Income inequality isn’t the problem

Published 8:16 pm Monday, July 29, 2013

President Barack Obama’s jobs speech last week was largely unremarkable. He offered the same solutions — “clean” energy jobs, infrastructure jobs, education, “affordable” health care — as he has for years, and he’s making the same excuse he’s made for years — Republicans won’t pass his agenda.

What was remarkable in his speech was his increasing focus on “income inequality” and the supposed threat it poses.

“In many ways, the trends that I spoke of here in 2005 — of a winner-take-all economy where a few do better and better, while everybody else just treads water — have been made worse by the recession,” he said. “This growing inequality isn’t just morally wrong; it’s bad economics. When middle-class families have less to spend, businesses have fewer customers. When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy. When the rungs on the ladder of opportunity grow farther apart, it undermines the very essence of this country.”

He said reversing such trends must be the government’s highest priority. The alternative is unthinkable, he added.

“Our founding precept about wide-open opportunity and each generation doing better than the last will be a myth, not reality. The position of the middle class will erode further,” Obama claimed. “Inequality will continue to increase, and money’s power will distort our politics even more. Social tensions will rise, as various groups fight to hold on to what they have, and the fundamental optimism that has always propelled us forward will give way to cynicism or nostalgia.”

All of that — because of income inequality.

But just what is income inequality, and is it really such a destructive force?

Oversimplified, income inequality is when the “rich get richer and the poor get poorer.” And it’s not really happening. That’s established in many studies.

One recent example is Cornell University’s “Deconstructing Income and Income Inequality Measures,” which shows that in fact, all income levels experienced higher incomes from 1979-2007. While some middle-income earners have seen some recent wage stagnation, it’s tied to the recession and not to our economic system.

During those years, incomes for the lowest fifth of the population rose 31.1 percent, while middle-income earners saw a rise of 34.4 percent. High earners did significantly better, seeing an increase of more than 81 percent.

But how is that bad? Obama denounces a “winner-take-all economy” because he believes that’s what we have. The poor get a smaller section of the pie, he believes.

The reality is there is no pie. Or rather, there’s no limit on the size of the pie. The size of any given portion isn’t dependent on the size of any other portion.

Income mobility is what we should be concerned about. That’s the ability to move from a low income bracket to higher income brackets. And that’s directly related to economic growth.

What can the government do about it? In Obama’s world, it can forcibly redistribute the wealth already there. In the real world, we know we have to create more wealth.