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.