Setting the Record Straight on Income Inequality
Much Progressive thought is based on the theory of power structures. It states that all disparities, inequalities and differences in economic and cultural power in society must inevitably be attributed to innate discriminatory forces within that system. This idea originates from Karl Marx’s theory of Surplus Value: it states that an employer making profit is inherently a form of worker exploitation.
This explains the Left’s utter obsession with income inequality: the gap between what an Indian farmer and Bill Gates earn. The growing concern about income inequality rests on three premises: first, that it has risen substantially in recent decades (and that it is as bad as the public perceives it to be). Second, that it can be explained as the rich exploiting the poor. Third, that relative disparities in wealth and income are more important than the absolute living standards of the poorest. Let’s examine each in turn.
You’ve all heard Bernie Sanders or AOC rant on about the proportion of capital which the richest 1% in society own. The assumption amongst many is that this share of wealth has been increasing since the 1970s. Whilst it is easy for politicians and media figures to blurt out statistics along these lines, the truth is that the measurement of income inequality is much more complicated than it looks. There is a great number of factors one must consider when measuring such: are you looking at government transfers? Are you looking at peoples’ incomes before or after tax? Are you including income from capital gains? And if you are, then are those gains at accrual , or having been realized ? Are you considering the friction between public assets and private assets? Because welfare transfers discourage people from saving and investing in private assets, like pensions, or saving accounts. Are you taking into account family size, which, having been reduced, increases the incomes of the poorest? Are you considering that a lot of income is underreported, which is why many economists prefer consumption data to income data when measuring peoples’ living standards. And perhaps most significantly, age must be considered. Age and income correlate very well – so as societies age, a greater share of the population will be dominated by those who get high incomes from pensions and other assets they’ve invested in over time. When one includes all these factors, studies have repeatedly shown that there has been no increase in income inequality since 1970, or if there has, it has been much more moderated than public perception. When one takes into account the accrual of capital gains, Armour et al. (2014 ) demonstrate the exaggeration of the increase in inequality. When you
Article from Mises Wire