Examining the Arguments Against Inequality

All of this attention being focused on growing inequality – which social scientists have known about forever – has got people upset. They like capitalism and free markets, so they don’t want to admit that free markets can create inequality along with prosperity.

The more I learn, the more convinced I become that there is wealth inequality in this country. And the less I buy that there’s plenty of opportunity for a hard-working American to get ahead. The numbers on economic mobility, wealth distribution and wages just don’t support that argument.

David Harsanyi took aim at the Occupy Wall Street protestors in a column arguing that capitalism is the only way to generate equality. Allow me to examine his arguments.

First he tries to divert attention from the issue.

If the wealthy get wealthier, no one has to become one penny poorer.

This is not the argument about inequality. Nobody said that anyone got poorer – but median incomes and wages have stagnated while the “1 percent” has seen their income grow by leaps and bounds over the past three decades. Here’s a chart from Mother Jones:

Inequality... explained.

from Mother Jones

You can see from this chart that the after tax share of income for the top segments of society has increased since 1979. Note that the graph on the left shows “before tax” incomes – but the difference is not enough to change the fact that the top 1 percent has seen far more growth in income than the 99 percent.

Not to mention, tales of runaway income disparity destroying the American middle class have been repeatedly debunked. James Pethokoukis at the American Enterprise Institute recently pointed out that new Congressional Budget Office “data show real median after-tax household income (half of all households have income below the median, and half have income above it) grew by 35 percent over the past three decades.

Yes, median incomes have risen. It’s interesting that you should bring up the CBO data. Guess what one of their reports shows? Between 1979 and 2007, the incomes of the top 1 percent grew by 275 percent. Wow, that’s a little more than the 35 percent increase in median income, isn’t it? And, there’s this handy chart on the share of income captured by each quintile of the population:

See that? That’s decline in share of income for everyone except the top 20 percent.

Over the past half-century, in fact, the wages of the middle class have captured a remarkably consistent share of gross domestic product.

Really? Hmmm… Nope. Demonstrably false. Wages as a share of GDP are at a new low.

Click for more charts explaining why Occupy Wall Street protestors are upset

from Business Insider

Despite gains in productivity, wages have not kept pace, as shown by another Mother Jones chart.

Remarkably consistent… in that wages haven’t increased very much, I suppose.

And the most important fact that eludes protesters and progressives is that the poorest 5 percent of Americans are still richer than nearly 70 percent of the world — with a lot more opportunity to change that situation.

True. But the U.S. also has the highest level of inequality among OECD countries. Granted, since we also have one of the highest GDPs per capita, that means the poor are still better off. But we also have the highest infant mortality rate of all developed countries. And a lot more opportunity? Compared to…? See the next point.

A 2007 Treasury Department study showed that 58 percent of households that were in the bottom quintile in 1996 moved to a higher level by 2005, and of households in the top 1 percent during the same time, more than 57 percent dropped to a lower income group.

“We do well” in comparison to who? As a measure of mobility and the meritocracy of a society, intergenerational income mobility is certainly a more useful measure than movement over such a short time period. Especially since I wonder whether the drop-outs from the top 1 percent dropped all the way out of the top quintile. How many of them retired?

The Treasury Department report does not take into account the normal, expected increase in wages as workers move up the ladder. A more detailed breakdown of the data shows that those in the highest quintile had a 61 percent chance of staying there and about a 92 percent chance of remaining in the top 80 percent. By way of comparison, those in the bottom quintile had a 55 percent chance of remaining in the bottom 20 percent and about a 90 percent chance of remaining in the bottom 80 percent. About equal then for mobility over a nine year period.

Treasury Department

The numbers on intergenerational mobility are a little different. That’s measured by making a correlation between parents’ earnings and how much their children make. The most cited study on intergenerational economic mobility in the United States is a 1992 one by Gary Solon using the Panel Study of Income Dynamics. Solon found that, contrary to the low correlation of .2 or less found by previous, flawed studies, the relationship clocked in at .4 or higher. A more recent 2003 study by Bhashkar Mazumder built upon Solon’s research but argued that when lifetime earnings rather than shorter term earnings of fathers was used, the correlation was closer to .6 for intergenerational economic mobility. A 2010 OECD report on income inequality showed the U.S. to have a lower generational income mobility than every OECD country except Italy and Great Britain. The most important factor for income mobility, according to the report, is education. In the U.S., the socio-economic status of parents has a greater influence on secondary education achievement than in other OECD countries.

A comparative study by the Economic Mobility Project also found that the U.S. has less intergenerational mobility than other countries.

So there’s considerable evidence that the U.S. has lower economic mobility than similar countries. Of course, in comparison to other regions of the world, it’s a different story.

And economist Shikha Dalmia recently pointed to a study by the University of Chicago’s Steven Kaplan that “shows that, despite government bailouts, in 2008 and 2009 the adjusted gross income of the top 1 percent — a disproportionate number of whom work in the financial industry — fell to 1997 levels.”

Heh. Yes, this is true as far as it goes – but then you want to look at their incomes in 2010 and 2011. If the record high corporate profits are any indication, then they’ll do well. Or maybe we should consider what level median incomes fell to in 2009? 1998 levels? You don’t say.

They have a nearly religious belief that too much wealth is fundamentally immoral and unhealthy for society. The economic systems they cheer on would coerce downward mobility for the sake of equality but ignore prosperity for the people they claim to represent.

What? Who thinks wealth is immoral and unhealthy? Prosperity can only benefit humanity. Concentrated wealth for the lucky few with low economic mobility, however, might be a problem. So you know the economic systems “they” would support? Have you spoken with them, then? Or are you perhaps simply applying your preconceived notions to the situation?

Besides the issue of income inequality, there’s wealth inequality which is, as you might expect, even higher. Since wealth is accumulated over time, this makes sense. It’s also great since you can invest your money and pay a lower tax rate on those capital gains than you’d pay on income.

How convinced are you that inequality is a problem? Or do you think it’s being exaggerated?


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