“Wealth Inequality” & the Fixed Pie Fallacy

Economics becomes convoluted once injected with political conviction. Emotional rhetoric quickly replaces logic and empirics. Catch phrases manifest and misconstrue reality to accomplish an agenda. If we think beyond stage one, many of these purported economic ills quickly dissipate.

One of the most popular catch phrases, especially with the Bernie Sanders crowd, has been “wealth inequality”. It is the fallacious belief that a few members of society have achieved great wealth at the expense of everyone else.

In other words, 90% of people have supposedly lost something substantial as 10% of people accrue wealth. It’s supported through boastful statistics such as who owns what amount of wealth and where the wealth accumulates. Leftist pundits, however, never seem to acknowledge how everyone else has been affected – only that they have lost something and that it is inherently bad.

To be truthful, many of these statistics are accurate. There is much debate over how these statistics are measured – what counts as wealth vs income, how to adjust for inflation, and before vs after tax income. However you measure it, wealth inequality has increased. What matters is how everyone has fared during this time.

This can be easily explained by a thought experiment. As shown in the attached image, inequality can increase, but the value of your “share of the pie” also increases. In real terms, this translates to broader access to higher quality goods.

But has that happened? Government survey data compiled by Heritage provides some insight.

  • 80% of poor households have A/C. In 1970, only 36% of the entire population had it.
  • Nearly two-thirds of poor households have cable or satellite TV
  • Over half have a cell phone
  • Half have a personal computer

As inequality has increased, the poor have access to more luxury and comfort goods – indicating that inequality has not come at their expense. The Robber Barons could not even dream about the goods owned by many of today’s poor. These dynamic changes would not happen in a fixed pie economy. It might seem trivial, but it represents profound growth in the standard of living.

Going back to the original example, it’s easy to see how statistical categories can be confused with real people. You could rightly conclude that a larger proportion of “new income” was going to the upper brackets. Although true, it’s an incomplete story.

If someone makes that assertion, ask yourself “how many people are in those brackets compared to decades ago”. In a fixed pie economy, nothing changes and everything is at everyone’s expense, thus it would be the same people. However, that is not the case.

In 1990, 15.6% of families earned between $35K and $50K; 19.1% of families earned over $100K. Fast forward to 2009 and the demographics have changed to 13.8% and 25.6%, respectively. As more people move into higher income brackets, perceived inequality increases. This effect is even more pronounced by a growing population.

The fixed pie fallacy is often invoked to support redistributive policies and confiscatory taxation. As if these “solutions” are necessary to maintain a standard of living for everyone. We should always look beyond statistical categories to determine the unseen real outcomes. Inequality has increased, but not at the expense of other people.

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