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.
The Conceptual Flaw in Income Inequality Concerns
It is already becoming clear that one of the major issues that the 2016 presidential election will turn upon is income inequality. Republicans should be able to win that struggle if they turn the conversation to economic growth. As I note in my new column for Defining Ideas, there are plenty of conceptual weaknesses in the progressive argument that the GOP can seize upon:
Let’s start with this fundamental observation: It is possible to reduce income inequality in one of two ways: lower the income at the top or raise it at the bottom. Indeed, it is possible, but only by extreme measures, to eliminate all inequality by spreading the wealth of the richest individuals around so that everyone has the same income. Yet none of the critics of income inequality will go that far, because they realize that that strategy will depress the income of the poor as well as the rich. So instead these critics moderate their demands: they are willing to sacrifice some measure of overall social welfare to obtain greater benefits at the bottom. Their theoretical position is that the substantial gains in utility for the poor will override the relatively small losses in personal satisfaction and living standards that the top income earners will experience as a result of redistribution.
Pity is, they have no idea how to steer this middle course. Politics is a very imperfect science to say the least, so that it is all too easy for these progressive policies to overshoot the mark, as it is much easier to lower levels of wealth than it is to raise them. Put simply, it is an intellectual fantasy to think that it is possible to address questions of inequality without taking into account any productivity losses that these proposals may take. Those difficulties do not arise if the first emphasis is placed instead upon the creation of wealth. Indeed it is altogether possible to improve the position of the worst off in society by a set of productive measures that widen the income gap between rich and poor.
Assume that we have just two groups in society, one of whose members all have wealth at the level of 10 and the second, far smaller, have wealth at the level of 1,000. A change in legal position that increases the wealth of the bottom group from 10 to 15 and the top group from 1,000 to 1,200 will increase absolute inequality even as it improves the position of the people at the bottom. Ironically, it will also give larger percentage increases to those at the bottom. Indeed, many social changes do produce gains across the board. But it is typically beyond the capacity of any social planner to steer productive activity in ways that ensure that whatever growth does take place will result in a reduction of any income gap by any system of state taxation and regulation.
Read the full column here and let me know what you think in the comments.
Published in Economics
If it can’t be restated by the average Joe at a lunch counter, it won’t do us any good.
Can you recast the argument with that rule in mind, Professor?
Let’s quit using their language. Talk about Earnings Inequality, not Income Inequality.
A rising tide lifts all boats. Don’t worry about the size of your neighbor’s boat- just worry that the tide is coming in.
Here’s how I would explain it to lunch counter Joe. If the company you work for has a really prosperous year and everyone in the company gets a bonus that amounts to 6 weeks pay, there is going to be an even greater gap between the guys at the top and the guys at the bottom. Still, the guy at the bottom is better off than before. If the company has a lousy year and the only way to prevent layoffs is to cut everyone’s pay by 10%, congratulations, there is now a smaller income gap. But the guys at the bottom are worse off than before. So what’s more important, the amount of money in your wallet or the difference between your wallet and the CEO’s?
FightininPhilly. Well said!
The Left’s entire “Income Inequality” argument is the logic employed by your average mugger:
I want money.
That guy/gal has money.
I’ll use force to take theirs for myself.
Nothing but crass, green-eyed envy dressed up as an academic economic argument.
Fun with median family income and income equality:
Let’s construct a simple economy composed of five families and examine one simple change and its impact on income distribution and income inequality:
FAMILY. INCOME
A. 100,000
B. 80,000
C. 60,000
D. 40,000
E. 20,000
OK. What is median family income?
60,000
Let’s consider family C. It is a two earner married couple, each person earning 30,000 per year.
OK. Let’s suppose EVERYONE gets a 10% raise. And let’s also suppose that family C gets divorced.
FAMILY. INCOME
A. 110,000
B. 88,000
D. 44,000
C1. 33,000
C2. 33,000
E. 22,000
What is median family income now?
38,500. ( (44,000 + 33,000) divided by 2 )
So. Everyone’s income went UP by 10%. But changing the composition of family C resulted in median family income falling from 60,000 to 38,500
Ok. Now lets suppose that instead of family C getting divorced … Family E got divorced. Family E is also a 2 earner couple each originally earning 10,000. Recall, our original income distribution …
FAMILY. INCOME
A. 100,000
B. 80,000
C. 60,000
D. 40,000
E. 20,000
Median family income is 60,000. Again, everyone gets a 10% raise but now family E gets divorced.
FAMILY. INCOME
A. 110,000
B. 88,000
C. 66,000
D. 44,000
E1 11,000
E2. 11,000
What is median family income now?
55,000 ( (66,000 + 44,000) divided by 2 ). So changing the composition of family E lowered median income from 60,000 to 55,000. And income inequality has doubled. Even though everyone has received a 10% raise.
That phraseology is a bit worn, no?
A climbing plane lifts all butts no matter what class your riding in….
Doesn’t quite roll off the tongue, I’ll work on it.
We need to phrase it in a manner the LIVs can understand;
“Would you be in favor of making your favorite movie star/rapper/sports star/tattoo artist/reality star pay 80% of their income to the government?”
The Left always uses CEOs/Bankers/Wall Street types when talking about income inequality because nobody likes those people. Use rich people the uninformed masses like and their answer will change.
Interesting!
It might help to point out to people that the average American taxi driver or school teacher lives a lifestyle that is probably closer to that of Bill Gates than to that of poor people Egypt or Haiti. Think about that. If you could live one year of your life like Warren Buffet but in exchange you had to live one year as a beggar in Burma, would you do it or would you rather keep your life as you have it now?
Maybe we shouldn’t break the system that allows even people at the lower end to live a pretty comfortable life.
Agreed. There seems to be a jealousy at play here.
And for some reason, we’ve become a culture where victim-hood is prized. We want to be looked at as downtrodden even though we live in more luxury than 99.9% of the humans who have ever lived and died.
For average Joe at the lunch counter: How about just saying that evaluating an economy based on income inequality is the sort of thing that only a Communist would do? You see, if what we care about is income inequality, then the best society is Communist — everyone is equally poor and equally miserable.
There’s a reason why only Left-wingers talk about income inequality.
What we need to talk about is how ordinary hard-working people are doing. Are average wages up or down?
I don’t care whether the rich get richer. When the Dems talk about it, they’re babbling like Commies and trying to distract the people from what really matters.
I care whether honest, hard-working people can make a decent living in this country.
What’s wrong with saying that you want everybody to be able to earn a lot of money and get rich? It’s a great aspiration for a society- and you know what? A lot of poor people do want to earn a lot of money and get rich.
If you can tap into that without insulting half of society I think you’re onto a winner.
These days I’m just full of quotes I can’t give attribution to because I can’t remember who actually said them, but I distinctly remember reading about a humorist in early 1900’s (possibly Will Rogers) advising politicians running for office: “Don’t tell people that you’re going to soak the rich, because most people plan to become rich and they don’t want to be soaked for it.”
That also may be a comment on a difference between the U.S. population then and now.
Good News: The government is going to make the rich pay for everything.
Bad News: According to the government, you’re rich.
I saw this on Facebook:
So, the progressives’ goal is to help the middle class while avoiding helping the rich. I’m not sure why the rich not getting richer would be a goal in and of itself, but okay. However, it seems to me that most if not all possible changes we could make to the system that make it easier for the poor to get richer will be at least as effective at making it easier for the rich to get richer. A free market is going to benefit everyone, but especially people who are good at providing things people want to buy. That’s going to benefit rich people more than poor people, although it will benefit both. In a centrally planned economy, the rich are going to be better at gaming that system to their benefit, so I don’t see how that gets to the goal of equality either. Maybe an invention that somehow was very beneficial to those who are poor, but not especially beneficial to those who are rich? Even in that case, it seems like the rich would have the capitol needed to invest in that invention, and thus would benefit from it, while, not incidentally, also benefiting the poor.
Global poverty has dropped greatly due to economic growth. Poverty is a solvable problem. Income and wealth inequality are not solvable and are not problems.