Income Inequality

Income inequality is one of the many boogeymen created by the state and their parrots. By manipulating statistics and wild speculation, rich people have been vilified as the feudal overlords of the middle class. Nothing could be further from the truth. Even if you think there is a “solution” to income inequality, using government extortion to steal people’s property doesn’t really create any aggregate social justice. The people who cause the inequality hysteria are, themselves, extremely wealthy (i.e. Russell Brand and Rachael Maddow). If they were really concerned about a few people having too much, they would voluntarily redistribute their own wealth. Instead, they advocate for the forceful theft of other people’s property. Funny how that works. There are many economic factors at play here – the malpractice of the Federal Reserve being a major one. Here are a couple fallacies of income inequality.

 

Although inequality statistics are not false, they are often used to draw false conclusions. The big one goes along the lines of “household income has been barely growing for the middle class while sky rocketing for the elite”. The first obvious problem here is the arbitrary use of households as an indicator for income. Household income is defined as the cumulative income of people living at the same address. Statistics show that, as quality of life has improved, the average number of people in households has declined. This is because people can increasingly afford to live by themselves. For example, if three people making $20K each live in the same household, their HHI is $60K. If they get raises or their purchasing power otherwise increases, they may choose to move out. Now, we have 3 different households making about $20K. With this in mind, are either three worse or better off? This economic activity shows an increase in standards of living as compared to purchasing power, but it clouds economic analysis. This statistic is also misleading because it ignores who comprises a household. For the bottom 20%, only 6% of households contain a full-time worker and about 50% contain one part-time worker. In the top 5%, over 70% of households include at least one full-time worker and many have two full-time workers. This stat also ignores government pay outs. For one, social security is literally the robbing of young people with lower incomes and giving it to old people with lifetime savings, retirement accounts, and larger income. If you are 65 and receive social security, you now have two incomes, one of which comes at the expense of the poorer generation. The “household” income argument is largely false.

The second common fallacy says that “worker’s income have not risen in recent times”. This claim is very misleading because of how it defines “worker” and “income”. Comparing wages of the bottom 20% with the top 20% is comparing apples to oranges. In the bottom 20%, most workers are low skilled and part time. In the top 20%, significantly more people have college degrees and work 50 weeks per year. It’s not necessarily that the bottom is paid less or has no wage growth for their productivity, but that more part time workers are being averaged with statistics. Furthermore, real consumption per person has increased 74% in the last 20 years – which is not consistent with the claim that income has diminished. By 2001, most people defined as “poor” had possessions once reserved for the rich – cars, DVD players, color TVs, cell phones, microwaves, and air conditioning. While it may be true that worker’s income has not risen in-line with productivity, total compensation (health insurance, retirement, etc.) has risen enormously and is a growing share of compensation. This creates immeasurable variables such as returns on 401k plans and paid vacation days. However, you are still being compensated for your labor.

My least favorite, and most uneducated, fallacy is that “off-shoring of jobs by multinationals replace higher paying jobs with lower paying, thus causing diminishing income”. This claim assumes the job market is a zero-sum game (it’s not). While this may be true in the short term or case-events, it is not true in the long term or aggregate; the latter two are more important and accurate measures. Actually, between 1993 and 1996, seven out of ten new jobs paid wages above the national average. Economists have done plenty of studies, which I encourage you to find, that show offshoring (and immigration) net a positive gain for aggregate labor demand.

As with many hot issues, income inequality is a misrepresentation of reality. There are other fallacies, but they are more complex. The statistics addressing the inequality are inflated and manipulated for political ends, but that does not mean we can’t learn something from it. If we want to help those most in need, we need to break the chains of government social programs and stifling economic regulations. Instead of buying into the divisive “evil rich people” scheme, we should address the root cause of generational poverty: government intervention and control.

Information retrieved from Thomas Sowell’s “Economic Facts and Fallacies”.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s