President Obama and others on the Left seem obsessed with income inequality. Income, not so much.
Often, it seems that they care less about creating wealth for a broad range of the American people than in making sure that society’s wealth—or, more accurately, income—is “fairly” “distributed.”
Indeed, former Labor Secretary Robert Reich has a new movie, a documentary that deals with income inequality in much the way that Al Gore’s An Inconvenient Truth dealt with the idea of man-made Global Warming.
I often challenge my friends on the Left on this issue:
What if there were a magic spell or some unforeseen technology that immediately doubled the income of each person on earth? People who live on $1 a day would have $2 a day. Bill Gates would see his income doubled as well. Would you be in favor of this development, even though the numerical gap between rich and poor would likewise double? If you would oppose this, how would you explain your position to the person living on $1 a day?
What if that spell or that technology doubled the income of the poorest people, tripled the income of the middle class, and quadrupled the income of the rich? Everyone would be better off, but the rich-poor gap would greatly increase. Would you be in favor of that, my left-wing friend?
That is, in fact, the sort of choice that we as a society face. The greater the degree to which people are allowed to work and exploit their talents and retain the fruits of their labors, the better the condition of people at all levels of society—and the greater the difference between people at the top and people at the bottom.
You can eliminate relative poverty only by increasing actual poverty. Throughout American history, people in the political mainstream have understood this. Conservatives and Republicans and libertarians and moderates got the idea, but so did liberals like John F. Kennedy and the late AFL-CIO President George Meany. Today, however, the political establishment, the media, and the academic world are dominated by so-called “progressives,” people who are incapable of understanding the way the world works or who are just too power-obsessed and cold-hearted to care.
You can equalize the running speeds of people in a race only by slowing them down. You can’t do it by speeding up the slowest runner. Nor is there any reason you should; it’s not the fast runner’s fault that the slow runner is slow. (If you want everyone to get a trophy, just give everyone a trophy; don’t waste people’s time by going through the motions of staging a race. If you want trophies to be distributed equally, just have a lottery; don’t waste everyone’s time by putting weights on the backs of the faster runners to make thing equal.)
Some people are healthier than others. In a free society, the healthy are not healthy because other people are sick. Likewise, in a free society, poor people are not poor as a result of other people being middle-class or rich. (There are societies in which the rich get rich by ripping off the poor, such as slave societies, aristocracies, and kleptocracies, but those societies aren’t free.)
I created a simple model to illustrate the tradeoff between income equality and income. This is how it works:
Imagine a meeting hall full of people — 5,000 people, each with an income of $1,000 a year. Each person has a coin, and, when cued, each person flips his or her coin.
If a person’s coin comes up heads, he or she gets a 1% raise. If it comes up tails, there is no change.
After the first flip, about half the people will be making $1,010 a year, and the other half will still be making $1,000. After two flips, about 1,250 people will be making $1,020.10; approximately 1,250 will still be stuck at $1,000; and about 2,500 people will be making $1,010 a year. (That’s because about one-fourth of people will be lucky and get two heads; about a fourth will be unlucky and get two tails; and about half will be in the middle, with one heads and one tails.)
Repeat the process. After a total of 10 flips, here’s how income is “distributed.” (Note that this is distribution based entirely on luck. In this model, there is no role for factors such as unequal talents, unequal willingness to work hard, and unequal levels of experience.)
- Average income: $1,051
- Average income for the bottom 1%: $1,009
- Average income for the bottom 10%: $1,024
- Average income for the bottom 20%: $1,029
- Average income for the bottom 50%: $1,038
- Average income for the top 20%: $1,074
- Average income for the top 10%: $1,079
- Average income for the top 1%: $2,200
- Ratio of income in the top half to income in the bottom half: 1.025
- Ratio of income in the top 20% to income in the bottom 20%: 1.045
- Ratio of income in the top 10% to income in the bottom 10%: 1.054
- Ratio of income in the top 1% to income in the bottom 1%: 2.159
Now, let’s change things a bit. Instead of a 1% raise for each heads, let’s repeat the experiment with a 10% raise for each heads. Here are the new results:
- Average income: $1,589
- Average income for the bottom 1%: $1,052
- Average income for the bottom 10%: $1,191
- Average income for the bottom 20%: $1,261
- Average income for the bottom 50%: $1,390
- Average income for the top 20%: $1,955
- Average income for the top 10%: $2,066
- Average income for the top 1%: $4,499
- Ratio of income in the top half to income in the bottom half: 1.287
- Ratio of income in the top 20% to income in the bottom 20%: 1.551
- Ratio of income in the top 10% to income in the bottom 10%: 1.735
- Ratio of income in the top 1% to income in the bottom 1%: 4.277
Notice that the average person is better off by $538 a year. People in the absolute worst-off 1% category are better off by $43 a year, people in the bottom half are better-off by $352 a year, and the One-Percenters are better off by $2,299 a year.
Now, a person on the Left would see that as grossly unfair. Perhaps, in a sense, it is. But in this experiment, almost everyone is better off, and no one is made worse off, by the raises. (After 10 coin-flips, approximately 4,995 of the 5,000 people will have gotten heads at least once, while a lucky few—roughly five people—will have gotten heads every time.)
Continuing with our example, imagine that, instead of a 1% or 10% raise for each heads, it’s 50%. The new results show a dramatic increase in what a leftist would point to as income inequality.
- Average income: $8,460
- Average income for the bottom 1%: $1,128
- Average income for the bottom 10%: $2,219
- Average income for the bottom 20%: $2,797
- Average income for the bottom 50%: $4,272
- Average income for the top 20%: $17,954
- Average income for the top 10%: $22,182
- Average income for the top 1%: $62,606
- Ratio of income in the top half to income in the bottom half: 2.960
- Ratio of income in the top 20% to income in the bottom 20%: 6.419
- Ratio of income in the top 10% to income in the bottom 10%: 9.996
- Ratio of income in the top 1% to income in the bottom 1%: 48.755
Wow! Those rich folks are really making out—but so are people in the bottom 20%, who make 180% more than they did before we started flipping coins. In fact, every group is better off, except for those five losers who never got heads, and they are no worse off. In that situation, a very small tax on their more-successful fellow citizens would be sufficient to provide the most unfortunate people with substantial amount of public assistance. As they say, you can redistribute only the wealth that has first been created.
Note that the average person in the bottom 10% in the third scenario is better off than the One-Percenters in the first scenario. At 1% growth per heads, the average One-Percenter makes $2,200 a year. At 50% growth per heads, the Bottom-Tenner makes $2,219 a year.
That, dear reader, is the difference between a free-market economy and a centralized/command economy. By paying little or no mind to income “distribution” and focusing instead on growth, free markets allow people to have higher incomes. Almost everyone is better off, no one is worse off, and there are enough successful people to support a system of relief for the unluckiest few.
That is the difference between the United States ($41,560 GDP per capita in 2011) and, for example, sub-Saharan Africa (reportedly $2,334 in 2011). That’s why we in the U.S. live in a country where poor people (as defined by government bureaucrats) have TVs (96%) and DVRs (83%), microwave ovens (93%) and refrigerators (98%), and even, in most cases, computers (58%)… while it’s estimated that 1.4 billion people in the world live on less than $1.75 a day.
Also important: In the real world, people with low incomes aren’t necessarily poor. For one thing, government benefits are usually left out of calculations of income, such that a poor person often has a higher real income than a working-class person or small-business-class person. And in the real world, people don’t stay in the same income category; sometimes a person has a low income because he or she is a college student with a very high prospective income (think of Obamacare advocate Sandra Fluke), or he or she is retired with no income but substantial wealth, or he or she is a Kennedy-type “trust fund baby.” It’s very common for a person in the bottom 10%, based on income at one point in life, to be in the top 10% at a different point in life, or vice versa. So the supposed maldistribution of income in the U.S., as reported by politicians and pundits, is greatly exaggerated in any case.
The next time you hear one of those pols or pundits complain about income inequality while promoting policies that make it harder for regular people to attain prosperity, be prepared to ask: Do you really want to improve the lives of the poor, the working class, and the small business class, or do you just want to punish the rich regardless of how much it hurts those who aren’t rich?