Monday, January 23, 2012

Back in the U.S.S.R.

Does Income Inequality Matter?

With the '99 percent' crowd along the president working the class warfare agenda hard, I believe many (including me) do not understand why they are actually upset.  Income inequality does and has always existed, but does it really create a form of oppression championed by the left.  Lets have a look at a few places where income inequality would actually matter, IF THEY WERE TRUE....

1) Do the poor have to get poorer for the rich to get richer?

I really like the chart below because it illustrates from 1950 to 1980 (typically considered the time of the great middle class society) middle class income roughly doubled, and the super rich income roughly doubled.  Then from 1980 to 2007 (the age of Reagan and big banks) the middle class saw the income increase ~33% and the super rich saw their income increase ~40%.   All in all, incomes increased at about the same rates; of course income inequality grew from 1980-2007, but it also grew from 1950-1980. 

Data: U.S. Census Bureau

But while all of the info is great, the key point is this: ALL INCOMES IN ALL CLASSES WENT UP.  The income pie got bigger and all groups can buy more.  Even if you are near the bottom of the income ladder, you are better off than those in the same income range 30 years ago.   Maintaining the lower income levels is pretty impressive considering that explosive immigration and globalization have pressured labor prices over the last 30 years much more than they did in the 50s and 60s.

So, to answer the question, the poor do NOT get poorer so the rich can get richer, and while you may look at the chart and say "but the spread is getting bigger", I say, "so what?", you are making more than you would have 30 years ago.

2) Are laws and policies being manipulated by the rich?

I will just propose this question to you,  the top 5% of earners pay ~40% of all of the federal income taxes.  Do you believe that group receives 40% of all government services?

Check out this blog that shows the extent that wealth already gets redistributed to the under-employed:

Don't get me wrong, I don't like special interest lobbies and corporate bailouts anymore than the next guy.  However, with frequent elections I don't think the top 1% can impose their will in the long run, unless the electorate chooses to stay very uninformed.

3) Does income inequality prevent mobility up the income ladder?

On the contrary, income inequality creates incentive for workers to move up the income ladder.  If incomes were relatively equal, then workers would have very little incentive to increase their productivity. Here is a nice blog with further proof that income mobility is alive and well.

Based on the above, I would conclude that income inequality is hardly a source of problems for society.  In the last 30 years, all incomes groups have seen income go up, the proportion of government services vs. taxes paid is still extremely slanted towards lower income individuals, and people have incentive to move up the income ladder.

Moreover, I get the sense that income inequality is brought up to make people think they are being treated unfairly, without of course giving any universal standard for fairness (because one does not and will never exist).  I am all ears to listen to arguments to the contrary, but I have not found one yet that is backed up with persuasive evidence showing how society benefits from more income equality.

I encourage you do more than just accept the talking points not just on income equality, but other issues as well.  Ask what is the impact of income inequality, what is the environmental impact of having a pipeline from Canada, what is the fair share of taxes people should pay.  You will be very surprised how short these arguments are on facts, and how long they are on playing on your fears, jealousies, and insecurities.

And for the second time in five blogs, Milton Friedman speaks:

"A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."


Brian Scott said...

Andy, since you are using hyperbole to make your point - please allow me to do the same (great use of the Beatles song, BTW!). At what point do you think things become too unequal between the rich and the poor? What if 10 people had 50% of the wealth... or if person had 99% of wealth. I think it is fair to say that we could not have a democratic system - look at any feudal government of the past or North Korea today. In those cases you had a few very rich people and a sea of poor. Currently the richest 400 people in the U.S. have as much wealth as the bottom 50% of the U.S. population COMBINED (~150 million people!). I personally like capitalism - it is a great motivator; but it needs to have safeguards to protect our democracy and provide economic mobility. Lately we've seen a move by the right to weaken unions, increase taxes on everyone but the wealthiest, and cut social safety nets. I think this has led to a lot of disillusionment and the birth of the 99%-ers. But again, I’ll pose the question: what is too unequal in your mind?

Andrew Blankenship said...

Hey Brian, I think some of the point of the article was to look at things that would indicate income inequality had gone too far.

1)If the rich are getting richer while overall incomes goes down, 2)if laws are skewed to redistribute wealth to the rich, 3)and if income mobility is stifled, then I would worry about the balance of money corrupting society. However, none of those things currently exist.

The safeguards you speak of are elections. The right wants to weaken unions, lower taxes (they do not want to raise anyone's taxes as you hinted), and cut safety nets because all of these things lend to a stronger private sector with a much better environment to attract business and investment with the ultimate end of driving job growth and allowing people to provide for themselves through their own productivity.

Equality will come much faster and more sustainably when we allow businesses to drive up the demand for labor until the price of labor goes up.

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