“Income-Inequality” Problem (2007 Nov)

by Barry A. Liebling

One of the oldest, most familiar leftist chants is that people have unequal incomes, inequality is bad, and something has to be done about it. The solution is taking wealth from some and giving it to others or making it impossible for anyone to make “too much money” in the first place. While the leftists’ task of leveling income is still a work in progress, they have had spectacular success on the intellectual front. Very seldom is their economic-inequality-is-bad slogan challenged.

The Wall Street Journal, a leading voice for the free market, recently published “Income-Inequality Gap Widens” by Greg Ip (Oct 12, 2007; Page A2). The article asserts that “The richest Americans’ share of national income has hit a postwar record…underlining the divergence of economic fortune blamed for fueling anxiety among American workers.” The messages of the article are that income inequality has increased, that this is a troublesome development, that it may play into the hands of Democrats who want more government interventions, and that President Bush is quoted as saying, “What needs to be done about the inequality of income is to make sure people have got good education.”

Significantly, The Wall Street Journal does not question the leftist dogma that income inequality should be a focus of public policy. And this plays into the hands of meddlers eager to tamper with everyone’s life. It assures that discussions regarding income inequality are about when the government should act and what it should do. The idea that income inequality, by itself, is not a legitimate issue is not considered.

When leftists call for “correcting income inequality” free market advocates typically use three retorts – each of which emboldens interventionists.

The first popular rejoinder is that the interventionist is overstating the degree of income inequality. The friend of free markets will cite statistics showing that the actual gap between the lowest wage earners and those making the most money is really not so large as the interventionist claims. A variant of this comeback is pointing out that the income-inequality gap is frequently transient and that many people who are at the lowest levels acquire good educations, are highly productive, and rise to high income levels. The flaw in this rejoinder is that it cedes the philosophical argument to the leftists. By stipulating that the gap might be too large it keeps the door open to check for signs that the inequality threshold has been breached.

The second riposte of the free market enthusiast is to point out that economic productivity is not a zero-sum game. The total size of the pie does not remain constant; it grows. When someone has a huge income it is generally because new wealth was created – not taken from those who are making less money. This argument assumes that interventionists would be mollified if they understood that wealth is produced and is growing. Of course, the tactic does not work because leftists are not fundamentally interested in increasing the total amount of wealth. Their obsession is to make sure that those they favor have a “fair share” of the pie – and those they despise be compelled to “make sacrifices.”

The third comeback of free market partisans is that income-inequality is necessary because it motivates the most productive people to work hard and generate wealth. When people at the top achieve high incomes it benefits people at the bottom by enhancing everyone’s income. The problem with this approach is that its premise is that those who create wealth have no natural right to it, but society might allow them to keep more than an equal share if it incentivizes them to produce more. This is very close to the position of John Rawls in his Theory of Justice which asserts that economic inequality is acceptable only if it benefits the least able.

Why do leftists do so well in conversations about “income inequality” and why are their critics so ineffectual?

Of course the power of repetition and habit counts for a lot. The term “income inequality” almost always elicits remarks about how bad the gap is and what corrective actions should be taken. Few people are inclined to pull back and question the assertion that income inequality is troublesome.

Also, there is a powerful rhetorical trick that helps the interventionists. Income inequality is measured by how much of the “nation’s income” various people happen to have. And the trick is that the expression “nation’s income” suggests that the nation itself has an income, is the legitimate owner of it, and that individuals are secondary. From that mistaken belief it is a short step to view anyone with more than an equal share of the “nation’s income” with suspicion. Furthermore, if the proportion of the “nation’s income” that anyone has is accepted as a proper metric, economics does become a zero-sum game. No matter how large the pie is, one person’s gain subtracts from what is available to everyone else.

There is a real problem with “income inequality,” but it is not about redistributing wealth. It is about conceptualizing income and justice properly. How much wealth anyone has in comparison to his neighbors is not a legitimate issue. Instead what matters is how each person obtains wealth. Those who create value, trade honestly and by mutual consent, or receive gifts from others are entitled to their income. Conversely, those who secure money through coercion, threats of coercion, theft, or fraud deserve nothing.

*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***

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