From the Archives: Is 'income inequality' a serious problem?

Publisher's note: This article was originally published on Examiner.com on April 7, 2010. The Examiner.com publishing platform was discontinued July 1, 2016, and its web site went dark on or about July 10, 2016.  I am republishing this piece in an effort to preserve it and all my other contributions to Examiner.com since April 6, 2010. It is reposted here without most of the internal links that were in the original.

This was my third article published on Examiner.com. Eventually I wrote about 500 articles that appeared on the now defunct news site over the six years between April 2010 and June 2016.

Is 'income inequality' a serious problem?
April 7, 2010 6:02 PM MST

One doesn’t expect The Sabre, a web site devoted to sports at the University of Virginia, to be a place to find long discussion threads about political and economic issues. Yet on March 30, a lively exchange of ideas ensued when one of its contributors posted a quotation from former Federal Reserve Board Chairman Alan Greenspan: “Income inequality is where the capitalistic system is most vulnerable."

In his 1996 book, Hidden Order: The Economics of Everyday Life, legal scholar and economist David Friedman wrote:

“When a psychiatrist wants to get his audience’s attention, he talks about sex. Economists talk about the income distribution. In both cases the audience’s interest is prurient (what are other people doing?), puritanical (that they shouldn’t be?), and personal (how am I doing?). In both, there is the thrill of violating taboo; although sex is gradually becoming an accepted topic of conversation, asking how much money someone makes is still beyond the pale.”

Though asking about someone’s income is still not permitted in polite conversation, it is not forbidden in political discourse. Members of Congress and political candidates talk about it all the time, sparking the question: Is “income inequality” something that should worry us?

George Mason University economist Tyler Cowen put the question in perspective in the New York Times. “What matters most is how well people are doing in absolute terms,” he wrote. “We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.”

Fears about income inequality stem from a pre-modern understanding of economics, in which because some people “have,” others “have not.” In the pre-industrial, pre-capitalist world, this was largely true. If Midas had a lot of gold, it meant he was taking it from his subjects, who had no gold.

But the fabled Midas hoarded his gold; he neither spent it nor invested it. Today’s affluent people both spend and invest their earned incomes. They don’t hide it under their mattresses. As a consequence, they create products that fulfill our needs and wants, hire workers, and make other people wealthy in the process – or at least more wealthy than they would have been in the absence of spending and investment.

In his magnum opus, Human Action: A Treatise on Economics, Austrian economist Ludwig von Mises wrote:

“The inequality of incomes and wealth is an inherent feature of the market economy. Its elimination would entirely destroy the market economy.

“What those people who ask for equality have in mind is always an increase in their own power to consume. In endorsing the principle of equality as a political postulate nobody wants to share his own income with those who have less. When the American wage earner refers to equality, he means that the dividends of the stockholders should be given to him. He does not suggest a curtailment of his own income for the benefit of those 95 per cent of the earth’s population whose income is lower than his.”

In other words, “more wealth for me, but not for thee” is the principle at play.

Redistributing unequally distributed wealth would require one of two things:

One option is passing laws that forbid businesses from paying their employees – including high-level management, rock stars, and Oscar-winning actors and actresses – what they (the businesses) and the market think they are worth. That is, set ceilings on earnings.

The other option is to establish a system of confiscatory taxation that would take earnings from the person who earned it, in order to bring their income beneath an arbitrary ceiling, and give it to the government, which in turn will spend it on goods and services provided by other rich individuals and the companies they own. That is, rob Peter to pay Paul.

Commenting on the “economic consequences of confiscatory policies,” Mises wrote that “in the long run such policies must result not only in slowing down or totally checking the further accumulation of capital, but also in the consumption of capital accumulated in previous days. They would not only arrest further progress toward more material prosperity, but even reverse the trend and bring about a tendency toward progressing poverty.”

Put more simply, by constricting the capacity of the rich to create jobs and buy things, one ends up creating more unemployment and ultimately punishing the poor and middle classes.

In a PBS documentary film about his life, The Power of Choice, the late Milton Friedman said, “The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both.”

That is a lesson well-learned by policymakers in Washington and in Richmond.