Saturday, August 18, 2012

Dutch Vs American income distribution

Dani Rodrik has a post that compares the income distribution in US and Netherlands and asks whose citizens are better of. He writes,
The bottom 40% or so of the population is better off in the Netherlands, especially as we go lower in the distribution of income.  The bottom 5% have nearly double the income in the Netherlands.  The top 50%, by contrast, are significantly better off in the US. So are the Americans better off than the Dutch? I cannot tell you. But I can say that per-capita GDP or aggregate productivity numbers cannot answer the question.

I am not sure I agree with Dani's ambiguity on this. Consider the theoretical case. The question is to compare the relative "utility" or "happiness" levels of "America" and "Netherlands" in the aggregate. It is known that the marginal utility or happiness from every additional unit of income decreases with increasing income. Therefore, those in the lower half of the income ladder experience a much higher marginal utility from their additional incomes than those in the upper half. This means that the Dutch, with higher incomes for their bottom half, will have greater cumulative marginal utility than Americans, who have higher incomes for their upper half. In other words, controlling for the difference in per-capita incomes, in the aggregate, the Dutch are better off than the Americans.

Now let me illustrate the philosophical case from a Rawlsian perspective. Assuming you take birth in this world from a veil of ignorance, which distribution of income would you prefer? Since we would want to hedge for the worst case scenario, the Rawlsian answer would be the Dutch income distribution.

Therefore on both theoretical and philosophical grounds, the Dutch income distribution would appear to be superior or the Dutch better off than the Americans. 

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