The World According to Income Inequality

July 26th, 2007  |  Published in Politics, Social Science

As a social scientist, it is my job to come up with complicated explanations for social phenomena. And indeed, every interesting thing (along with many boring ones) is “overdetermined” by many causes, as Althusser would have said. But at all times, I keep one simple hypothesis in the back of my head. It’s like the WD-40 or Duct Tape of social science hypotheses: it almost always comes in handy, and a surprising amount of the time it’s the only thing you need:

  • H1: Income inequality explains everything.

Take, for example, professional sports teams. They tend to lose money. Yet whenever one comes up for sale, there are many would-be buyers, and the value of sports teams has skyrocketed over the past few decades. But why has the increase in team value been so rapid, and so out of proportion to revenues? The answer, of course, is income inequality. Austan Goolsbee explains:

SO owning a sports team gives budding billionaires local stardom and a big return — no wonder that they are lining up to buy these teams. The only question that remains, I suppose, is why the vanity value of teams keeps climbing. You might have thought that this value would be about the same whenever there’s a sale, so that the capital gain wouldn’t be such a big component. But because ever-richer guys are bidding against one another, there has been persistent inflation in team values.

Since sports teams are essentially a vanity purchase for the ultra-rich, their price is determined by the amount of money available to the very richest people in our society. Recent years have been very kind to the top .001%, hence the rapid appreciation in the value of sports franchises.

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