Income Inequality, Wealth, and the Beauty of Economic Growth

Lately I’ve noticed a resurgence in discussion about the income gap in the U. S. People are citing the widening of the gap with dire tones as though it is a harbinger of mass poverty and the return of serfdom. They would have us all believe that incomes are zero-sum and that as the rich get richer everyone else invariably gets poorer. Soon, they say, the middle-class will vanish. Yet anyone with basic knowledge of economics knows this is not the case (though many choose to ignore the laws of economics for political purposes). Even a third-grader could understand that as the pie grows larger, everyone gets more even when the percentiles remain unchanged.

The term “income inequality,” to begin, is a misnomer. No one believes that all incomes should be equal (save communists, of course). Incomes will be unequal so long as people remain unequally skilled and work in different fields. Goods and services are valued unequally, therefore their producers and providers will be valued unequally. To say that income disparity is “unfair” is to simultaneously charge people’s collective valuation of goods and services of the same injustice. It also ignores the reality of how income is accumulated – voluntary exchange. Steve Jobs is not rich because he has stolen from millions of people. He is rich because he gave us the iPod, and in return we gave him our money.

The discussion over the income gap also confuses income with wealth. If my income remains unchanged over time but the goods I regularly purchase become cheaper, I become wealthier. In fact, I am wealthier for having bought the iPod from Steve Jobs, who loses wealth in our transaction. What I lose and Jobs gains is the ability to become wealthier. Money, and by extension income, has no inherent value of its own; it is only worth what you can exchange it for. If everyone abruptly rejected the dollar as the medium of exchange, money would at once become worthless. However, so long as my iPod continues functioning, it will always retain its worth. And as long as Steve Jobs continues to make me wealthy with great products, I am happy to make him richer and contribute to the income gap.

While the discussion over the income gap misconstrues reality because of what it can’t measure – changes in wealth – it also distorts what it can measure. While it is true that the top 20% group has increased its share of the percentage of income over the past few decades and the bottom 20% group has seen its decrease, Americans have not remained members of the same group. Over time members of the bottom 20% progress, in one way or another, and ascend to a higher income quintile. Similarly, less than half (around 40-43 percent) of those in the top 1% quintile in 1996 were still there in 2005. This is called income mobility. Combined with growth in income for all income quintiles, this shines a much more optimistic light on the gap in incomes as reiterated by a 2007 report on income mobility from the Department of Treasury:

Research shows that the distribution of lifetime incomes is more equal than a one-time snapshot implies  because a household’s relative position in the income distribution often changes over time.  Concerns about income inequality at a particular point in time may be assuaged if low incomes are temporary and income mobility provides individuals and families with the opportunity to improve their economic situation over time.

Another aspect of discussions of income distribution is the extent to which all income rises over time with an expanding economy.  Some have likened this process to an escalator where the opportunity for mobility means that no matter which step a person starts on, he or she can move up.  With an escalator, while one can get ahead faster by walking up the steps, much of the movement is due to the escalator itself. That is, the real incomes of households can increase over time with the growth of the overall economy.

Just how much better off are the poorest Americans? The report shows that, from 1987 to 1996, people in the lowest income quintile increased their mean income 247.5%. From 1996 to 2005 this number increased to 284.6%. And that, ladies and gentlemen, is the beauty of economic growth.

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9 thoughts on “Income Inequality, Wealth, and the Beauty of Economic Growth

  1. First, you are not wealthier for having bought an iPod from Steve Jobs, but quite the opposite. You fail to include depreciation in your calculations. As soon as you purchase the iPod it instantly loses value and is worth significantly less than what you paid for it. Mr. Jobs is the one becoming wealthier in this transaction. If you forget depreciation of any good that you own, you still have yet to account for the fact that the price of said good is only going to decrease over time thanks to the market; there will be a newer and better good out rather soon to replace the current version of your iPod thus significantly decreasing its value whether you have purchased one or not.

    Now on to correct the significant mistake here. You place great emphasis on income mobility. As do I. For all of these people moving up the ladder of income mobility, there is another person moving down. This is what it wrong with your system. If there is equal distribution of income, there is no worry about people moving down this ladder. What makes this work is the same principle you use to justify your argument. As the ‘pie’ grows, income grows for ALL people, not those fortunate enough to benefit via whatever means they were fortunate enough to have benefitted from. Therefore, in my system, everyone experiences economic growth, not just those who get lucky.

    • Wrong, and wrong.

      “As soon as you purchase the iPod it instantly loses value and is worth significantly less than what you paid for it.”
      I’m really not sure by what kind of logic you’re basing this on. A price decrease relative to a newer good is not depreciation.

      As for your second statement, I’m gathering this: If we make all incomes equal, economic growth will lift all people at the same level. Is that right? If so, have you ever taken a lesson on basic economics, ever? I mean…this is a joke, right?

  2. ‘Basic Economics’, as you phrase it, is synonomous with free market economics. While you’re absolutely in full understanding of how the free market works, things work rather differently in a command economy. So the answer to you final (legitimate) question is yes.

    Once you use something, it depreciates. Fact. Whether it is a car or an iPod, it still depreciates.

    Lastly, for now, please stop picking and choosing quotes and using them out of context and meaning strictly for your own gain. That is called lying. Your first full paragraph in your response is severely misconceived. A price decrease to a relative good is not depreciation. This is using a quote of mine way out of its originial context. When a newer good replaced your iPod, the worth of your iPod (new) on the market goes down, thus the worth of your actual iPod goes down, thus your personal wealth goes down. Basic Economics.

    • “Once you use something, it depreciates.”
      Perhaps with some things, yes. But depreciation is not a significant factor in long term measurements. My TV, furniture, computer, iPod, car, etc. all last for years and years. In fact, many things appreciate in value over time. Depreciation is a mirco factor, not macro.

      And, again, you’re confusing price with wealth. If a new iPod comes out, and I want the new one, my demand has changed, not the inherent wealth of my iPod. If a new iPod comes out, and I don’t know about it, how am I to know that it is suddenly worth less? I don’t, and this proves that it is only perceived demand that has changed. The worth of something is not what it can be sold for, that is its price.

      As for your belief that all incomes should be equal, you ignore both incentives and the connection between wages and economic growth.

  3. Not all people need incentives, some people can be intrinsically decent human beings.

    And if only ‘perceived demand’ has changed, then one has witnessed the workings of the market. It is not what the owner believes their goods are worth, but what others subjectively feel someone else’s goods are worth.

  4. Mike, that’s what we call a utopia.

    By “perceived” demand I mean demand through perception, not “what others subjectively feel someone else’s goods are worth.” I don’t think any of the new BlackBerry’s are worth more than mine, despite their price being higher. Nor do I think a brand new Ford F-150 is worth more than my 32 mpg Civic (many people agree, which is why Ford and GM are struggling against the Japanese manufacturers).

    You call yourself a socialist, yet you’re arguing basic economic law that even socialist concede to.

  5. Yes it may be a utopia, but, by default, it is also proof that our current system is flawed.

    Your next sentence logically reads, ‘I mean x, not x.’ They are synonomous.

    And sorry Chris, but you aren’t quite in tune with what socialism is. Wikipedia does us as much justice as it does to anything else.

    • Socialism being a utopian dream proves that capitalism is flawed? That’s a non sequitur. No system is perfect, but your conclusion does not logically follow your beginning.

      And I said what I said, you can argue over my semantics, but it doesn’t look good in a debate when you start attempting to tell your opponent they meant something different as to make it easier to refute.

  6. Im so confused here? It doesn’t look good in a debate to do such, yet that’s all you’ve done.

    A Utopia, by definition is perfect, unflawed; therefore if capitalism ≠socialism, it is, by logic, flawed in its existence. Basic analytic philosophy (and thats the modern alternative to more broad-viewing leftist philosophy).

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