Free Markets, Free People

James Q Wilson

Income inequality: why you shouldn’t care

James Q Wilson makes many of the same points that have been made here over the last few months concerning the argument about income inequality that the left has been trying to use as a reason to tax the rich even more than they’re taxed now.   In sum, most of the left’s arguments rest in the premise that the economy is a zero sum game and that the income the “rich” are taking had to come from someone else’s slice.

That argument, much like the climate change debate, depends on a measure of ignorance among those they’re trying to influence. 

In reality, income inequality is nothing to be concerned about when it meets certain conditions.   Or, in other words, it isn’t a zero sum game and everyone has an opportunity to do better.

The first measure as we’ve noted before, is income mobility.  Wilson:

The “rich” in America are not a monolithic, unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half of people in the top 1 percent in 1996 were still there in 2005. Such mobility is hardly surprising: A business school student, for instance, may have little money and high debts, but nine years later he or she could be earning a big Wall Street salary and bonus.

Mobility is not limited to the top-earning households. A study by economists at the Federal Reserve Bank of Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years. Over the same period, more than a third of those in the highest fifth of income-earners had moved down. Certainly, there are people such as Warren Buffett and Bill Gates who are ensconced in the top tier, but far more common are people who are rich for short periods.

In sum, you have both the top and bottom quintiles changing constantly as income earners move up or down fairly regularly.  That means those moving up must be getting the opportunity to do so somewhere, and the fact that there is a change of about half in the period studied says many are succeeding.

Who are these people that get ahead?  Well as Wilson mentions, a poor (I’m talking income here) student who graduates and gets a job in his or her field most likely won’t be poor in the sense of income very long.  And that goes for most of the “rich”:

Affluent people, compared with poor ones, tend to have greater education and spouses who work full time. The past three decades have seen significant increases in real earnings for people with advanced degrees. The Bureau of Labor Statistics found that between 1979 and 2010, hourly wages for men and women with at least a college degree rose by 33 percent and 20 percent, respectively, while they fell for all people with less than a high school diploma — by 9 percent for women and 31 percent for men.

Also, households with two earners have seen their incomes rise. This trend is driven in part by women’s increasing workforce participation, which doubled from 1950 to 2005 and which began to place women in well-paid jobs by the early 1980s.

Preparation, delayed gratification and a work ethic.  The old Puritan ideal.  Amazing the staying power it has, no?  That and adding a spouse with similar traits has a tendency to boost income to the household significantly.  Yet for some reason, the left (who, btw, are all about workplace equality and equal pay) now want you be jealous of those accomplishments.

If, as the left would prefer, we should be concerned with income inequality and the mechanism that advances it, the solution is simple:

We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce — but who would want to do that?

Well certainly not the left, who doesn’t want the rich to go away.  Instead it simply wants to make you hate them so they can justify taking more of their money.  But Wilson’s point is spot on.  This once was the key to the door of the American dream.  Now it’s the key to a class of citizen who is  vilified and called greedy and accused of not paying their “fair share”.  If anyone is killing the American dream, it is the American left.

The tax on the rich is offered as a panacea to all that ails us.  It will help pay down the debt and it will “level the playing” field.  One assumes that means that it will somehow help the poor not be poor. 

But Wilson points out, poverty in the US isn’t a function of the rich making a greater percentage of the national income.  Poverty is a cultural problem that has nothing to do with the rich or taxing them:

The real income problem in this country is not a question of who is rich, but rather of who is poor. Among the bottom fifth of income earners, many people, especially men, stay there their whole lives. Low education and unwed motherhood only exacerbate poverty, which is particularly acute among racial minorities. Brookings Institution economist Scott Winship has argued that two-thirds of black children in America experience a level of poverty that only 6 percent of white children will ever see, calling it a “national tragedy.”

Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.

Most of the lack of economic opportunity and dearth of skills comes not from the rich making too much, but those in that condition making poor choices early in their lives.  Combine that with some of the less desirable cultural aspects of poverty and you end up with a fairly permanent underclass with little hope of advancing.

But that has nothing to do with the rich or how much they make.  Problem?  Yes.  A product of income inequality.  No.

And even then, poverty in this country is a relative thing:

Between 1970 and 2010, the net worth of American households more than doubled, as did the number of television sets and air-conditioning units per home. In his book “The Poverty of the Poverty Rate,” Nicholas Eberstadt shows that over the past 30 or so years, the percentage of low-income children in the United States who are underweight has gone down, the share of low-income households lacking complete plumbing facilities has declined, and the area of their homes adequately heated has gone up. The fraction of poor households with a telephone, a television set and a clothes dryer has risen sharply.

In other words, the country has become more prosperous, as measured not by income but by consumption: In constant dollars, consumption by people in the lowest quintile rose by more than 40 percent over the past four decades.

Income as measured by the federal government is not a reliable indicator of well-being, but consumption is. Though poverty is a problem, it has become less of one.

I always think of my mother when I read things like this.  She was defined as “poor” after retirement and my father’s death.  House paid for, cars paid for, and had more money in retirement (very large savings account) than she could spend, but when measured against the arbitrary income line, you’d have thought she was eating cat food and living in a cardboard box.   She lived very well, but her “income” – all she received a year from Social Security – put her under the poverty line. 

So Wilson’s point is correct – measuring consumption paints a completely different picture, and that picture says things are getting relatively better for the “poor” in this country even while the rich seem to be getting richer.   Something about “lifting all boats” in there.

All of this is, simply, class war populism.  President Obama said in his State of the Union address, “call it class warfare if you want.”  Okay, I will.  That’s precisely what it is.  It is the demonization of a class designed to shift blame from one entity (in this case the Obama administration) to another (the rich) and blame them for all the problems now extant. 

The fact remains that income inequality isn’t a problem.  It is certainly not even a major problem.  And for the most part, American’s reject the argument:

American views about inequality have not changed much in the past quarter-century. In their 2009 book “Class War? What Americans Really Think About Economic Inequality,” political scientists Benjamin Page and Lawrence Jacobs report that big majorities, including poor people, agree that “it is ‘still possible’ to start out poor in this country, work hard, and become rich,” and reject the view that it is the government’s job to narrow the income gap. More recently, a December Gallup poll showed that 52 percent of Americans say inequality is “an acceptable part” of the nation’s economic system, compared with 45 percent who deemed it a “problem that needs to be fixed.” Similarly, 82 percent said economic growth is “extremely important” or “very important,” compared with 46 percent saying that reducing the gap between rich and poor is extremely or very important.

So why does the left continue to pursue it?  Well, one of the reasons is, as mentioned, a need to blame someone else for the perceived failings of this administration. “It’s not our fault.  If only the rich would pay their fair share.  But the Republicans won’t allow it”.

The second, of course, is that left – champions of progressive taxation – see this as an opportunity to advance that ideal again.  Wilson asks the pregnant question which you’ll never get the left to agree too:

But what is the morally fair way to determine tax rates — other than taxing everyone at the same rate?

Indeed.  And:

The case for progressive tax rates is far from settled; just read Kip Hagopian’s  recent essay in Policy Review, which makes a powerful argument against progressive taxation because it fails to take into account aptitude and work effort.

Those are traits that can never be made “equal”.  Those are what propel some out of the lowest quintile and keep others in the highest quintile.  Since you can’t make people work harder or increase their natural aptitude for work, the only way to make things “equal” is to do what?

Penalize those who excel.

That’s precisely what the progressive tax system does.  In the case of this country, it then subsidizes those who don’t excel, thereby getting exactly what those subsides pay for – a permanent underclass, or at least the basis for one.

So, income inequality isn’t our problem.  Poverty is.  Or at least the American version of poverty.   And taxing the rich won’t do a thing to solve that problem.  Nope, the answer is much more complex and involved than that.  That’s what the left doesn’t want to face.  Because if it does, it is likely to find the root of the current problem of poverty in this country directly in programs leftists have touted for decades.

And we can’t have that, can we?


Twitter: @McQandO