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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
Sorry, I’m not trying to put up strawmen. There are several comments on this thread that dismissed the concept altogether. I agree that poverty is obviously the more pressing issue. I’m just trying to hit this narrow middle ground between pushing for some kind of government action “against the rich” as you’ve rightly pointed out, and the other extreme which says that even talking inequality is worse than useless.
Count me in with the latter group. :)
That’s true. It’s also true that inequality is reduced when more people feel growth from the bottom, which hits two birds with one stone. As you said, we shouldn’t focus on inequality and we shouldn’t try to bring anybody down just to reduce it.
Oops, posted too soon and now I can’t edit. The last thing I wanted to add to my previous comment is:
But I also don’t think we should dismiss complaints about inequality or deny that it is a real thing that can have negative consequences — which is the impression I draw from some of the comments on this thread and elsewhere.
The real consequences it can have are psychological and aggravated by dwelling on them. You should say to the one who complains, “What can be done to improve your situation?” Without reference to anyone else’s.
Sorry I am getting “short” here. Remunerated labor calls!
With respect to my comment #20, I originally wrote a humorous over-the-top huffy first paragraph, but deleted it for space limitations.
So it was going to be:
——
So now I’d like to say:
Hear! Hear!
I agree. But here’s what I think “income inequality” means to many American voters: Megacorp, Inc. has a CEO who takes home $35 million per year including stock options. He runs the company poorly, falls deep into the red, and then decides to lay off thousands of low wage hourly employees, causing some to lose their homes. The CEO gets fired by the board and has to settle for a couple million dollars of severance — a hundred times more money than any of his laid off employees made in an entire year.
So which politician gets the votes: the guy who appeals to Americans’ sense of fairness and sympathy to say this is not right, or the guy who says “income inequality” is not a legitimate concept? We will lose every time.
I don’t support government redistribution of wealth nor laws restricting executive salaries, but don’t you think we need to address the issue?
Unfairness does not equal inequality. That someone is handsomely compensated for doing a poor job is clearly unfair. That others lose their jobs because of it is tragic. And none of it has anything to do with inequality.
If the CEO were paid $100,000 with the same results, those who lost their jobs would be just as unemployed and possibly houseless. We need to stop acknowledging inequality as an issue.
I don’t care. Individual liberty is primary; any inequality in income is a side-effect, and should neither be sought nor avoided.
You’re right, unfairness and inequality are not the same thing. But in this example, the unfairness was directly a result of the people being treated differently: their unequal compensation and unequal consequences. If they had all been laid off with the same severance, I don’t think people would complain about it being unfair. Well, they might still say it’s unfair in a cosmic sense that people lost their jobs, but they wouldn’t say the treatment of the employees was unfair relative to the executive.
And, Sowell also observes the same is true of countless other kinds of inequality….
To be blunt, I think this kind of response is what repels a lot of people from the conservative movement. It plays into their stereotypes of us perfectly. Note I’m not saying you’re wrong on substance.
Sorry, Don. I didn’t mean to imply you said more than you did. But there is truth in your jest.
Over and over on this thread we hear that inequality is a natural byproduct of the free market. In fact, it’s an indicator of the health and success of a free market economy. Mark and I are willing to grant that is true. But how does that apply to the United States today? Or maybe Ever?
Rather than trying to make the case that inequality doesn’t matter in textbooks, therefore it must not matter in real life, we ought to acknowledge that it does matter and propose a solution that focuses on conservative ideas and squelches redistribution.
I agree the “I don’t care” was rude, so I apologize for that. The rest, though, was just terse and categorical (and my opinion), and I always hope thinking readers can handle such abrupt assertions objectively.
I was cranky, and blowing off some steam. I’m tired of hearing about income inequality, because I’m tired of our side being jerked around by accusations and pleas couched in such terms. I don’t believe we should do anything to grant legitimacy to these complaints because I don’t think they’re well-founded — or founded at all.
(cont….)
(cont….)
I believe income inequality is unavoidable, regardless of the system of government. Even in some ideal system in which each person’s life is getting ever better, and each earns more each year, the incomes would still be disparate. If each person is better off each year, I don’t understand why income inequality would be important. Wouldn’t a concern about it be naked envy?
I fear that granting this idea legitimacy increases the chance of misguided coercion to “fix” it. Leaving people alone is more important. It’s the best chance everyone has of making the best of their lives.
Why can’t conservatives understand they are going to “fix it” anyway? Why can’t we ever step in first and keep them from fixing it?
Because we’re not left-wing socialists who think the answer for everything is more government intervention. We shouldn’t be conceding the necessity of government solutions every time a problem (real or imagined) is presented. This just reinforces my belief that we are beyond fixing this mess, and the best thing for the long-term is the complete collapse of the current system. When hand-wringing over Marxist myths dictates our responses, we are no longer subject to the rule of law but to whatever the prevailing emotion of the moment is. The relationship between the federal government and its citizens has been fundamentally distorted by the welfare state and overreach, and it’s going to be a painful process to change it. Giving into it for expediency’s sake is going to make it that much harder to correct.
A while back, Kevin Williamson wrote a piece worth reading on this topic called “Inequality Does Not Matter“
Despite the title, Mr. Williamson’s article is not inconsistent with the statements Mark and I have made in this post.
I personally don’t care. I understand that rising tide helps all boats, but for society I think a huge disparity undermines national unity. I think the key is mobility. If only a select few get to be and stay rich, then we’ve created a defacto aristocracy. If the economy is dynamic and people over a generation or two fluctuate within the income classes then people will bristle at the rich. We threw off a defacto aristocracy once before.
$35 million for a CEO? That’s like the 18th highest paid in the world. No matter; here’s how I’d answer it:
With maybe 175,000 employees, that CEO salary would be less than $1.00 per employee per day, hardly enough to forestall layoffs. You need about $150 million to keep, say, 4000 minimum wage employees working.
Given that, explain to me exactly how government redistribution will fix the fundamental problem with Megacorp’s business model, change course, and keep those jobs. The answer should be in the form of a spreadsheet.
Of course. And this works fine for data-driven types. But for people who react emotionally based on concepts like fairness, which I would put forward as the approach of the average voter, that answer will probably hurt more than help.
And it’s not just government redistribution we need to forestall. It’s salary caps, or regulations that limit the ratio of earnings between top and bottom employees within a company, or requirements to fund unemployment funds. The other side has a half dozen “solutions” to something we don’t even acknowledge is real. That’s why they will win.
Numbers are often used to feed the flame of emotion. Like here. And when they do there’s an opportunity to show that the numeric perception is off by, very typically, a couple of orders of magnitude.
A classic example was when the left was complaining about suicides at the Foxcon plant in China. Emotional appeal. Well, Foxcon employs a million people, so their suicide rate was a small fraction of the overall Chinese suicide rate, completely flipping the complaint around.
So I was overly detailed above. For a quick debating point I would note that the ratio of CEO pay to the lowest paid employee is a bogus metric. Instead ask, “What is the cost of the CEO’s expertise and responsibility *per* *employee*?”. And that completely flips the argument around.
Correct. And, once we realize that, we realize that we need to stop talking about income inequality, right?
We start talking/thinking about crony capitalism, etc. And, we acknowledge that some causes — maybe among them, difference in intelligence and other abilities — are not “problems” to be solved by state intervention.
I’m annoyed with Owen Findy’s comments at #75 and #76 because he made the argument against the inane concept of “inequality” so much more astutely than I ever could.
That’s not fair!
Did the numbers win the argument? Were most people convinced there was no problem at the plant? I honestly don’t remember, but I’m skeptical.
The three million Republican working-class who stayed home in 2012 might disagree with you.
First, the problems of the American working class are well documented; they suffer from cultural problems, wage stagnation, and a lack of social capital (see Charles Murry’s A Coming Apart, or Robert Putnam’s Bowling Alone). Each one of these reinforce the others.
Second, Elizabeth Warren’s audience is college-educated professionals and leftist activists. She says those things to look good, not because the working-class is her base.
Third, physical capital need not replace workers, that was the entire point of my comments on immigration. Workers aren’t being replaced by physical capital, they are suffering from a lack of it, and one way to increase capital formation is to have a tight labor market.
Suicide rate is generally specified as deaths per 100,000 population per year. It was reported that 14 Foxconn workers committed suicide in 2010. (Wikipedia: Foxconn Suicides) With about 1 million employees that’s a suicide rate of 1.4 deaths per 100,000.
The data here is somewhat murky, but the last time I checked the US suicide rate was about 11 deaths per 100,000, and the China suicide rate was about 22 deaths per 100,000.
So the suicide rate at Foxconn was an order of magnitude less than the regular Chinese suicide rate. (That’s to a first approximation. To do a proper study you’d need to narrow down the stats by demographics and all.)
And that’s the usual result when the left supplies numbers: order of magnitude, opposite direction.
Sorry, my question wasn’t clear. I assumed you were right about the numbers. I was trying to ask, in the realm of public opinion, did the numbers matter? Did the majority of the public and the media change their minds about it because of a careful examination of the data? I’m guessing not.