co-authors, Federal Reserve Bank of Minneapolis consultants V.V. Chari and Christopher Phelan, to learn more. The interview has been shortened and edited for clarity.

How would you explain the "veil of ignorance" theory in layman's terms?

Chari: John Rawls argued that the sensible way to make moral judgments about political issues is to imagine that none of us knows our current position in society. Our current position does not influence what we think is desirable; we adopt a perspective of neutral observation.

A way to imagine a neutral observer is to imagine that all of us are transported to Mars — or some outside planet — and then we decide on a social arrangement, and then we are randomly reassigned as possibly someone quite different from who we are. If we happen to be currently rich, there is some chance we could end up as somebody who grew up in an inner city and had an underprivileged education. Or, if you're a poor person, you could be a rich person. So that was the "veil of ignorance" construct that was invented to allow us to make judgments without letting our personal circumstances influence that thinking.

When you apply this theory to income inequality, what happens?

Phelan: If you take income inequality as being exogenous — exogenous is a term we use to mean like it just fell from the sky — then you would just say, "bad." You want to just raise the lowest person up. But in reality there's a tradeoff between inequality and income levels where, if you try to get rid of inequality too much, there just won't be enough to hand out. People make a tradeoff between income inequality and, let's say, economic growth.

Chari: The basic message of our paper is, imagine all the persons in the world are transported to Mars and we are going to be randomly reassigned. There's a very good chance, roughly a 20 percent chance, that we'll end up as a relatively poor person in India. There's a smaller chance, but still significant, that you might end up as somebody in Africa or Latin America. So therefore, sitting in our position in Mars when we are deciding on these social arrangements, we've got to ask ourselves, "How will that social arrangement help or hurt me if I end up in Chad or if I end up in Manhattan?"

Given that there are a lot more people who live in poor countries than in relatively rich countries, the odds are pretty good that, when deciding on social arrangements while living in Mars, you would be very concerned about global inequality. That is what would concern us from a first approximation. We would set up social arrangements which would provide a lot of opportunities in the event that we happened to be reborn in a desperate country — and that we would be less concerned about our prospects if we happened to be cast into Denmark or Sweden.

How does this factor in to the current debate?

Chari: Our paper is directed at some subset of people who argue that because income inequality in developed countries has increased dramatically, we have to engage in more extensive redistribution inside the United States or Sweden or France. What we are saying is, it's perfectly fine to make that argument — if what you acknowledge upfront is, look, I'm selfishly interested only in the wellbeing of people in the United States.

The political system responds to those who have that consideration. But some people say, not only is this good policy, it's an ethically desirable policy — and it's only when people make that last argument that we say their thinking is not well grounded in the discipline of ethics as envisioned by John Rawls.

All we are saying is, if you believe in Rawls's principles, then step one, you ought to be celebrating the extraordinary decline in worldwide inequality that has occurred over the last 35-40 years — the biggest improvement in human prosperity in the history of humankind. Second, you ought to be advocating very extensively for policies that make poor people in poor countries better off. Somebody below the poverty line in the United States is by the standards of world distribution extraordinary affluent. You have to care much more about poor people in Chad than you do about poor people in Mississippi.

Your study discusses global trade. How does this play into your argument?

Phelan: Let's say you're a furniture maker in North Carolina. Let's say you're in the part of the factory that requires a low-skilled worker or a textile factory in North Carolina. Those industries got defeated when we opened up our trade to the rest of the world. For the most part, there isn't much textile industry in the U.S. — it's all moved overseas. Well, the people in that industry were relatively poor in the U.S.

If you apply the veil-of-ignorance criteria to just people in the United States, it gives bad policy. It means the poorest of us get poorer. If you apply it to the whole world, it's a good policy, because it makes the poorest of the whole world richer.

What are your suggestions for getting redistribution policies right?

Chari: I think that economics has good lessons and messages. "Increase trade" is one, "increase research and development" is another, and somewhat more controversial is "increase immigration from very poor countries to very rich countries." These are all devices that I think would make poor people better off, and those are the kinds of policies that those who advance an ethical point of view — I'm not necessarily one of them, I'm just an economist perusing those ethics, but those are the policies they ought to be dealing with.

The policies they typically end up advocating are policies that restrict immigration, restrict the ability of rich societies to become prosperous so they can share their additional knowledge with people in poor countries. For example, advances in, say, cell phones — innovations like the iPhone — have made some people in the United States and Finland and so on extraordinarily rich. They've also served dramatically to improve the function of the markets in Africa and have brought immeasurable benefits to those people, so, in some sense, those kinds of innovations have increased inequality in a developed world but have reduced one way of inequality, and therefore, they should be applauded from the perspective of the veil of ignorance.

Phelan: I'm not personally convinced that inequality in the country right now is something that needs to be fixed. There is a tradeoff in society between inequality and growth. If you try to ensure everybody gets everything, level all differences, you would be removing incentive to get education, to work hard, to take risks.

The person poor in our country right now is actually relatively wealthy compared to the person in that position 100 years ago, and they are relatively wealthy compared to the world income distribution. They have cars, air conditioning, houses — poor deprivation used to be a big deal. It's not that it doesn't happen ever in the United States, but the fraction of people who literally are having trouble getting enough calories to get through the day has shrunken dramatically to almost nothing. It's not nothing, but it's getting close.

Courtney Such is a RealClearPolitics intern.