Thursday, May 2, 2013

Income Inequality: the wrong argument

Much has been made in the past few years about income and wealth inequality in the United States. Most liberals (politicians, writers, bloggers) have all jumped on the band wagon and throw out numbers about how a CEO makes 1,100 times what an hourly worker makes or that how the top 1% has as much wealth as the bottom whatever percent. The exact numbers are irrelevant because the entire argument misses the point. Inequality measures aren't a useful measure of anything.

There are a couple of ways to illustrate this point. The easiest is with a story.

 The first is to look at a scenario with little inequality and create inequality.
Let us imagine that we have discovered a small island in the south pacific that is pristine and untouched. A small tribe that has about 100 inhabitants, they are fishers and hunters and gatherers. There is almost no separation in wealth on the island. The chief of the village has a slightly larger hut but that is the only wealth inequality.

Now an Englishmen thinks that this would make a great resort. So he puts up the capital to open a resort. He hires 50 people from the village to work there. Five of them are made managers of various operations and one is his VP to oversee the entire operation. All 50 people who work there only work 40 hours a week and make a decent living, they are able to buy imported steel and bricks for nicer housing on the island. The managers are paid three times the hourly workers and have a few nicer things in their new houses. The VP is paid 20 times his hourly workers and he is able to take a vacation away from the Island once a year.

The other fifty people who do not work for the company decided to keep on with their same lives, to hunt, trap and fish for their livelihood. For them life did not change one bit since the opening of the new resort with the exception that they occasionally see foreigners wandering around taking photographs.

At this point in the story it is useful to stop and think about the wealth inequality. Before the Englishman arrived there was very little wealth inequality on the island. But since he has opened his resort there is now a huge chasm between the top 5%, the top 1% and the rest of the Island. In fact the top 1% is so rich that he is able to leave the Island on a regular basis, something that had never been done before.

Let us look at the bottom 50%. They are now much poorer relatively since the resort opened on their Island but they are living in the identical conditions they did prior to the resort opening. Herein lies the problem of wealth inequalities argument is that poverty isn't a relative thing but rather an absolute. The 50 islanders who kept on living their same way of life were completely and utterly unaffected by the other half of the Island who decide to get jobs and live a different way.

Chapter two of our story picks up when a visitor to the Island happens to be a liberal economics teacher who teaches the people living on the Island about the horrifying conditions of wealth inequality and all of the horrible implications both morally and economically.

A Small band of Islanders decide that they will rid their Island of wealth inequality. They burned the resort and all of the new houses to the ground. They passed a law stating that no foreigners were allowed on their sovereign soil and they made everyone return to their lives as hunters/fishers/trappers. Everyone was returned to the previous state like that resort had never been built and the Island was returned to its previous pristine state. Wealth inequality was solved.

That is not the only way to solve wealth inequality but it is by far the quickest and most effective. When a small amount of people have a large amount of wealth trying to redistribute it can be tricky (particularly if it is land or a company) but destruction is the quickest and most effective means at leveling the wealth playing field.

There are a number of incredibly important our country needs to address about poverty. How much should we provide to people who cannot or will not work for themselves? How do we do a better job of making sure children in our country aren't hungry? How do we provide services for the poor and needy without providing incentives for not working and/or having more children? There are shortcomings in our social safety nets and it is a shame on our nation that we have hungry children. We need to work together to address these issues. One issue that does not need to be addressed is income inequality.

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