A 2017 study found that 66 percent of Democrats view economic inequality as a “very big” problem, and 93 percent believe it to be at least a “moderately big” problem. And it’s not just the public – politicians like Bernie Sanders and Elizabeth Warren have frequently argued that the wealthy elite of society represent a danger to the economic wellbeing of average Americans.
Their concern isn’t totally unfounded – in 2015, two economists published a paper arguing the top 1% own roughly 40% of privately-held wealth in America.
But is wealth inequality bad? Here are three important questions to ask.
1. Is wealth inequality moral?
The answer is: it depends on how the inequality came about. Economics professor David R. Henderson uses Bill Gates as an example of a good inequality:
“Gates got rich by starting and building Microsoft, whose main product, an operating system for personal computers, made life better for the rest of us. . . [each] gain we consumers got from each step of the PC revolution occurred a year earlier because of Bill Gates. Over 40 years, that amounts to trillions of dollars in value to consumers.”
Gates deserves his wealth because he created innovative products that improved people’s lives. But Henderson notes that not all wealth is earned this way:
“Mexican multi-billionaire Carlos Slim is currently the seventh-richest man in the world. The Mexican government handed him a monopoly on telecommunications in Mexico and he uses it to charge high prices for phone calls. Slim is clearly exacerbating income inequality in a way that makes other people poorer.”
If wealth is earned through political favoritism and regulatory protections from competition, then such activity is detrimental to society.
2. Is wealth inequality justified?
To answer you must ask: what kinds of people are in the top 1 percent and how do they make their money?
A University of Chicago study found:
“Nearly all of the recent rise in top incomes has come in the form of business income.
. . . Typical firms owned by the top 1-0.1% are single-establishment firms in professional services (e.g., consultants, lawyers, specialty tradespeople) or health services (e.g., physicians, dentists). A typical firm owned by the top 0.1% might be a regional business with $30M in sales and 150 employees, such as an auto dealer, beverage distributor, or a large law firm.”
These findings help illustrate the incredible diversity of economic success in America. Across the entire economy, technology and globalization have enabled a scale of wealth creation never seen before. One of the study’s authors explains:
“There are a few Carnegies and Rockefellers, a Bill Gates and a Jeff Bezos here and there, but there are a lot more people earning between $300,000 and a few million dollars doing a lot of different things.”
And according to a recent study, these successful people are less privileged than they used to be:
“The share of Forbes 400 individuals who are the first generation in their family to run their businesses has risen dramatically from 40% in 1982 to 69% in 2011 . . . [and] the percent that grew up wealthy fell from 60% to 32%.”
Declaring that the 1 percent are largely privileged Wall Street financiers is misguided to say the least.
3. Is wealth inequality detrimental to average workers?
One common fallacy is that the size of the economic pie is fixed – if someone gets more, another must get less. However, an article from FEE explains this is not the case:
“Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%.
He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.”
The article also points out that lower prices of food, material goods, and technology have drastically increased living standards for the poor.
Corporate welfare, however, does create harmful wealth inequality. When the government picks economic winners and losers by handing out tax-financed subsidies, the consumer is harmed because firms prioritize lobbying over innovation. If government regulations were not so voluminous and arbitrary, a more competitive market would likely arise.
Ultimately, wealth inequality is a highly contested topic among economists. While certain causes are commonly acknowledged, their degrees of impact are far from decided. Unfortunately, politicians frequently spread erroneous information disguised as “facts”: CEO’s are not earning 350 times what their employees do, the income tax is highly progressive, the government heavily redistributes wealth already, and the 1% did not profit from the Great Recession.
Instead of fighting “inequality,” perhaps policymakers should focus more on lowering the cost of living and expanding economic opportunity. As global markets have opened, the returns to successful entrepreneurs and skilled workers are higher than ever. We should be ensuring that as many people as possible can take advantage.
Do you think economic inequality is a problem? If so, what could be done to address it?
[Image credit: Flickr-Steve Jurvetson CC BY 2.0 - edited for size]