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  • Income Inequality, One More Time

    This is part three in a debate with liberal blogger Tim Mitchell on whether income inequality is a problem. In part one I laid out why income inequality isn’t a problem. In part two I refuted arguments made by Mr. Mitchell. In this post I show why Mr. Mitchell’s arguments continue to fall short. For part one from Mr. Mitchell, click here. For part two from him, click here. For part three from him, click here.

    The fundamental point about income inequality remains: All income groups have made solid economic gains over the past few decades, and nothing in Mr. Mitchell’s arguments indicates otherwise.

    In the opening paragraph, Mr. Mitchell states that questioning why income inequality matters if all income levels are gaining is “a poor way of framing the argument as it makes magnitude irrelevant. Indeed, following Mr. Weinberger’s logic, the top 1% could be taking home $0.99 of every dollar the entire country earns, essentially turning our society into an oligarchy, yet Mr. Weinberger would ask what the problem is.”

    This statement encapsulates most fundamentally the difference in worldviews. The left sees inequality itself as a problem. This is because equality is one of the left’s highest values. The right values equality, too, but in a different sense. The left values equality in the sense of equal outcomes. The right values equality in the sense of equal opportunity. The conflict arises because equality of opportunity is incompatible with equality of outcome.

    In response to Mr. Mitchell’s point, let’s assume for a moment that we’re in an economy where the top 1 percent takes home $0.99 of every dollar (We’re nowhere near that today), but everyone is still gaining. How could this be, some may ask?

    If there are more dollars in the economy, everyone will gain. For example, if we had an economy that produced $100 trillion per year, instead of our current $14 trillion per year, there would be many more dollars from which everybody could take a slice. So, even though the slices of each dollar would be unequal, everyone would be taking more total slices, resulting in gains for all.

    As a hypothetical, think about it like this: Would it be better to take 40 cents of every dollar in a $10 trillion economy, or to take 20 cents of every dollar in a $30 trillion economy? Alternately, assume in 1980 that the poor made $1 and the rich made $100. Assume that in 2010 the poor made $3 and the rich made $300. In this scenario, inequality has increased, but the poor have tripled their earnings. Would anyone argue that the poor aren’t any better off?

    Furthermore, purchasing power would continue to increase – every dollar would buy more goods and services – as I highlighted in my original post.

    So how one frames this debate comes down to one’s worldview: Is equality (of outcome) a goal in and of itself? If not, then why does it matter that some have gained more than others?

    However, Mr. Mitchell takes issue with my argument that all have gained. Specifically, he offers a rebuttal my point that lower- and middle-income earners have gained:

    Economists Ian Dew-Becker and Robert Gordon find that “over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth.

    First, the study doesn’t deny that all income groups have gained. Rather, it argues that incomes apart from those in the top ten percent didn’t grow equal to or faster than average productivity growth. In other words, income gains weren’t equal because the top gained more than the bottom.

    Arguing that incomes for 90 percent of Americans didn’t grow faster than average productivity growth is a far cry from arguing that, “for most households, income growth in the 1970s and 1980s was hardly noticeable and was actually negative for 60% of the population during the Bush years,” as Mr. Micthell argued in his original post.

    Besides, when looking at income gains, isn’t the relevant question, who is productive? Isn’t it very possible that top earners – Steve Forbes, Steve Jobs, etc. – were most productive? Among other things, top earners do tend to work longer hours than the rest.

    Even so, this study understates the gains of the lower- and middle-class. Like the Census Bureau, Picketty-Saez and CBO numbers Mr. Mitchell earlier supplied, this study also doesn’t take into account benefits and pension in addition to income (total compensation).

    Nor does it adjust for number of people per household. Mr. Mitchell questions whether adjusting for this is really important, arguing that in doing so “we would be attributing growing incomes to the fact that American families chose to have fewer children. But why should the choice to have a smaller family be considered a form of income growth?”

    The point, though, is that the data he provides measure households, not individuals. High-income households tend to be married couples with multiple members of the family earning money, while low-income households tend to be single-parent households with fewer people earning. Assuming they’re all making similar salaries, would it be appropriate to count people in households which have three income earners as rich, while counting people in households with one income earner as middle-class?

    Thus, absent from Mr. Mitchell’s response is a refutation to the central fact that when total compensation is taken into account and household adjustments are made, the statistics are clear that the middle-class has made a 33 percent gain, or $18,000, since 1979, and this has come with little personal debt.

    And as I added, these statistics also don’t account for equalizing factors such as taxation, which is much heavier on the rich, nor transfer payments, which favor lower- and middle-income earners. Excluding these two factors make economic inequality appear much more unequal, and miss a large chunk of lower- and middle-income compensation.

    So not only have lower- and middle-income earners made significant gains relative to 1979, but wealth concentration has stayed pretty flat, indicating that when “all financial and nonfinancial assets, including bank accounts, investments, houses, cars and debt,” are taken into account, there is more equality. This supports the evidence that consumption inequality is not as large as income inequality.

    Mr. Mitchell argues that consumption inequality is not really smaller. He states:

    …we know that prices overall are increasing, but if computers and cell phones are getting cheaper, something else must be driving the increase in prices. Health care is an obvious answer; the cost of college tuition is another.

    But the important point is that while most things that were once available only to the rich are now cheaper and available to the middle- and lower-class (TVs, cell phones, cars, computers, air travel, vacations, cabins, iPods, among others), since 1979, more people than ever before from the middle- and lower-class also enjoy college education, despite its rising costs. Similarly, compared to 1979, more people from the middle-class today are insured and receive health benefits from their employers (part of total compensation). In fact, health benefits have been a huge part of compensation over the past few decades.

    And lastly, progressive Stephen Rose is right when he argues that the “entire ‘decline’ of the middle class came from people moving up the income ladder.” Mr. Mitchell responded that “by focusing on income levels rather than growth rates, Rose totally misses the boat: that’s only about a 1% annual income growth rate…”

    In other words, according to Mr. Mitchell, gains weren’t equal enough: Some were gaining much more than others.

    So we arrive back to the point I raised in the introduction of this post: If all income groups have gained since 1979 – some groups by 33 percent, others by 333 percent – why does inequality matter? The answer may well depend on whether one more strongly values equality of outcome or equality of opportunity. But the statistics are clear: No matter how one slices it, all income groups have gained over the past few decades.

    Posted in Economics [slideshow_deploy]

    15 Responses to Income Inequality, One More Time

    1. Joe the Realist says:

      Equality of opportunity? Are you really trying to argue that opportunities are equal for the rich and the poor? I can't think of a more ignorant statement.

      We should increase taxes on the highest tax brackets and create new tax brackets for millionaires in order to help pay for the inequity of opportunity that exists. Please remember that we have a progressive tax rate in this country. We all (rich and poor) pay 10% of our first $8,500, 15% of our next $26,000, and so on. So, if the rich can't stand paying more taxes on the money they make over $379,150, they could simply give the additional money to any number of charities. It seems to me that they have that opportunity, while the poor does not.

      • Steve says:

        You are incorrect, and moreover, a fool. While the system may be progressive, it does not equate to actual taxes paid. In addition, the United states has the most progressive tax structure in the OECD. Finally, note that the bottom 48% of earners apy no Federal income taxes at all. Education, you clearly have none.

    2. OhioHistorian says:

      Equal outcome can happen with equal opportunity. An outcome of zero with an opportunity of zero is the normal state, however.

      What will be the common denominator will be hopelessness, not opportunity. Those who have not need to read Walter E Williams April 13, 2011 column, Eat the Rich. He shows how there are not enough resources in this country to give what the liberals are promising each other. The result is that all will have much less than today, just has happened in Cuba, is happening in Venezuela, and any other country where this outcome equality is tried.

      What the average liberal needs to realize is that under their preferred scenario, they lose all of their wealth and privilege as well. Unless they intend to take the government by force, they will not be the natural rulers because they have been the sheep of the truly malevolent people who are pulling their strings. They will be in at least as much, if not more, poverty and hopelessness than the rest of us.

    3. alec romalo Scotts V says:

      EXCELLENT ARTICLE , KEEP IT GOING..

    4. Mike, Wichita Falls says:

      An AP article in today's paper seemed to lament the fact that the top earners, the "evil" rich, were only paying an effective 17% income tax due to a legion of deductions available to all people. One of the primary deductions for me is charitable contributions, and I believe it is for those top earners as well. Face it…the government, the "evil" rich and the middle-class are in the business of charity. It is laudable and praiseworthy when individuals, rich or middle-class, engage in it, but it is legalized theft when the government does so. I would rather have millions of rich and middle-class individuals making carefully considered charitable contributions than one large federal government that can't even balance a budget.

    5. Don Harper, Lubbock, says:

      For course, the rich have greater opportunities than the poor. But, at least in this country, the poor do have plenty of opportunities if they will only avail themselves of them. When the poor begin to value education and realize the self esteem derived from the rewards of their own efforts, then they will move up the income ladder. But as long as the government offers them a meager, but liveable existence through wealth transfer, there is little incentive for them to exert themselves. Poverty should have uncomfortable consequences, which would cause most to try to get out of poverty. It used to be that way.

    6. Leon Lundquist, Dura says:

      I should like to point out that Rich Americans are Americans too! They are also entitled to Equal Protection under the Law. The Rich are also entitled to Free Speech, and Equal Opportunity. Considering the mouth foaming hatred of Capitalists we see coming from the Left, our Rich Americans are becoming an endangered species! It is not lost on me that Capitalists were attacked mercilessly by National Socialists, that is the reason Nazi's hated Jews, not because they were Jewish but because they were Capitalists!

      If you take an equal percentage of a bigger fund you naturally get more cash, and in a way this is another example of "Statistics Lie!" Of course the Rich got richer, but so did everybody else! Progressives hate the facts! In the last 200 years the American Experiment has conclusively proved that "Everybody can be rich!" Our poor became rich compared to any other national demographic. For some strange reason Progressives cannot see the virtue of Growing the Pie! We have already solved the Poverty Problem with our Constitutional Representative Government! Communism never worked and never will. None are so blind as those who refuse to see!

      I would rather have twenty percent of $100 Trillion than 99% of the Rich American's Capital, we know the deficit cannot be paid if we took all their Money! But, it would be Criminal to ask! That's my point all along, the Democrats are asking for Totalitarian Powers! You have answered Mitchell very well. Thank you.

    7. sam says:

      What happened to the value of our 'legal Tender' since 1979? We don't know yet!

    8. Chris in N.Va says:

      More than one college professor has given students the opportunity to "level the playing field" and "redistribute" test scores from the top tier, who studied their little behinds off, and spread them equally across the strata, to include the party-hearty and don't-study-at-all group.

      The underachievers routinely embrace the scheme, which lifts their grades for a short while until the high achievers, tired of seeing their efforts punished, quickly adopt the study/work ethos (or lack thereof) of the bottom strata. Soon, all students were languishing in the D-to-F realm, with the intended beneficiaries of the A-students' largesse complaining the loudest, but still contributing the least. Where the good-intention-paved road led.

      Funny how that works in a "market" kind of environment; you get more of what you reward and less of what you punish/disinsentivize.

      There are those who learn by instruction, those who learn from others' experiences, and then there are those who will only learn by peeing on the electric fence for themselves.

    9. Darlene, San Diego says:

      To Don in Lubbock — couldn't agree more. Too many people nowadays sit at home watching TV and waiting for the arrival of the government check — and then just run to the voting booth every few years to re-elect the politicians who promise them the most "freebies," — i.e., the fruits of someone ELSE'S labor.

      As a nurse, it makes me SICK and ANGRY to see people having MORE children when they're dependent upon government assistance (i.e., TAXPAYER-funded) checks to raise and feed the ones they ALREADY have at home, and to see so many people playing the "disability" game (the list of "disabilities" keeps growing, including diagnoses such as "chronic fatigue syndrome") — from a relatively young age — when they are perfectly capable of doing SOME kind of productive work to support themselves.

      — and now we have a president and Congress who are turning a blind eye to our federal immigration laws — even going so far as to SUE state governors who are trying to enforce them — and wanting to grant amnesty and citizenship to illegal (i.e., lawbreaker) immigrants in this country, a large number of whom, statistically, do not even finish high school, and who will most likely ensure the re-election of "candy-man" politicians in perpetuity.

      … and a note to "Joe the Realist" — Who do you think already donates the largest amount of money to charitable causes and organizations? — Hint: it isn't the poor — and I personally know several "wealthy" people who originated from "poor" families, but had the initiative and drive to take advantage of the opportunities that EVERYONE in this country has to better him/herself — i.e., working toward a high school diploma, at the very least, and attending college (money IS available to low-income students, if they take the initiative to do the research — low-cost student loans, government grants, and SCHOLARSHIPS, if they're willing to work for them) — and I am speaking from PERSONAL EXPERIENCE. Some of us might start out on a lower rung of the ladder, but EVERYONE has "equity of opportunity" in this country, if one has the initiative and drive to work his way up the ladder — too many people expect to be granted a job on the top rung immediately after graduation from high school or college, or would rather accept a government-issued unemployment check, than do a job that is "beneath" them — and then whine about those who have "won life's lottery."

    10. David, Virginia says:

      While there are a few of the rich who got there through immoral, unethical and illegal means, most got there by earning it. Most of today's richest Americans weren't born rich, they weren't met at the front door of their high school on graduation day by someone offering them a free ride. Most of the rich took advantage of the same opportunity that EVERY citizen of the country has – they worked to pay for an education, they got a job and learned a business, or they started their own business. Bottom line – they worked their butts off and earned what they have. A huge chunk of government spending every year is money that the government confiscated from those who EARNED it to give to those who won't. Call it welfare, call it medicaid, call it WIC, call it unemployment, housing assistance, etc. etc. etc. Those are all just fancy names for redistribution, confiscating from those who earn to give to those who don't.

      Yes, we need to take care of those who CAN'T take care of themselves. But their is a huge difference between CAN'T and WON'T. No I'm not one of those "evil rich", but I do contribute my fair share every year to support those who won't. And I'm tired of watching a chunk of what I have worked for being confiscated to provide a handout to the "poor and underpriveleged" who are only lacking in ambition.

    11. Thomas in San Diego, says:

      The USA is one of very few places where a poor person can become very well-off, or even wealthy, by dint of hard work, frugal habits, and seizing opportunities for advancement. Long ago Ben Franklin noted that in his travels he saw that too much charity for the poor kept them in poverty. Liberals have not yet learned that obvious lesson.T

    12. Pingback: Income Inequality, Round Two | The Foundry: Conservative Policy News.

    13. Pingback: Why Does Income Inequality Matter? | The Foundry: Conservative Policy News.

    14. Entropy says:

      I am one of those independents with an admittedly conservative leaning. However I do not dismiss the fundamental concerns that the average citizen of a liberal persuasion raises.

      To those on the right since that is my orientation, I am an extremely hard worker. As a chemist of 25 years i do not think you can casually dismiss me as a whack job

      Now, my observations from my years in the work force. The idea that there is equal opportunity in american if you bust your hiney is ludicrous. I work for people who could not do basic math without a calculator, yet they are the managers and I am the rank and file worker. The reason is simple.They hire friends and family, promote on the basis of friendship and lock out true achievers based on merit. This happens time and time again in american workplaces. That is nepotism.

      So my friends, I know the government is a failure of momumental proportions, but so is the private sector.

      So as a weary independent, I could care less if they tax us all into oblivion. I am representive of alot of voters.

      You can argue about my sentiment or think about it as the next elections cycle comes.

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