Sunday, January 8, 2012

Why income inequality is a bogus argument

This from my January 1 Knoxville News-Sentinel article

Happy New Year. Generally when politicians and the media all latch on to a topic, you can be assured that it is trivial. That is certainly true of the topic du jour, income inequality.

First of all, the president in a speech said that we have reached the point "when middle-class families can no longer buy the goods and services that businesses are selling." Excuse me?

Certainly the president cannot be this out of touch with the truth. Surely there is an argument to be made that his policies have made us worse off. But to conclude that the middle class is suddenly impoverished is hyperbole at best.

What has prompted all of this are reports of rising income inequality in the United States over the past 20 years. However, when the top 1 percent of earners is excluded, income inequality has remained the same. What also is true is over that same period the real income of all income cohorts — save the bottom 20 percent — has risen.

There are reasons for these trends.

First, as pointed out by the Heritage Foundation, the top tier increased because a change in tax laws caused a shifting of business income to individual tax returns as individual rates fell below corporate rates.

Second, the bottom tier has been adversely affected by illegal immigration. We keep hearing that the middle class is shrinking.

However, economist Stephan Rose notes that since 1979 although those households earning between $30,000 and $100,000 shrank, there was no increase in the percentage of households earning below $30,000.

What happened?

The households above $100,000 doubled. So the shrinkage of the middle class was caused by upward mobility. Not a bad thing.

The catalyst for all the income inequality hand-wringing was a study released by the United Nation's Office for Economic Cooperation and Development that showed the measures of income inequality increasing. However, income inequality statistics tell you nothing about the well-being of a population.

The same report cited India as being one the worst performers, with its income inequality doubling over the past 20 years. This is because of the dramatic growth in India's middle class during that period.

Also the emergence of middle classes in Russia and China have worsened income inequality.

Yet who would argue that the Indians, the Chinese and the Russians are worse off because of increasing income inequality? Quite the contrary.

Now consider that the countries with the most equal incomes are in this order: Slovenia, Slovakia, Czech Republic, Sweden and the Ukraine. Four former Soviet bloc countries plus a western welfare state. All have median incomes significantly below that of the United States.

It should not be surprising that socialist countries striving for wage equalization create disincentives on both ends. Those with lower incomes have little incentive to work harder and those on the upper end have no incentive to keep earning more and innovating either.

However, those who would rather be poor but equal in income are all welcome to emigrate.


John in Ky said...

I look at it much more simply. We do have a growing difference between the rich and the poor... but the reason is the loss of the middle class mostly from manufacturing jobs shipped to China or Mexico since the late 90's. The top earners made more profit from the cheaper products and the middle class mostly went to lower paying jobs. The politicians, I think, were sold on "the cheaper price of goods, will actually make the money that people earn go farther." .... which is true on the surface but doesn't look into the future of creating a fast food and gas station service sector style economy that is only waiting for a bump in the road to create a very long lasting problem- where we are now.
When most people are working low paying jobs servicing others needs, and those people are buying less bc they are broke too, your economy will fall to a baseline of sorts- minimum needs of the people to survive(not there yet).
The only way we can get out of it is to remove all corporate taxes- paid by consumers anyway- to help level the playing field with China, for manufacturers to slowly come back. And enact some sort of consumption tax to drag in taxes from illegal sources (30B in drugs annually) and the rich who chose to spend their money. I fear a slow drift to the edge of the waterfall if we don't enact this soon.
I know you disagree with the Fair Tax, but we need something other than the massive tax law book mess we have now.
The repub nominee shouldn't deny or ignore the income inequality attacks bc the people feel the truth. They should acknowledge it, and every political party's responsibility in getting us here, and show a path to get back jobs from China through corp. tax removal etc.
sorry to write a novel here, but this is the only issue that matters in this election.

H.A. Black said...

John, I may not like the fair tax but I do favor the flat tax. I am not convinced that we have exported the good paying jobs to China and replaced them with fast food jobs. However, I do agree that if we constrain all the job killing regulations that do little good - except sound good to the uninformed - and eliminated the corporate income tax on income both foreign and domestic, we will have a job boom. Just a simple example is the dustup over the Keystone pipeline.