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Seven Reasons Why Income Inequality is Not Killing the American Dream
Less income inequality is self-recommending, according to the left. Full stop. Reducing the income gap as much as possible — while still, of course, leaving some incentive for wealth creation — should be a top priority of government. Maybe the top priority. As President Obama said late last year: “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American dream, our way of life and what we stand for around the globe.”
We know now, however, that mobility has not been decreasing. Economic research also suggests that income inequality — at least so far — is not a fundamental threat to the American way of life. The Manhattan Institute’s Scott Winship draws the following conclusions from his review of the literature:
1.) Across the developed world, countries with more inequality tend to have, if anything, higher living standards. The exception is that countries with higher income concentration tend to have poorer low-income populations.
2.) However, when changes in income concentration and living standards are considered across countries—a more rigorous approach to assessing causality—larger increases in inequality correspond with sharper rises in living standards for the middle class and the poor alike.
3.) In developed nations, greater inequality tends to accompany stronger economic growth. This stronger growth may explain how it is that when the top gets a bigger share of the economic pie, the amount of pie received by the middle class and the poor is nevertheless greater than it otherwise would have been. Greater inequality can increase the size of the pie.
4.) Below the top 1 percent of households—and prior to government redistribution—developed nations display levels of inequality squarely in the middle ranks of nations globally. American income inequality below the top 1 percent is of the same magnitude as that of our rich-country peers in continental Europe and the Anglosphere.
5.) In the English-speaking world, income concentration at the top is higher than in most of continental Europe; in the U.S., income concentration is higher than in the rest of the Anglosphere.
6.) Yet—with the exception of small countries that are oil-rich, international financial centers, or vacation destinations for the affluent—America’s middle class enjoys living standards as high as, or higher than, any other nation.
7.) America’s poor have higher living standards than their counterparts across much of Europe and the Anglosphere, while faring worse than poor residents of Scandinavia, Germany, Austria, Switzerland, the Low Countries, and Canada.
So income inequality doesn’t seem to correlate with lower living standards in advanced economies, particularly America’s. And income inequality doesn’t seem to be reducing upward mobility. These would seem to be an important conclusions to acknowledge before beginning an all-out War on Inequality.
Likewise, it’s important to have a deep understanding of the American economy — an economy that is the most innovative in the world and created 50 million jobs over the past three decades — before government implements policies that might alter its essential, unique nature. Example: Before raising investment taxes “on the rich,” consideration should be given to the impact on venture capital investment. Do we want fewer billionaires, even ones that get rich by creating wonderful new products or services rather than, say, inheriting their wealth or benefiting from government favor? A less dynamic and entrepreneurial economy may be one with less inequality and less opportunity. And more opportunity is what we want, even if some folks get really wealthy as a result.
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I’m proud to live in a society where people who build a better mouse trap can still succeed and earn handsome rewards for their efforts. God bless ’em.
The problem is not the top of the income distribution but the bottom. And the real issue is the elephant in the room that no leftist will discuss – the demise of marriage and the American family. A recent study by AEI indicates that parents in traditional families have more economic success. And the children of traditional families enjoy more economic success as well. As more and more Americans have children out of marriage the more the bottom drops out of the income distribution.
This makes sense to me. I’m not an economist, but it seems like economic growth should be expected, as you describe, to increase living standards overall, while also increasing inequality. Wealth is valuable because it improves living standards, but also because it creates new opportunities to create more wealth. Most of the time, a few people will be better at exploiting those new opportunities then the rest of us.
E.g. if you develop a useful piece of software, you create wealth and get richer. But the benefits of the software don’t end there (why would people pay for it if it only benefited the inventor?). Businesses that use that software will increase their profitability and also benefit. But it stands to reason that the opportunities presented by the software will not be equally exploited by everyone.
A technological advance is probably not going to benefit everyone everywhere equally well simultaneously. In contrast, a technological advance that hasn’t happened will benefit everyone equally. If you have zero pie, you have no choice but to give everyone the same size slice. In 2014, all people share equally in the benefits of teleportation technology, because it doesn’t exist and thus there are no benefits. Some people have many nice automobiles while others have none at all. That inequality didn’t exist prior to the invention of the automobile.
I want to follow up on my last comment.
I know that it’s an oversimplification to talk about wealth as a pie that gets distributed (that’s how leftists think), but for me as a non-economist it makes this a little easier to think about.
Just as a zero pie requires total equality, an ever enlarging pie would allow for great levels of inequality. If you have a pie that can only be cut into 6 pieces, the highest possible inequality you can get is 1 to 5. A pie that can be cut into 100 pieces makes it possible to have 1 to 100 inequality. A bigger pie doesn’t require greater inequality, but it makes it possible.
John D Rockefeller was the first billionaire, as of 1916. Why didn’t we have billionaires before that? It wasn’t that people were more fair and shared more. It was because the economy wasn’t yet big enough to lift anyone to billionaire status.
When the top incomes in an economy increase, it could be seen as a mirror image of a canary dying in a coal mine. If the economy is capable of making people richer than ever before, it’s an indicator of a strong economy, which benefits everyone.
To me, all “income inequality” means is that there is no upper limit to success in this country. As long as society as a whole is progressing materially (and even with blips like the recent recession, across all segments of the population, living standards have continued to improve), then if some people are spectacularly successful, that’s a net good.
It seems to me that this whole “income inequality” canard is just the Left changing the subject. They cannot argue with the economics of an expanding, free market economy improving everyone’s living standards, making the pie bigger for everyone, as Michael Sangeret explains above.
So they artfully change the subject. In order to manipulate people into supporting their policies. Suddenly, “income inequality” is this big, important crisis that MUST be addressed. The economic facts become secondary to their noble goal. And somewhere, the spirit of Saul Alinsky smiles.