Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
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
You can answer that as well as I.
I would say, “A little, not a lot.”
This is a great example of why statistics are problematic. In this case the stats do not address why.
In life there are many reasons people commit suicide. At this company you have one person every 3 weeks killing themselves for the same reason. (Presumably)
Comparing the rates and concluding the company has no problem is quite like looking at macro data and concluding that inequality is not a problem.
When one looks beyond the data one can see that it certainly is a problem, one reason is bad policy, and we can fix that with good policy.
:) I’ll take an inside-out compliment any day!
Re. the exchange on suicide, poverty and, I guess, though it seems to be lost, income inequality: With Durkheim’s classic study (1897), suicide became associated with social isolation — the less closely tied to society one was, he said, the more prone to killing oneself. At least in the US, suicide has also long been thought to go with affluence — the more affluent the individual, the more at risk.
The US suicide rate has long been high by western standards, a dark offshoot, perhaps, not just of affluence but of social and geographic mobility and individualism. According to Wikipedia, China’s rate is significantly below ours, which could have to do both with less absolute affluence and tight social bonds within villages.
Foxconn presents a more urban-like environment than most of heavily rural China knows, but one in which the workers live, dine and spend leisure time together, much as in village life. It is possible (perhaps even likely) that Foxconn’s low suicide rate has to do both with China’s comparatively low rate and with a high sense of community among the workers — none of which correlates with the way the media portrayals that prompted this discussion presented the company, the state of mind of the workers, or the causes of suicide.
Go figure.
I am with many posters here who are hardly troubled by income equality in a free market system, but, sadly, our attitude will likely not resonate with those who have been indoctrinated against capitalism. So I greatly appreciate this informative post, as it provides factual data that undermines the premises that 1) income disparities under a free market are largely a result of exploitation and 2) that people mostly remain in a certain income group and do not achieve upward mobility. Thanks very much for the post.
Income inequality is a bad thing when society is a multi-cultural “saladbowl” because all-too-often the haves and have-nots tend to align to some degree along cultural lines, which only serves to spur claims of discrimination, predjudice, etc. It is also a bad thing when the culture is based around conspicuous consumption, since the inability to “keep up with the Joneses” will again lead to disgruntlement among the less-fortunate.
That said, there are plenty of societies that can handle high inequality – ones with homogenous populations (or whose minorities have assimilated to prevailing cultural norms), for a start. Societies with cultural mores that emphasize thrift as opposed to consumption would also seem to be well-equipped to not care too much about inequality.
Basically, it seems to me that inequality just takes the already-existing fault-lines in a society and magnifies them several times over. If society is cohesive, tranquil, and with a firm cultural consensus, then inequality won’t matter so much. If society is fractious, loud, and prone to factionalization, then inequality will drive huge wedges between people and groups.
Good points, Adam. Especially the importance of sharing a common culture. The left does not want a common culture because their whole game is to pit groups against each other.
Compared to three hundred years ago, there is less of a gap between rich and poor. Only the rich rode in carriages, the poor walked. Now the rich drive a Lexus and the poor drive a used Ford, but they all have cars. Only the rich had a watch, the poor counted on the sun and the stars to know what time it was. Now the rich man has a gold watch and the poor man has a plastic one, but it probably keeps better time.
By the way, these observations are not mine, I think they were Thomas Sowell’s, but I’m not sure.
Gretchen, I’m not sure I agree that three hundred years ago there was more inequality between rich and poor. Actually, I’m not even sure they’re all that comparable. Though I’m not an economist or even all that good with numbers, intuitively there seems to be a vast gulf between a society in which the primary form of capital is arable land and the primary mode of production subsistence farming on the one hand, and on the other our post-industrial mishmash where everything is liquidated and globalized six ways to Sunday. Is a dirt-farming yeoman who settled on a scrap of rocky Tennessee upcountry better or worse off than a paralegal making $40,000 in the Bronx? At least the farmer had direct control over where his next meal came from and where he lay his head at night. The paralegal has access to much, much more liquid wealth, but is arguably in a more tenuous position vis. the farmer.
Anyway, this is a (probably) irrelevant digression that isn’t germane to Peter’s question.