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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
PS: Immigration, if anything, has been shown to increase incomes, on average, even if only slightly, for native workers.
That’s because the jobs they take come from the native screwed.
I don’t think inequality, in and of itself, is a bad thing at all. However, I think poverty is a bad thing that we need to work to reduce. Poverty is bad for the person who is poor regardless of whether or not they are in the bottom 10% or if everyone is equally poor. Inequality doesn’t make people go hungry. Poverty makes people go hungry.
I don’t think fighting inequality is in any way the same as fighting poverty. I strongly suspect that efforts to reduce inequality are counter-productive to the effort to reduce poverty. Poverty is just the absence of wealth, so to fight poverty you would have to create wealth. I think it’s difficult to create new wealth that is equally available to everyone immediately.
I guess it’s possible that if technological progress hit some kind of natural plateau that persisted for a long time, maybe the poor and rich would have equal access to all goods and services, since there would be no rare, cutting-edge new toys for the rich to buy. I’m not sure that would be something to celebrate.
I agree with Dan. It depends on the system. In a free market income inequality is a good thing.
I agree with AIG. Income inequality only looks bad when you look at groups, such as the bottome or middle or top 10%. When you look at individuals, as Sowell and many others have pointed out, class mobility is extreme. The bottom fifth for basically all of America’s history has been composed mostly of imigrants in and young people. A few decades on, most of those individuals are in the third or second fiftth. A great many have reached the top fifth. This has held true into the 21st century but I would predict that upward mobility will decline as govt interference in the market grows.
Sowell et al point out over and over that you have to look at individuals and what happens over time, not groups which, in a sense, cannot change. I mean there will ALWAYS be a top 10% and bottom 10% no matter what you do. The big question is whether those groups are set in stone or whether people are moving out of them.
Media never seems to get into those subtlties, though.
Income inequality, more specifically the potential for income inequality, is the fundamental force driving the free economy. The ability to earn more money is a necessary condition for anyone to engage in investment, innovation, and entrepreneurship. It is fundamentally a good thing.
That said, envy and resentment are natural elements of our fixed human nature. The fact is, extreme concentrations of wealth can result in inordinate concentration of power and influence. And even if it doesn’t lead to corruption, it can lead to the appearance of corruption. And if not that, it can still lead to culturally toxic envy and class-warfare resentment politics.
So income inequality is basically good and necessary for the vast prosperity we know today. But just like anything else involving humans, it’s not a pure good.
I don’t think the government should take any direct action to reduce it. But it would be better for the country, a la Charles Murray’s Coming Apart, if the huge disparities in income and lifestyle we have today were less huge. All other things being equal, this would lead to a more shared American experience for people of various incomes and a more stable polity.
If you get “screwed” by people with no education, no skills and who can’t even speak the language, you’ve got bigger problems than “immigration”.
Charles Murray’s conclusions in his book don’t make a lot of sense to me. A few minutes of research on the two communities he describes reveals that they do not have widely divergent patterns in marriage rates etc.
What they do have, is a huge divergence in …when…they do this: i.e. the ability of the “richer” community to forego pleasures for later in life, when they can afford them better. I.e., get married later in life, have kids later in life, thus giving them more time to get better educated and more specialized.
Which means that it’s not simply getting married and having kids that’s the “trick”. Its being able to have enough sense to plan your life with a longer term view. And that’s where the main divergence between the “upper income” and “lower income” people arises.
Well I’m not gonna get screwed. I’m in one of those percents you mentioned. ( Although not any of the really good ones. )
I haven’t read the book; my familiarity with its contents comes from watching interviews of Dr. Murray. Could you go into more detail on what is mystifying about his conclusions? I understand them basically to say that the marrying population is tending to split along IQ lines, which correlates strongly with income. That is, people marry within their IQ range and therefore their income range. The life experiences of people in the different income ranges are vastly different, more different than they have been in decades. Part of this difference ends up in a feedback loop where the affluent don’t want to live near the others, don’t share in their culture, etc.
Death, taxes, income inequality…
Good? Bad? No, just certain.
The only important question is what ‘r ya gonna’ do about it. And depending on the proposed solution, that can range from very good to very bad. Right now, we’re experiencing something on the “very bad” end of the scale.
“Income inequality” is a misnomer that’s sole purpose is to peddle lies.
Every individual who has a lifelong career will go through most of the income brackets in their lifetime. Only those who are deeply committed to their profession have a chance of seeing the top bracket, but they sacrifice for it, usually their personal life.
I didn’t mean you “you”. I meant “you”.
Sure, but he also says this translates into different marrying patterns etc. But the marrying patterns aren’t all that different between the two, except for the when.
It is an irrelevant thing. Income inequality is only an issue if you have a stagnant, or finite, economy. So long as the ability to accumulate wealth is possible, then why should it matter that some one else can accumulate more than you? It speaks to the desires of socialists to prevent people from creating wealth, and that is the real issue.
And the who, as I mentioned in my comment. My gut tells me that is at least as important as the when.
Lots of great points made here. One thing worth noting is that lefties who complain about income inequality always cite statistics based on pre-tax earnings, and those lefties always want to raise taxes on “the rich” to solve the “problem.” But since they measure inequality by pre-tax earnings, no amount of taxes on “the rich” will ever make the least dent in the “problem” as they measure it. The same is true of government benefits, which they never count as part of the “income” of the lower classes. Thus, they can endlessly raise taxes on “the rich,” and distribute the money to the poor, but the disparity in pre-tax earnings will never go down (until taxes get so high that “the rich” simply stop working).
I agree with Larry3435: a lot of great points here. His point about measuring pre-tax v. post-tax income is exactly right. It turns out that this is one (though only one) of the problems with the work of Thomas Piketty, the French economist who book Capital in the 21st Century has just been publish. Following is from the same article excerpted in my post:
What is absolutely essential is to find a really clear, popular way to talk about zero-sum games. Because the economy is not a zero-sum game.
Income inequality is considered unfair when one assumes that the economy is a zero-sum game – where I can only be rich by making you poor. Adam Smith explained that trade is not a zero-sum game and that specialization makes everyone richer. In a zero-sum world, it is appropriate to get exercised at the 1%. In a non-zero-sum world, the right response is “so what”. Classical Liberals need to be able to talk about the reality of our non-zero-sum world in a way that is as catchy and accessible as preaching envy and hatred of the 1%.
There is another argument, that inequality is in and of itself harmful, but the evidence for this seems to be mostly manufactured, or in the heads of those looking for it. At worst it seems an argument in favour of envy as a virtue.
Oh, thank goodness!
As I review the comments in this thread I see a lot of great points about how income inequality does not matter or is even good. And I think on a very basic level those points have merit. However, those points all tend to focused on income, macro-statistics, and the wealthy in terms of the poor.
Knotted up with the idea of income inequality is an inequality of access and information. That is, access to government officials, quality education, and the wealthy themselves. And information as regards one’s ability to make quality decisions. (Intangible data perhaps.) The wealthy have a great deal of income, access, and information. All 3 work in concert to make economic success relatively easier. The middle class has some income, access, and information. The lower class has little of all three.
My contention in this regard is that we ought to acknowledge that it is a problem but that income redistribution isn’t addressing the core problem. Instead, conservatives ought to propose ways to make the problems of access and information less problematic.
Regarding the focus on wealthy and poor – I’m not sure that’s what really matters in income inequality. What if the real divide is found between the 49th percentile and the 50th? What if a chasm develops right in the middle and that chasm becomes incredibly difficult to cross?
I don’t know if this is happening but my gut says it is – through a combination of bad laws and technological changes. If it is happening, then the redistributionist idea of taking money from the top and shoveling it to the bottom will accomplish nothing. It will simply gather us all closer to either side of the chasm. They will have misdiagnosed the disease.
But perhaps, rather than being dismissive, we can more properly diagnose this idea of income inequality and propose conservative solutions that build a bridge across the chasm.
Perhaps.
Unequal is not necessarily poor. It could just be less rich. And when it comes to inequality, the kind of people who worry that somebody has too much generally think anything more than what they have is too much.
Many people perceive their own situation in relative terms. If others around them are doing a lot better, they feel a sense of exclusion, don’t necessarily understand or accept why things are different for them, perceive it as injustice (which may well be true), and are unhappy.
While it’s good to promote a general sense of gratitude, it’s a fact of life that some people will always be upset that their situation isn’t as good as their neighbors’. Our natural response is to respond defensively, give lectures about the abstract principles of the free market and the rising tide, and dismiss it as statistical smoke and mirrors.
But this will not make us friends and win votes. As Casey suggests, we should resist the urge to tell them, “You’re not poor, there’s no inequality. Statistically speaking 75% of your income bracket will rise by three quintiles before age 65”, and instead acknowledge their reality.
Poverty is a problem. Inequality is not, or should not be considered one. If we are going to wring our hands over inequality, we are once again letting the left set the agenda. Since we will never have perfect material equality, there will always be fodder for the outrage of those who want to leverage inequality.
Let us instead address poverty, for which we know the cure.
To the extent that we operate in a free market this statement is essentially true. However, I believe it is naive to think we operate in a free market.
See Don’s earlier comment. #20
Okay, I have read Don´s comment and see his point, but I still think it is a mistake to embrace an issue which is just pandering. Crony capitalism should be eliminated on general principles, not because it causes inequality. (I assume–perhaps mistakenly–that this is the main cause of the unequal growth in income).
By the way, have I ever mentioned, Casey, that your avatar is hands down the cutest on Ricochet and it always makes me smile?
I think this is oversimplifying the issue. If somebody said, “Since we will never achieve the complete elimination of poverty, there will always be fodder for the outrage of those who want to leverage poverty”, we would not therefore decide to stop talking about poverty.
It’s also no good to tell someone who feels like he is suffering from severe inequality, in the form of hardships he has but his neighbors don’t, that he should quit complaining because he’s never known “true poverty”.
Opposing government action to reduce inequality does not also require us to deny that it is a real fact, that it makes people upset, and that in its severe forms it can lead to social friction that degrades our political culture.
Stop with the straw man already! Or show me where is the callous soul who has so proposed?
Maybe we should just ask this question, over and over: If the poor vote for Democrats and the non-poor for Republicans, which party has an interest in perpetuating poverty?
EJHill had nothing to do with it! :)
Income inequality is a good thing, so long as it is not associated with high levels of cronyism. High levels of non-crony income inequality means that the most talented are being heavily motivated to create lots of value. This value “trickles down” to all, resulting in those with the lower levels of income having a substantially improved standard of living. Such a dynamic also tends to result in high levels of income mobility, as the new value creators supplant the elites of old and usually at much higher levels.
Of course in cases of cronyism, very seldom are high levels of value being created for all, it’s usually more a case of profiting from rent-seeking, to everyone else’s detriment. Likewise, income mobility by tearing down existing fortunes is bad, because it serves as a detriment to the talented creating more value. Instead they spend lots of time and resources trying to avoid the death tax.