Beating the income inequality drum

Jan 17, 2014 by

By Dean Kalahar

January 17, 2014

Over the next two years the drumbeat of income inequality will be repeated more times than Iron Butterfly’s In A Gadda Da Vida. The political aim will be to sway the American voter into believing two things: income inequality in America is immoral, and the Democrats are the only party that can fix it. There is just one problem; it is a fallacy and conservatives better learn the tune if they want to win the next two elections.

This theatre of the absurd has three acts. First, confuse economic worth with self-worth and say that pay rates must be equalized to reflect the “equal worth” of every person. Second, say wealth is distributed unevenly, as if by some grand conspiracy. Third, demonize businesses for manipulating pay and degrading human dignity. As this melodrama gathers steam, the liberal curtain call is made to end the injustice of income inequality.

If we wanted to quickly destroy this fallacy we could look to Simon Kuznets, winner of the 1971 Nobel Prize in economics for his work on national income accounting. Kuznets’ conclusion: “In poor countries economic growth increases the income disparity between rich and poor people; but in wealthier countries economic growth narrowed the difference.” Or John Luke Gallop’s research in 2012 that showed “a strong tendency for inequality to fall with economic growth at low to middle income levels and a weaker tendency for inequality to rise at middle to high income levels.”

Of course Nobel Prize economics rarely influence the gullible so some simple economics is in order.

Economic classes that people are grouped into should not be confused with snobbery. Whether people are grouped into upper, middle and lower classes or into quintiles, showing for example the top 20% or bottom 20%, classes exist only to the extent they represent the breakdown if incomes by statistical groups. People are not born into and remain entrenched in static castes.

The “have” and “have-nots” are not different people, just people at different stages of their lives. Individuals in the bottom and top 20% are always changing. The top income earners retire while the lower income earners increase their human capital over time and replace those who were once on top of the earning scale.

Social mobility between classes happens with remarkable ease. A Wall Street Journal analysis of Treasury Department data on 96,700 income tax returns from 1996 to 2005 showed that nearly 58% of filers who were in the lowest income group in 1996 moved into a higher group by 2006. Almost 25% of the bottom income filers moved into the middle or upper income groups and 5.3% made it to the top quintile in ten years.

After factoring in inflation, the median income of all tax filers increased 24% over the same period. Those who were in the bottom quintile in 1996 saw their income increase 90.5% over the ten year period, while those in the top quintile saw only a 10% gain in income. 57% of the top 1% dropped into a lower income bracket over the decade. And only one income group had an absolute decrease in income: the top 1% saw their income decline by 25.8% over the ten year period.

Differences in family income from the bottom to top are also narrow. 90% of Americans make between $30K and $90K a year. Visualizing “poor” versus “rich” by comparing a homeless person to Warren Buffet may be dramatic, but highlighting the vivid exceptions to the statistical truth does not accurately portray demographic realities of income.

The top 20% are not all multi-millionaires. Focusing on the 1.8% of Americans that make $200,000 or more a year does little to advance reality. Most in the top 20% in America make less than $100,000 a year; and as Thomas Sowell has shown, an absolute majority of Americans in the bottom 20% make it into the top 20% over the course of approximately 17 years.

The bottom 20% does not mean “skid row.” Most of the people in the bottom 20% in America do not live on the streets or remain at the bottom for very long. If escaping from poverty is impossible, why do so many risk their lives on rafts or cross deserts to reach America if not to escape poverty?

Culture must be weighed into income data. The poor in America are far richer in real economic terms than the rich in many places around the globe. When the bottom 20% in America has a higher standard of living than the top 20% in many other countries, the cries of income inequality are disingenuous.

Using government data, Nicholas Eberstadt showed that in 1900 2% of homes had electricity and only one out of ten had flush toilets. In addition, fewer people lived in poverty in 1973 than today but in 1973 most poor people did not have a car while 75% of “poor” people today have a car. Today more “poor” homes have cell phones and cable TV than non-poor families had in 1970. One of the biggest problems of the “poor” today is not malnutrition; it is heart disease and diabetes found among obese individuals.

In addition, time, age, wisdom, skills experience, and productivity must also be factored into any analysis of income inequality. And don’t forget the laws of supply and demand are also constantly at play. Even equal opportunities differentiate income because not everyone will make the same choices with the freedom they are given. As Walter Williams says: income is earned, not distributed” and “far more important than income inequality is productivity inequality.”

The cry to equalize wages sounds harmless and seems “fair,” but it comes at the cost of efficiency. The lost incentives and signals that varying incomes provide to the market provide far more in terms of raising the standard of living for everyone than any moral benefit offered by do-gooders looking to seize power by sounding compassionate.

With the platform of “income inequality,” the left is utilizing semantic sleight of hand and emotional rhetoric to create an illusion by confusion. This drumbeat will be struck constantly as a political tool, like hammer and sickle, to gain power.

The goal of progressive theatre is to fly as peaceful as a butterfly in order to mask the true intent of building an iron curtain. Liberals can sing In A Gadda Da Vida as long as they want, but there is no Garden of Eden in a world of scarcity. Conservatives better learn quickly to change the tune.

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