On Income Inequality

The latest leftist, anti-capitalist fad is income inequality — the fact that some people have higher incomes than others. Although income inequality is present in every society (no matter what economic system), it is apparently now a major concern because it appears to be growing in Western countries that are more or less capitalist. In fact, according to a panel of “experts” income inequality is the biggest global risk of the near future — right up there with massive national debts, high unemployment, etc. (isn’t it odd that income inequality suddenly became such a huge global risk right after the media started talking about it?).

Speaking of the media and income inequality, the BBC has an article reporting on analyses of U.S. and British income inequality which shows that income inequality has been rising for the past several decades (for some reason the title of this article is “The Wealth Gap” despite the fact that the article is about income, and it should be obvious that wealth != income). For the U.S., the BBC cites data from the CBO which show that between 1979 and 2007 real after-tax income (i.e. adjusted for inflation) increased from a high of 275% for the top 1% to a low of 18% for the bottom 20%. For the U.K., data from the World Top Incomes Database show that between 1997 and 2007 the average income for the bottom 90% increased from £10,567 to £12,430 while the average income for the top 0.1% increased more dramatically from £646,358 to £1,179,947. It’s clear from the data that income inequality is rising.

So what?

It’s also clear from the data cited that real income is rising at all levels. In the U.S. the bottom 20% saw an increase in their real after-tax income by 18%. That means that, in terms of income, even the bottom 20% of 2007 were about 18% better off than the the bottom 20% of 1979 (actually, data on the increase in wealth over this period would be even more enlightening). The rich are getting richer…and so are the poor (just not as quickly as the rich). We’re supposed to be fretting about the “global risk” posed by a world where even those with the least income are on average earning more and more?

Although the BBC article is clear in showing that income inequality is rising yet real income is also rising in all income brackets, it is really a superficial analysis which leaves several important details about income unclear. For one, it simply breaks down income into various classes (e.g. bottom 20%) instead of tracking individuals. Not all of the bottom 20% income earners in 1979 were still the bottom 20% income earners in 2007. This is due simply to the fact that individuals do not stay in the same income brackets during their lifetimes — they tend to earn more income over their careers (from promotions, raises, etc.) and rise from lower brackets to higher ones (and then back to lower brackets once they’ve accumulated enough wealth to retire). That CEO in the top 1% of income earners wasn’t always earning so much income — the income from his first job almost certainly put him in a lower income bracket. Similarly, some number of even the bottom 20% of 1979 were in a higher income bracket in 2007, in which case those individuals saw even more than an 18% increase in income between 1979 and 2007.

Another detail about income which is left unclear by the BBC article is how much income is from wages versus entitlement benefits — did the analyses cited include entitlement benefits as “income”? Individuals in lower brackets receive income from various entitlement programs, and these can add up to a significant portion of their disposable income. As an example (H/T Wintery Knight), it has been calculated that when taking into account entitlement benefits and different tax rates

a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year.

The income increase for the lower brackets may be underestimated by the analyses if entitlement benefits were not considered income. On the other hand, if entitlement benefits were considered income then one could appear to reduce income inequality by simply increasing entitlement benefits (and thus income in the lower brackets) — but such a naive solution would only exacerbate this already significant welfare trap while neglecting the far more productive goal of trying to increase income from wages.

It turns out that the BBC article isn’t the first time Britain has expressed worry about income inequality — British leftists have been unduly concerned about wealth and income inequality for decades. One such leftist challenged Margaret Thatcher on the fact that income inequality had increased during her time as Prime Minister, and the Iron Lady gave the same obvious response: all income levels had increased, so there’s no problem. The priceless video of this amusing exchange is here (H/T Wintery Knight):

It is certainly worth investigating why income and wealth inequality are increasing, but only to better understand the global economy and to help determine how to increase the income and wealth of the poor even faster. The real question is not how to reduce income and wealth inequality but how to increase the income and wealth of everyone. Increasing income and wealth inequality is not a problem if real income and wealth are also increasing at all levels, as is the case now. Leftists, who dislike capitalism and envy the rich, want everyone to be focused on the wrong issue (income inequality) in order to avoid talking about the fact that the free market has succeeded in increasing real incomes at all levels.

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4 thoughts on “On Income Inequality

  1. Pingback: Don’t be fooled by the income inequality red herring | Eternity Matters

  2. Pingback: Income Inequality… So? What’s the point? – | Rightlinks Blog – Greece: Setting the standard for Democrats everywhere

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