Economics 101 & Public Square

When Income Inequality Is – and Isn’t – a Problem

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As I mentioned in a previous post, income inequality per se is not a harbinger of poverty. But why?

Economist David Henderson explains it this way:

How does an increase in inequality mean that income was shifted from poor to rich? It doesn’t. An increase in inequality tells us nothing about income shifts. You could have everyone’s income growing and yet inequality increasing, as, in fact, has happened over the last 30 years. So there’s no “income shift” at all.

Income inequality can be a red herring. It gets us caught up in the wrong conversation. What really matters is whether the poorest among us have a legitimate chance to improve their conditions.

Shifting to More Mobility

If a large portion of society is experiencing higher levels of incomes over time, then, as Henderson explains, income inequality is the wrong variable on which to focus. We should direct our attention to income mobility. This gives us a much better picture of:

  • How those in the lower income quintiles fare.
  • The ability of those in the lower quintiles to escape their conditions of poverty and increase their earning potential.

We should direct our attention to those at the bottom who are not experiencing income mobility, figure out what their constraints are, and discern how to best undo those constraints.

We never know the potential of untapped human creativity and skill. That is the real tragedy of those trapped in poverty. If they don’t have a chance to escape being poor, they never really get a fair chance to show the world what they have to offer. This is a great injustice that is not evidenced in income inequality data.

In For the Least of These, IFWE’s upcoming book on poverty, economist Lord Brian Griffiths and Dato Dr. Kim Tan put it this way:

Poverty was not what God intended for the world he created. Poverty is an affront to human dignity. Human beings are endowed with infinite dignity and entrusted with the power to exercise stewardship  over the created world. Seen in this light, the scar which is left by poverty on God’s creation is that much more painful. Poverty is the most extraordinary waste of human potential.

This tragedy is evidenced by the number of people who are born poor and stay poor. Recent economic research suggests that income mobility has remained largely stable over the last half of the twentieth century. While that is not terrible news, it’s not great news either.

We want income mobility to continue to increase because it means that the income group you start in, which tends to be lower because of your skill and education level, is not where you stay. In fact, varied reports show that income mobility exists in the US but has remained stagnant for several decades. According to the US Department of the Treasury, over fifty percent of individuals in the lowest income quintiles move out of those quintiles in just a few short years, but there are still some who never escape the trappings of poverty. What do we do about those who don’t emerge out of these conditions?

Hindering Income Mobility

A growing concern is that we live in a culture of cronyism that keeps people trapped in poverty. Well-connected companies who can afford to hire expensive lobbyists and attorneys are spending their time and money on K Street. These firms know market competition is tough, and any new company or innovation could steal their customers. To protect themselves they often seek the help of the government, through tariffs, price supports, entry barriers, and licensing regulations.

This harms the poor in two ways:

  • When well-connected, wealthy firms engage in cronyism, the small ventures run by folks who have little capital and no money for lobbyists are shut out of the market.
  • Cronyism often results in less innovation, poor quality products, and increasing prices because it limits the market.

Economists Robert Lawson believes we will see the first generation of people who don’t do as well as their parents as a result of this cronyist environment. Cronyism’s impact on decreasing income mobility is a serious concern because it threatens flourishing and impacts the poor and unconnected the most.

We see very harmful income inequality when politically connected people increase their income through various acts of cronyism. This is an example of the rich getting richer at the expense of the poor. Income inequality that results from market trade and innovation works in the opposite way—the rich get rich because they serve us, and there is never a guarantee that they will stay rich.

We must fight against 21st century cronyism that has been in progress for decades. This would be a powerful way of leveling the playing field, creating more opportunities for everyone, and helping the poor to permanently escape poverty.

Editor’s note: This is a continuation of excerpts from IFWE’s forthcoming book, For the Least of These: A Biblical Answer to Poverty, which is available for pre-sale here. This post was adapted from Anne Bradley’s chapter on income inequality.

 

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  • Did any of the working poor state that income inequality is a red herring or was that only said by economists who have always lived comfortably? And when company payrolls are subsidized by gov’t assistance programs make income inequality a red herring? And also that statistics showing income mobility are snapshots of the past and thus cannot imply the future for the working poor.

    And is it really regulations that hurt the poor or the unbridled actions of those who seek to maximize their own profits? And how does comparative advantage affect what we say about eliminating regulations? And finally, how do we separate the prosperity that comes from crony capitalism from actual capitalism so we can evaluate capitalism?

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