Perception of Inequality as a Problem Across Ideologies

Trends in Economic Inequality

Global Inequality

American Inequality

Though the economy has doubled since 1980, wages have barely increased if adjusted for inflation; All the gains from the economy have gone to the super-rich; With money comes political power (as an example, Reich refers to the power to lower their tax rates, and claims that that's the reason for the decrease in marginal tax rates for the rich during the latter half of the 20th century); Huge budget deficits as a result of less tax paid by "the rich"; The middle class is left divided in a conflict for the small rest of the economic growth left for them; and An anemic recovery.

Inflation

... the change in the Consumer Price Index overstates the change in the cost of living by about 1.1 percentage points per year, with a range of plausible values of 0.8 to 1.6 percentage points (Boskin et al., 1996). That is, if inflation as measured by the percentage change in the CPI is running 3 percent, the true change in the cost of living is about 2 percent. This bias might seem small, but when compounded over time, the implications are enormous. Over a dozen years, the cumulative additional national debt from overindexing the budget would amount to more than $1 trillion [5].

Non-Wage Benefits

People=/=Statistics

... is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. [...] But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress.

Robert Reich confuses statistical categories with real people. When Reich says that, since 1980, most people's wages have barely increased, he gives the impression that most people have enjoyed nearly no economic gains over the past three decades. What he means is simply that the average wage, adjusted for inflation with the CPI, hasn't gone up. But statistical results such as averages or medians can give a very misleading picture about what's happened included in those groups. Here's an example: Let's say that you annually keep track of the average height of your three kids. This year, the average height is, say, 4'2". Next year, you have a fourth child, and you calculate the average height again. The addition of that infant will lower your kids average height even though each of your first three kids have grown in height during the year. Clearly, you wouldn't conclude from the lower average height of your children that your children are shrinking in size. That would be absurd. But the same reasoning applies to average wages. The individuals behind the statistics have changed a lot since 1980.

Individual workers obtaining new skills and becoming more productive; People going out of the labor force, i.e. retiring; People becoming members of the labor force for the first time, i.e. teens and young adults, as well as immigrants and the increasing degree of participation of women in the latter half of the 20th century; and Capital flight, i.e. that rich businessmen take their capital and wealth abroad as a result of a high degree of taxes and regulations.

Causes to Income Inequality, or Lack Thereof

and

Inflation and Cantillon Effects

There is absolutely no reason why an increase in the quantity of money should create more rather than less growth. It is true that the firms who receive money fresh from the printing press are thereby benefited. But other firms are harmed by the very same fact because they can no longer pay the higher prices for wages and rents that the privileged firm can now pay. And all other owners of money, whether they are entrepreneurs or workers, are harmed too, because their money now has a lower purchasing power than it would otherwise have had [9].

Let us now assume that because of ambassadors and foreign travelers residing in England, as much money has been introduced into circulation as there was before [thereby doubling the quantity of money]. This money will pass first into the hands of various artisans, servants, entrepreneurs and others who have had a share in providing transportation, amusements, etc., for these foreigners. Manufacturers, farmers, and other entrepreneurs will feel the effect of the increased money, which will increase the expenditures of a great number of people, and this will in turn increase market prices. Even the children of these entrepreneurs and artisans will enter into new expenditures. With this abundance of money, their fathers will give them a little money for their petty pleasures and they will buy cakes and meat pies, etc. This new quantity of money will be distributed so that many who lived without using money before will now have some. Many exchanges, which used to be made on credit by valuation, will now be made with cash, and that will increase the pace of the circulation of money in England compared to before.

I conclude from all this that by doubling the quantity of money in a state, the prices of products and merchandise are not always doubled. The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled [10].

Does Inequality Matter?

If everyone is better off, what does it matter that the improvement comes faster for some than for others? Surely the important thing is for everyone to be as well off as possible, not whether one group is better off than another. Only those who consider wealth a greater problem than poverty can find a problem in some becoming billionaires while others grow wealthier from their own starting points [11].

There is one and only one way [...] in which any two people can really be “equal” in the fullest sense: they must be identical in all of their attributes. This means, of course, that equality of all men—the egalitarian ideal—can only be achieved if all men are precisely uniform, precisely identical with respect to all of their attributes. The egalitarian world would necessarily be a world of horror fiction—a world of faceless and identical creatures, devoid of all individuality, variety, or special creativity

[...]

An egalitarian society can only hope to achieve its goals by totalitarian methods of coercion; and, even here, we all believe and hope the human spirit of individual man will rise up and thwart any such attempts to achieve an ant-heap world. In

short, the portrayal of an egalitarian society is horror fiction because, when the implications of such a world are fully spelled out, we recognize that such a world and such attempts are profoundly antihuman; being antihuman in the deepest sense, the egalitarian goal is, therefore, evil and any attempts in the direction of such a goal must be considered evil as well

The great fact of individual difference and variability (that is, inequality) is evident from the long record of human experience; hence, the general recognition of the antihuman nature of a world of coerced uniformity [13].

The fact that that product today is as great as it is, is not a natural or technological phenomenon independent of all social conditions, but entirely the result of our social institutions. Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.

A society that puts equality - in the sense of equality of outcome - ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests [14].

Conclusion

Footnotes

Perhaps the most common theme in the mainstream discussion about economic matters today is that of inequality of wealth and income. The United Nations, for instance, has taken on the challenge to reduce inequality "within and among countries" as their 10th Sustainable Development Goal. "Economic growth," they proclaim, "is not sufﬁcient to reduce poverty if it is not inclusive and if it does not involve the three dimensions of sustainable development – economic, social and environmental." By "inclusive", they seem in this context to mean "economically equal", in that the different income and wealth quintiles don't have too much of a difference in terms of growth or total rates.The debate about income inequality became more widespread after the French economist Thomas Piketty published his major work Capital in the 21st Century in 2015. Through a bunch of equations, graphs, and economic theories, he could supposedly "prove" that the rich are taking on more and more of a share of the nation's wealth. In other words, wealth is becoming increasingly concentrated in the hands of the few.There are many important questions to bring up regarding the matter of economic inequality, which I will discuss in this article: (1) how the matter of equality is perceived differently across political ideologies; (2) whether the inequality is increasing or decreasing within and among countries; (3) if it is increasing, what some possible causes are; and (4) whether it ultimately matters whether income inequality is increasing or decreasing.As a sociological phenomenon, the matter of inequality can be understood by how followers of distinct political ideologies perceive it as a problem, or a lack thereof. Regarding the different perceptions of the matter of equality between them, economist Thomas Sowell (2007) wrote that "In the unconstrained vision, the results are to be equalized - to one degree or another - whereas the equality of a constrained vision is the equalization of processes" [1]. What matters most to those with the constrained vision (like the Right, and libertarians to some degree), therefore, is whether the processes and systems are treating different subjects differently or not, most importantly regarding the rule of law (that the same laws and rules apply equally for everyone). Those with the unconstrained vision (like Socialists and to some degree Social Democrats), however, desire equality of outcome, where everybody ends up equally despite initial inequalities. One can recognize such an unconstrained vision on the matter in statements like the UN's support for "inclusive" economic growth. The philosophical dispute between these visions of equality will be elaborated later, but for now, it'll stand as a juxtaposition to keep in mind while we go through the statistics of and causes to economic inequality, as it is the desire mostly among those with the unconstrained vision that the statistics will show more of an equal outcome.When analyzing trends in economic inequality, it's important to note the distinction between national and global inequality. The first describes inequality within individual countries, while the latter concerns that between them on a global scale. One could make an overview of inequality in a myriad of countries, but for this study, I'll stick to analyzing national inequality in the United States and global inequality generally.According to Johan Norberg (2003), an increase in global inequality has been criticized as a negative side-effect of globalization and free trade, and he reports that this notion is rooted in figures from the UN Development Program'sfrom 1999 [2]. "But the problem with these figures," Norberg proclaims, "is that they are not adjusted for purchasing power. That is, the UNDP numbers don't take into account what people can actually buy for their money. Without that adjustment, the figures mainly show the level of a country's official exchange rate and what its currency is worth on the international market, which is a poor yardstick for poverty."Studies [3] where the figures are adjusted for purchasing power, however, indicate rather that global inequality has"ever since the end of the 1970s. This decline was especially rapid between 1993 and 1998, when globalization really gathered speed." He also notes that the authors of these studies argue that "Estimates that compare countries rather than individuals [...] grossly overestimate inequality because they allow gains for huge numbers of people to be outweighed by comparable losses for far fewer." For instance, if one compares China and Grenada, the country aggregates treat them of equal weight, even though the former population is 12,000 times larger than the latter. Norberg thus concludes that "Once we shift our focus to people rather than nations, the evidence is overwhelming that the past 30 years have witnessed a global equalization."Writers for HumanProgress has also created a graph illustrating the decrease in global income inequality between 1952 and 2017. It shows, as Norberg claimed, that the inequality decreased especially quickly between 1993 and 1998, but also that the decline has been far greater in the years after his book was published in 2003.Though global inequality may have increased, what then about inequality within countries, most notably in the United States? In a video published in 2011 with over 1.7 million views, Robert Reich, Secretary of Labor under Bill Clinton, makes numerous claims of alarming trends in economic inequality:To stick to the topic, I'll here mostly stick to point 1 and 2 (on the 3rd point, see here , and for the 4th, here and here ).If Reich's claims are true, it could certainly be perceived as a problem, but are they? He seems to base his data on a study by Piketty and Saez, which, similar to Reich, claims that 100% of the gains from the economic growth between 1979 and 2014 has gone to the top 10% of the income distribution [4], and that the median income growth has decreased by 8%. However, a later study by Piketty & Co themselves has indicated that the economic trends in the United States may be a bit more optimistic than they earlier reported. In Piketty, Saez & Zucman (2018), they report a 33%-increase in median income growth, and that the top 10% has only taken on 55% of the economic growth between 1979 and 2014.Some studies suggest an even more positive improvement, so why is there so much divergence between the results of different studies on inequality? Economist Donald Boudreaux proposed in his repudiation of Reich's video that there are at least three questions one should ask about such studies, whose answers could significantly impact the results. Those questions are (1) which measure of inflation is used; (2) whether worker benefits besides wages are included; and (3) whether statistical aggregates and individuals are conflated.On inflation, Boudreaux claims that if one uses the Consumer Price Index (CPI), the average hourly wage appears to have decreased by about 4% between 1976 and 2006. However, this index has its problems. Most notably, the CPI Commission itself concluded thatWith other measures of inflation, therefore, the growth rate in median income is far bigger. Boudreaux claims that the Personal Consumption Expenditures Deflator (PCE) suggests that the growth rate is about 10% and that it's up to 18% with the Gross Domestic Product Deflator. On the matter of inflation, he thereby concludes that "I caution anyone against basing a firm conclusion on a statistic from a single index." But why do different measures of inflation lead to such different results? Boudreaux says that one important reason is that "it's really difficult to account for improvements in the quality of goods and services. For example, a television in 2012 is a vastly superior product to one that you could buy in 1976. There's simply no scientifically agreed upon way to account for such quality changes when adjusting for inflation." One important reason for the different results between the two Piketty studies could thus be that the first one used the CPI while the latter used the National Income Deflator.Another important factor next to inflation, according to Boudreaux, is whether worker benefits other than wages are included in the calculation. Examples of this include health insurance, sick leave, maternity leave, paid vacation days, pensions, and so on. Boudreaux asserts that while one can disagree about what measure of inflation one should use, "no reasonable person disagrees that to accurately measure worker's total compensation, all forms of compensation must be included: wages and salaries, as well as benefits." He also claims that such additional benefits have become a larger share of the total compensation, which would naturally lead studies to suggest a decreased median income growth if excluded. According to Boudreaux's own calculations, including those benefits indicate an increase of compensation up to 26%, though it depends on which measure one uses to calculate inflation.A related matter to alternative worker benefits is that of government transfers, where people get an extra source of income as the state "redistributes" a portion of tax revenues to people with lower income. Ignoring this income stream in an analysis of income inequality is doomed to present a skewed version of reality, depending on the scope of income redistribution in the population at hand. In the United States, the scope is pretty significant. If you compare the growth in average income by income group between 1979 and 2015 before and after taking taxes and transfers into account, for instance, you don't see much difference for the highest quintile, but the trend for the lowest quintile changes severely, and the improvement of the middle three quintiles also seems far more positive [6]. As only the top quintile pay more taxes than they receive in transfers (and the second highest have a net result of approximately zero), then, the income distribution is significantly impacted if one takes transfers as well as taxes into account. With taxes and transfers taken into account, according to the Congressional Budget Office, the Gini coefficient (the measure of inequality from 0 to 1) goes down from 0.52 to 0.43 in 2015, where taxes and transfers account for 0.05 and 0.06 points difference, respectively.Government transfers, as well as the more or less progressive tax code, thus turns out to be a rather significant factor to the degree of equality in the income distribution in the United States. Studies on American income inequality which does not include these factors are most likely highly misleading.I touched briefly on the importance of understanding the difference between statistics of aggregates and individuals in the discussion about global inequality, and also in American inequality does this play an important role. For while we may think that we can get a fair overview of the comparative progress between the lower and higher income quintiles by studying the Gini coefficients and the difference in growth among the quintiles, one must not forget that these quintiles aren't fixed, but that they change over time.Economist Russell Roberts proclaims that the "biggest problem" with "pessimistic" studies like Piketty, Saez & Zucman (2018),These changes can come in the form of income mobility, i.e. that people from a lower income quintile go over to a higher one through somehow getting an increase in wages or other income streams or vice versa; and by other demographic changes, such as immigration and emigration (the most significant example of the latter relevant to trends in economic inequality might be capital flight ).So, what do we find if we instead look at how the same people do over time? According to a report by the Treasury Department, 57.6% of the taxpayers in the lowest quintile in 1996 had reached a higher quintile by 2005, with 28.6%, 13.9%, 9.9% and 5.3% going to the second, middle, fourth and highest quintile, respectively. Additionally, about 82% of those raised in the bottom quintile have a higher family income than their parents, which could certainly be acknowledged at least as a great intergenerational improvement for the poor (at least in comparison to those in the other quintiles, especially the highest) [7]. More specifically, the median family income in the bottom quintile appears to be twice as much for the children's generation than the parent's generation, while the growth rates for the higher quintiles are a lot more modest.Boudreaux asserts, therefore, thatWith the seemingly great improvement for the lowest quintile in recent decades we've seen above, what kind of demographic changes in the population could in that way skew data on income inequality to indicate a much more pessimistic trajectory? Some important ones include:Boudreaux emphasizes especially regarding the 3rd point that such trends can pull the statistic down, without necessarily negatively impacting the wages of other workers (though theoretically, it could somewhat lower the wages of future workers given the increase in demand for labor).Now that we've gone into depth on the statistics and important caveats to take into account when reviewing them, an important question yet to be answered is how the inequality comes about in the first place. To provide a sufficient answer, one should be able to at least explain (1) how rich people got rich in the first place, and (2) theoretical factors that would lead certain people's income and wealth to grow quicker than that of others.A common answer to the first question is that they received the money in inheritance; that they were born into the life of the wealthy, so to speak, and that they thereby constitute some sort of pseudo-dynasty. One poll found that up to 74% of American millennials believe that millionaires have inherited most of their wealth. This thesis doesn't match with the empirical evidence, however. In a survey of over 10,000 millionaires, up to 79% of them reported that they did not receive any inheritancefrom parents or other family members. And even if, hypothetically speaking, it was true that most millionaires became rich through inheritance, it would still leave us with the question of how their parents got rich, and how those inheriting the wealth would manage to maintain the wealth and income stream [8].I think that a more plausible answer would be divided into two parts: the economic and political means of acquiring wealth. As I've written extensively about this before, however, I will not use further space on that here. For the economic means, see: Why Do People Hate the Engine of Progress and What Profit Really Means ; and for the political means: The Real Differences Between the Private and Public Sector Why is Liberty the Noblest of All Values? The essence of it is, in short, that you can either grow rich by providing value for people through the marketplace in the form of goods and services they desire, and by giving people work in the process, or through the political process by authorities getting wealthy through taxation and eminent domain, and businesses seeking subsidies and special privileges therefrom.What I want to place further emphasis on here is why some income and wealth quintiles would grow quicker than others as a feature of economic growth. As far as income inequality is concerned, what is most often discussed is the non-political sphere. That is, politicians are almost entirely excluded from the analysis of "the rich". Businessmen are labeled as the sole villains to blame for "hoarding" wealth, while the politicians are the selfless and charitable folks that ought to be in charge of the process of taking from the rich and giving to the poor; they're the Robin Hoods seeking to save us from the horror of inequality. This perspective, however, doesn't seem to hold well up to scrutiny if one takes politicians into account as a subcategory of "the rich". When politicians and rent-seekers get wealth, the wealth they receive are taken from someone else without creating any new value for them, it's a zero-sum game; with entrepreneurs to the degree they do not rely on state-offered privileges, however, they have to benefit others in order to benefit themselves. Thus, what one could expect based on this point would be that more economic freedom and less state intervention in the economy would meanequality, rather than less. Research by Anthony Davies indicate that there may be some truth to that thesis. Through a similar process that made globalization and free trade lower the global Gini coefficient, American states where individuals are much more free to make their own decisions tends to have a lower score than those with more centralized decision. At the highest, the difference in the score exceeded 0.005 in 2011 and 2014; at the lowest, it went below 0.001 in 2009. A similar trend also seem to apply when one looks at the differences between countries with centralized decision-making and those with more freedom for the individual to make his own choices. The aggregate of the former has a Gini coefficient of about 0.02 higher than the latter.Of course, as we've seen earlier, statistics of aggregates can be misleading, so this is no definitive proof of the thesis presented, but it at least suggests that it may not be too far from the truth. However, whatever inequality that may appear in a free market would likely be the result of differences in choices and abilities, which will be discussed more later.There's still one aspect of state intervention leading to increased income and wealth inequality that ought to be further delineated: inflation. Inflation is when the purchasing power of money decreases as a result of an expansion of the money supply in the economy. Under a gold standard, where the money was linked to gold or some other apt commodity like silver, inflation was difficult to enact as expanding the money supply then would in practice mean that more gold or other minerals used as mediums of exchange had to be mined. Nowadays, however, new money can in many countries be printed "out of nothing" by central banks. This is often done in order for the State to get an extra stream of revenue to fund itself or its programs. The result of this is that the purchasing power of money goes down, and as the value of one's savings thereby goes down, one can call this a "tax on savings". As lower income people save more and those with higher income invest more, inflation will tend to lead to an increase in inequality of wealth. Additionally, it leads to an increase in the inequality of incomes through so-called "Cantillon effects". Economist Jörg G. Hülsmann explains,Richard Cantillon, after whom the term "Cantillon effect" is coined, illustrates further,In other words, those who get the new money first will get the most out of it, and the purchasing power of the money will eventually go down as it circulates through the economy as prices increases. When the increase in the money supply is the result of printing new money "out of nothing" by the central banks, it is generally those with good political connections that can get such new money in the form of credit, their earnings from the newly printed money benefits them at behest of everyone else, who now are worse off, generally speaking.Though presented far and wide as an important issue we need to tackle urgently, what's actually so bad about people ending up differently as a result of different choices? Johan Norberg argues thatDo the critics of economic inequality really "consider wealth a greater problem than poverty"? They may not think of themselves that way, but they seem at least to - for some reason - think that the negative side of inequality outweighs the positive side of the betterment of the poor.As with today, inequality in wealth and income was also "what is most criticized in our social order" back in 1927, and as Ludwig von Mises put it then, the logical conclusion of the critique against inequality would be "the equal distribution of all wealth [12]." However, what would it take to actualize that desire, and why - logically speaking - should the equalization process apply exclusively to wealth and income; why not also other attributes? Sowell documents that some of the writers and philosophers with the unconstrained vision, such as William Godwin, were "prepared to concede some advantages to talents and wealth, though other believers in the unconstrained vision varied in how far they would go in this direction." For what would actually be required to make people fully equal? According to Murray N. Rothbard,According to Rothbard, the concept of equality should be dispensed with as a desirable societal goal all together, as "if an ethical goal violates the nature of man and/or the universe and, therefore,work in practice, then it is a bad ideal and should be dismissed as a goal. If the goal itself violates the nature of man, then it is also a poor idea to work in the direction of that goal."Mises points out another important aspect of economic inequality in a free market. He claims that "Those who advocate equality of income distribution overlook the most important point, namely, that the total available for distribution, the annual product of social labor, is not independent of the manner in which it is divided." He explains further thatHe also delineates the function that the luxury of the upper class has for the general improvement for those in the middle and lower classes, which is important to note as luxury is seen especially negatively among those with the unconstrained vision. As I've gone further into detail about this here , however, I won't repeat that explanation for this article.As this article has grown significantly lengthy at this point, after having gone through "everything you need to know about inequality", I'll end with this well-known timeless quote on the matter from Milton Friedman:The charge against inequality appears to be based on both misleading and severely incomplete data, and questionable premises pointing to a potentially dangerous logical conclusion. Inequality is an inherent part of human nature, as we all have different skills, knowledge, goals, interests, etc., and making an effort to reduce it through social engineering is doomed to lead to a decline in individuals' freedom to make their own decisions in accordance with that inequality, as well as possibly leading to the opposite result of that intended. If we seek freedom first of all, some inequality is bound to occur, but people will end up equal in their ability to pursue their unequal goals and desires.