Is income inequality a “problem”?

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Economics / Society & Culture

I was just watching the show “GPS” on CNN. Speaking on the subject of income inequality, host Fareed Zakaria said “everyone agrees that income inequality is a major problem.” His guest, Malcolm Gladwell (author of Blink) then explained a theory of how it started, with an expansion of capital in the 1970s, the elites in entertainment and major corporations began demanding higher incomes.

My first thought was: I didn’t know that “everyone agrees” that income inequality is a problem. I certainly don’t think so. What is inherently bad about some people having more or less income than other people? Who exactly is harmed by this? It seems to me that income inequality is more an opportunity to advance than some sort of limitation.

Furthermore, if we each have different talents, and some work more or harder than others, and if the products we produce vary in terms of supply and demand, then shouldn’t we expect incomes to vary? And if so, what would be required to solve this “problem”?

Gladwell’s answer is that we could have an even more progressive tax—that is, your tax rate goes up as your income does, so that the very rich pay a very high rate. But, he says, this is impossible to accomplish, politically. So plan “B” is to have institutions just stop paying so much. If people just say “enough with the high incomes” then we won’t have them. Wow, I didn’t realize it was so simple!

I want to take Gladwell to task on both his reason for high incomes and his solutions. Yes, part of the problem relates to something he said: access to expanded capital. For him, this was a result of good economic times, but he doesn’t factor in the easy money policies that the government pursued in the middle of the century, and Richard Nixon’s final separation of the dollar from gold. With a fully flexible currency, access to capital was just a matter of ink and paper. As American citizens have preferred to print money than to earn it, there are more dollars in circulation than there should be, making conditions right for greater income diversity.

Another generator of inequality was, as Gladwell probably knows, the lowering of the tax rate under Reagan, then more under Bush 43. This allowed the economy to grow and for more people to keep their earnings. With greater liberty comes more inequality.

And the third major reason for income inequality is a major increase in global trade, such as Clinton’s opening of trade relationships with China. But this doesn’t just benefit the wealthy—if half of the items you own have another country’s name stamped on it, you’ve benefited economically from global trade. And this is genuine growth, not an artificial boom caused by government. Again, liberty = inequality.

As for Gladwell’s solutions, I can’t understand how high and unequal taxes are somehow morally superior to unequal incomes. In order to believe that, you’d have to believe that a dollar in the hands of government, through taxation, is more just and honorable than a dollar in the hands of an individual, through skill and labor. Countries that have tried this system for any length of time have only driven themselves into poverty because they ignored principles of human behavior. And anyway, he’s right about it being impossible.

Lastly, no institution is going to just tell their high-earners to take less or leave. There’s a reason they are getting a high salary in the first place: the company believes that the person is worth it, and they’re willing to compete for that person using wages. Let’s see what happens when an NFL team decides to just stop paying so much.

As long as people are free to use their own money, there will be inequality, and the more currency in circulation, the greater that inequality will be. But none of that is necessarily bad.

The moral of the story is this: Next time CNN decides to discuss economic problems and solutions, they should consult an actual economist.

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  1. Pingback: Fixing Europe’s Income Inequality « The Peking Review

  2. Eric Bagai says

    There is a reason why Zakaria is thought of as the Tea Party’s liberal. This is it.

    There are many orders of magnitude of difference between a teacher’s salary and the income of a hedge fund manager, and it can’t be justified ethically or economically. It’s just wrong. Zakaria makes it seem justifiable by comparing phrases and neutral concepts, not numbers.

    • Why is it wrong that teachers exchange their work for less money than the hedge fund managers?

      On the moral front, is the latter somehow hurting the former?

      And economically speaking, there’s no real way to measure the output of a teacher, so we can’t compare in precise terms. But the price of an average teacher’s labor tells me that society generally does not think an average education is as productive as a well-managed hedge fund. But you’re really comparing apples to oranges.

  3. Rapid increase in the currency in circulation (inflation) is the main cause. And the teacher vs. hedge fund manager aptly illustrate why. The teacher, as a union member, has a set salary, perhaps locked into a contract extending beyond two years. The “excess” money is naturally not going to go to the teacher. The manager, whose income is derived from opportunistic investing naturally finds means of promptly putting “excess liquidity” to use (and into his pocket).
    The predictions of tax revenues resulting from Bush II’s tax cut ended up producing an excess of more than $400-billion (or an expansion in the GDP in excess of $2-trillion). And guess what, income inequality increased correspondingly.
    Perhaps history’s biggest ever booster of income inequality will be the Obama-Bernacke-Geithner money printing presses.

    • Very interesting. I don’t believe I’ve ever considered the distributive effects of stimulus spending on contract vs. commissioned pay. Thank you for that!

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