Income Inequality

This inequality topic has been screamed pretty loudly by progressives lately. And, like most stuff they say, it’s actually unjustified in many respects largely based on poor interpretations of data. The Cato Institute has a nice paper describing trends in income inequality. Don’t just read the summary, download the actual full paper after scrolling down:

Income inequality statistics are often based on highly skewed data that doesn’t take into account crucial changes over time. Income inequality may have been somewhat steady for decades now and not been increasing very much, if at all. Also, the trend depends on whether you’re talking about the top 5%, 1%, or 0.1%. But, even if the above paper is wrong and real effective income inequality is actually increasing, what does that mean for the various political positions that different groups have? And, why does “inequality” in itself matter at all? “Inequality” trends and discussions on wealth gaps are actually discussions on the ratio of the wealth (or income) of the top richest fraction of people to the wealth (or income) of the lower fraction of people. This is a relative measure. This lower fraction can be several things, depending on what one is trying to measure; it can be everyone under the richest fraction, including the middle class, or the lowest fraction, that is, the poorest fraction at the bottom. For example, we might create a fraction with the income of the top 5% in the numerator, and the income of the bottom 20% in the denominator, and see how this fraction changes over time historically. There are other more accurate measures of true effective income and wealth, but we will use simple income for discussion and conceptual purposes.

There are multiple hypothetical reasons why this income gap or inequality ratio can change. The income of the rich could increase over time, while the income of everyone else stays the same (after adjusting for inflation) during that same time period. If this occurred, then the inequality parameter would increase over time. However, why would this be bad? Of course, we should be concerned about the quality of life of the poor. But, in this hypothetical case, their effective income stayed the same. So, they are not hurt by this increase in inequality, as they can still buy just as much food, etc. as before. When it comes to concern about the common man, the more important parameter to measure is the effective absolute ability of the middle and lower classes to provide for themselves and maintain a certain quality of life, and whether or not that is changing over time, not their ability relative to the ability of the top richest fraction of people. One should also understand that income is not the only factor here, as general prices and the cost of living also matter to the well-being of the poor. In addition, advances in technology and the products that businesses make can often increase the standard of living even if a worker’s wage is stagnant over decades.

If that absolute ability (to maintain a certain quality of life) for the middle or lower classes changes over time, then the next question is WHY? Do not automatically assume that such a change is due to supposed oppression by businesses. As most economists can attest, a free market actually helps the common man provide for himself, where regulation and government control diminish the standard of living. Examples:  the minimum wage laws increase severe poverty and unemployment, the FDA dramatically increases drug prices, the war on drugs throws people in jail and hurts their chances of getting a future job, and licensing, forced unions, and protectionist policies decrease access of the poor to new jobs and increase general prices. These, and many more, are ways that government increases the inequality of standard of living. So, if you’re upset about inequality or poverty or lowering standards of living, make sure that your blaming is accurately pointed.

Lastly, if the richest fraction of people is increasing their relative incomes over time, the next question is WHY? Could it have anything to do with government bailouts to banks, subsidies, special government handouts and privileges to the rich, the government providing regulations that inhibit competition and promote monopoly into the hands of the rich, and the fact that the government steals money from many people and funnels it to doctors and hospital executives through the various government health care programs? These, and many more, are ways that government makes the rich richer. I’m not saying that the rich are only getting richer through these government means; many are also getting richer by “natural” free market mechanisms. If rich people are rich, or if they are getting richer, what matters the most is how they did so. If they did so through the government, which is very common, than it is wrong and could not occur in a free market. But, if someone gets rich due to free market reasons, that wealth is legitimate and we should not ask the government to forcefully stop it. It is perfectly fair if someone gets rich by selling a product or service that others like to buy, as they are only getting rich through voluntary means as people voluntarily buy and benefit from the seller. Consider globalization in modern times, which could account for part of the increase in legitimate and fair inequality. Nowadays, to a higher degree than before, a company can easily sell its products all around the world, causing this single company to gain huge revenues from around the world. Some examples are the Apple products, like the iphone. This helps increase the trend of inequality, but this is fair and legitimate. Some inequality is just, while some is unjust. It all depends on the mechanism by which it occurred, whether it is through voluntary trade, or govt coercion.

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