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Question for Ricochet — Income inequality in America: Is It a Good Thing or a Bad Thing?
Is income inequality in America — whether rising or not — a good or bad thing? To answer the questions it would help to know why American incomes are unequal in the first place. I looked into this recently elsewhere:
In June, James Bullard, president of the Federal Reserve Bank of St. Louis, a research powerhouse in the Federal Reserve System, addressed the sources of US income inequality during an appearance at the Council of Foreign Relations. Bullard used what is called a life-cycle analysis of incomes. All of us – or at least most of us – are minimally productive in our early years, gain in productivity as we age, peak in our 50s and become steadily less productive until our final years. According to the St. Louis Fed’s analysis as told by Bullard, that normal cycle of life accounts for three quarters of the income disparities in the U.S.
By almost universal agreement among American economists, most of the remaining disparity has to do with education. Higher education makes for higher earning, and the value of good degrees has gone up significantly over time. I say good degrees to allow for the apparent degradation of aspects of higher education in recent years, which is another matter for another column.
Does anything else explain U.S. income disparities? Let me suggest a couple.
The first has to do with how people report their income, which is really about how they adjust to tax laws. Some years ago (this is a true story) a many-times-married Hollywood mogul bought his new wife a home on New York’s Upper East Side. Among the women’s friends, the purchase was taken to indicate the power of her charms over him. Homes for prior wives had been rented or belonged to the studio. But it turned out that he bought the new property not long after the Reagan tax cuts went into effect. In other words, once tax rates dropped, he stopped concealing his compensation as non-taxable business expenses (like a movie-studio-leased Fifth Avenue apartment) and started taking it as ordinary taxable income, from which he bought that residence. This shift likely accounts for a fair amount of the remaining growth (after the life cycle and education effects) in upper income earnings between the 1950s and 60s on one hand and the 1980s through today.
Another part of the change likely has to do with how those incomes are made. For beginning in the 1970s and growing explosively from the 1980s until the tax and regulatory hikes of the Obama years, new business creation and growth have been the engines of the American economy. But while entrepreneurs may make significant income in good years, they are more likely to lose significant amounts in bad ones, as when their ventures fail or they face new business challenges. If you were building a regression analysis of their collective earnings, you would see growing volatility over the decades, what is called a high beta.
So, again, here is my question: taking this all into account, is income inequality in America — whether rising or not — a good or bad thing; or is it neutral, neither good no bad?
What do you say?
Published in General
I think the question of income inequality should be as important to public policy considerations as height or hair-color inequality.
No.
+1 to Genferei
On the one hand, income inequality is a mathematical trick. If we imagine income distribution as a bell curve made of thread and the one end is knotted at zero (dead broke) and the other is pulled slowly and steadily upward – that is, at a consistent rate of increase – then we’ll see ever increasing inequality. In this sense, it is neutral.
Even considering that the rich tend to get a higher rate of increase, this is essentially inevitable and therefore neutral.
On the other hand, middle-class jobs are getting the squeeze as technology pushes out those jobs. That forces those in the middle either up or down. That’s probably a problem.
Or athletic ability. I’ve always wanted to play in the WNBA, but I am clumsy and short with poor eyesight.
Income inequality is a result of a free market where people make free choices. Libs claim certain families are at a disadvantage because parents have chosen to have children out of wedlock with no visible means of supporting them emotionally or financially.
Income equality is neither good or bad; it is a reality that no social engineering can change. It can only be addressed by individual effort and a desire to compete.
Let’s not put too much faith in a system that doesn’t exist outside of text books.
Income inequality is GOOD, and a necessity in any free society. Inequality is an incentive for those with lower earning-capacity to improve their earning capacity by acquiring skills, education, and employment. The way a person should react when they see another person more-successful than they are is to ask “What did they do to get where they are?”, and then try to model their own behavior on that. The automatic reaction of those on the Left today is to try and take away what the successful have EARNED, and give it to those who have not earned it. That attitude has proven to be extremely destructive of society, and we are seeing its results every day.
What really matters are the reasons for the inequality, and the feasibility of doing anything reasonable about it.
I would say income inequality in Africa is a big problem, because it is caused by kleptocratic governments who keep the masses down by stealing everything they have. It could also be a problem in the U.S. or other countries if it is an artifact of a government system that heavily rewards insiders and cronies at the expense of the people.
But a rise in inequality can be caused by many things that are perfectly legitimate and natural. First there is the Pareto principle, which says that in any population about 80% of the effects will be caused by 20% of the group. 80% of crime is caused by the worst 20%, 80% of productivity comes from the top 20% of the group, etc. This doesn’t always hold, but it’s a good rule of thumb.
So given equal opportunity and raises on merit, over time you will get a wide income distribution with the 20% at the top making much more than those at the bottom. I would consider it a problem if this didn’t happen.
One prime cause of rising inequality the left doesn’t like to talk about: The rise in incomes of the professional and managerial classes, and their tendency to marry each other. Here in Alberta, the median salary for a teacher with 10 years’ of seniority is about $85,000. Our neighbors are two married teachers, and they have a combined income of at least $170,000, and probably closer to $200,000 given their age. That puts them well into the upper-middle class, and not far from the “1%”.
When we send our kids to college and they marry other college graduates and form two-income households, that contributes dramatically to income inequality because the people on the low end of the scale are typically single mothers or single blue-collar or service workers.
The left keeps focusing on Wall Street at the source of income inequality, but I don’t hear them advocating lower salaries for government bureaucrats, professors, senior teachers, or other high-paid professionals who tend to marry within their cohort.
It’s not about the textbooks; it’s about the family upbringing. Period.
Absolutely true and in certain geographic regions of the U.S. it has been happening for decades. I would use NYC as a classic example of this; the term “trophy wife” was redefined in the 1980s as an attractive graduate from a top-notch school with a high-paying job.
So no free market then?
Are you arguing that if all of those in the lower quintile adopted a more traditional family style of upbringing and competed harder then income inequality would decrease?
I’m saddened whenever the topic comes up- it’s nothing our governing institutions or political class should be bothered by. Whatever happened to the 10th Commandment? (Religious or not, it’s still good advice.)
Are you saying that the free market and traditional values of personal responsibility nurtured- and in my case, enforced- by family background are mutually exclusive? If so, then you and I have most assuredly been raised on different planets.
I’m saying that the free market idea is an excellent tool but that it would be wrong to say that any such a system exists and certainly impossible to attribute any existing inequality to it. (Either good or bad)
While I think strong families and traditional upbringing would be beneficial for all, I think it would be hard to argue that it alone could make a significant dent in inequality.
Yes, but you’ve said it yourself. Income inequality may be a symptom of injustice or worse. Or it may be benign.
It’s not a good thing or a bad thing. It’s just a thing.
The thing is probably both which makes it a political thing.
Over the next 10 years bank tellers will be completely phased out in favor of machines. Self-driving trucks will begin to take the place of truck drivers. Some of those tellers will be able to move up into roles that require technical oversight. The rest will enter the market of some job at or below bank teller level. Some of those truckers will move into something logistical while others scramble for lesser driving jobs.
There is a real change coming. This change is in many ways different than what we’ve seen in the past. Farmers could easily be employed in factories, factory workers in service industries, but not so service workers into technical employment. The result could be a big gap between doers and thinkers. (forgive me for a lack of better terms)
Maybe it can’t be helped but it will be a source of political friction and it ought to be considered.
I have $10, and you have $20. Both our totals are doubled. We are both twice as well off as before, but the sum between our totals is now twice as large. I am demonstrably better off than before despite falling further behind you. Income inequality per se is not good or bad; how it comes about (naturally due to different levels of skill or productivity versus cronyism and corruption) is what matters. The Left believes all inequality is unnatural which is empirically false.
I saw a good comment on the Instapundit site. Something like: “Opportunity is not an equalizer, it is a centrifuge.” It is clear that some people are more willing to produce value than others, and that some people are better at producing value than others, and that the meaning of value is not always fair. Income inequality is usually a very good thing. It is a feedback mechanism to tell us all what is valuable and to push us to produce those things. We may not like it –some professional sports figures and movie stars are apparently worth 500 median households.
Income inequality bothersome. Really not so much. Taking George Soros, Bill Gates, Mark Zukerberg or other fabulously wealthy Lefties’ money away from them might be poetic justice, but it wouldn’t benefit me in any way.
What is highly irksome, and possibly leading to a mutiny on the part of the middle class, is the unconscionably high levels of taxation and the ever more oppressive regulatory state. Kevin Williamson discusses that today on NRO.
Well, let’s see; let’s do some reading…
NY Times: Let’s Talk About the Wealth Gap:
And, Investor’s Business Daily: Obama Calls Income Gap ‘Wrong’ — After Widening It:
*Now* is income inequality a good thing or a bad thing?
The income disparity in America has grown simply because this First World economy continues to sophisticate itself and many citizens have refused to adapt. And that word- adaptability- has always allowed this country to hold the strong suit.
If one is raised in a dysfunctional environment with no regard for the benefits of competition, one is simply encouraged to self-define as a victim.
If only it were so simply.
Many people have given good reasons here why “income inequality” means nothing, really.
But there’s another, much more obvious reason too: demographics.
The lower income brackets are composed almost exclusively of young and old people, and mostly single people (or single heads of households). Higher income brackets are composed almost exclusively of households with multiple working adults in their prime earning years.
Forgetting for a moment the single mothers with no education, the simple fact that more and more young people are going into higher education , and staying longer in school, means that they swell the lower income brackets. And when they reach their peak earning years, they swell the higher income brackets.
More and more “baby boomers” staying longer in their peak earning years, also swells that side of the distribution. And when they retire, their income drops them down to the lower levels of the distribution.
Which means: income inequality means nothing.
If one thinks of “income inequality” as if the people in a particular bracket are stuck there permanently for the rest of their lives, then yes, it may be a problem. But the fact is that there’s tremendous movement up and down. Those who are in the top today were once in the bottom. Many at the bottom today were once at the top.
If someone is foregoing earning now, for higher earning in the future, then being in the bottom distribution is a “good thing”.
40% of Americans will be in the top 5% of the income bracket for at least part of their life. 60% will be in the top 10%. 70% will be in the top 20%. 12% will be in the top 1%, for part of their life.
This is the kind of thinking that got us President Romney.
Income inequality is a completely meaningless variable. It leads people to the wrong answers (essentially, that inequality can only be eradicated by suppressing the working class, who are too stupid to educate themselves).
A much better variable is the disparity in worker-to-capital ratios, taking both human, social and physical capital into account. The reason working-class Americans are suffering today is that capital formation has broken down in all three areas.
This is why immigration is such a big deal. One way to increase physical capital formation is to restrict the supply of labor while running fiscal surpluses. The labor shortage gives employers an enormous incentive to invest in physical capital, while the fiscal surplus provides a pool of savings to finance said investment.
We can’t pass reforms to increase human or social capital among the working class, because the progressives will block it. But we can improve physical capital formation by blocking immigration reform and, in time, securing the border.
I would say this question is foolish and arises from a flawed premise.
Rephrase your question.
Wish I had Thomas Sowell´s actual quote at hand, but he has said something to the effect of: Why would we expect that a condition (economic equality) that has never prevailed anywhere to prevail here and now?
Of course, that doesn’t make inequality good.
Of course, it doesn’t make equality good either. We may all be equally poor.
But equally rich would probably be the best of all outcomes.
My point is only that we ought not be so flippant about something that is bad for, at the very least, the people it is bad for.
I’m not sure this makes much sense
First off, what’s this “working class” thingy? Last time I heard those words used, they were coming out of the mouth of Elizabeth Warren
Second, who says the “working class” is suffering?
Third, how do you figure “physical capital” replaces “workers”? It might in certain industries. It doesn’t for the vast majority of jobs. Physical capital has increased for the last 2 centuries at exponential rates
Fourth, what does “immigration” have to do with “physical capital”?
Fifth, the best way to measure these outcomes is through…permanent income. When measured through…permanent income…there’s no evidence of anyone “suffering” from anything