The discussion over economic inequality in the United States seems to have captured the public imagination, at least on the political left. President Obama has called it “the defining challenge of our time,” and Secretary Clinton has deemed it “a cancer.” Given the shorthand manner in which politicians sometimes refer to policy matters it is not always clear if Obama and Clinton are referring specifically to inequality, the ratio or distribution of wealth in society, or to raw poverty—the fact that millions of Americans live in impoverished circumstances. There is a keen difference in which of these two approaches one takes to the challenge of alleviating misery. Here, I’ve devised a simple test to understand the issue:
Scenario one: A two-class society. Imagine a society in which half the population earns $15,000 a year and the other half earns $150,000 a year. In other words, half are in poverty and half are doing well. Consider some permutations in this scenario.
1. Poor people triple their income to $45,000, but wealthy people quadruple their income to $600,000. This is:
a. Good, because the poorest have been largely lifted out of poverty.
b. Bad, because wealthy people had their income go up considerably more than poor people. They received a raise of $150 thousand and the poor received a raise of only $15 thousand. Income ratios have deteriorated from 10:1 to 13:1
2. It is the same society but there has been a stock market crash and depression. Poor people have their income cut in half, to $7,500, but wealthy people have 90 percent of their income wiped out, reducing it to $15,000. This is:
a. Bad, because society is significantly impoverished.
b. Good, because now the income ratio is 2:1 instead of 10:1. Inequality has been reduced.
c. Good, because impoverishing the wealthy is a worthy policy goal. Now they are exactly where the poor half was before the crash.
Scenario 2: A jobless society. Imagine a different scenario in which there are two identical societies, with only one difference. Society A is the U.S. without Steve Jobs. No Apple and no Apple products. Society B is the U.S. with Steve Jobs, in other words the U.S. as we know it today.
a. Society A is a better society. It has less income equality, with fewer billionaires and fewer millionaires.
b. Society B is a better society because it has greater innovation and a reduced cost of music and audio products, providing greater access to poor people. We are not bothered by additional millionaires or billionaires, even if they insist on turtlenecks.
Scenario 3: Bad math. Warren Buffett is going through the Berkshire Hathaway accounting books at the end of the year and he discovers his accountants have made a huge mistake, but he cannot tell exactly what the mistake is—there are two possibilities. In situation A, Berkshire Hathaway actually sold exactly twice what was originally thought, so Buffett has earned twice the amount through his stock holdings, as has everyone else who owns Berkshire Hathaway stock. In situation B, Berkshire Hathaway actually sold exactly half what was originally thought, so his profits are exactly half. Your conclusion:
a. Situation A is bad because it promotes inequality and reinforces theories of popular French economists. Buffett does not need any more money.
b. Situation A is good because it means more wealth has been created, society is more prosperous, thereby reinforcing theories of long-dead Scottish economists. Consumers have benefitted from twice as many products and services. Even if the gains for the additional economic activity flow disproportionately to the owners of Berkshire Hathaway stock, this is still good for society.
Scenario 4: The coffee chain. Scenario A: A well-known chain of coffee shops announces it is expanding and will create 1,000 new jobs, but these jobs are just 20 percent above minimum wage. Scenario B: The same coffee chain announces it had a bad year and it is shrinking, eliminating 1,000 jobs at 20 percent above minimum wage
a. Scenario A is good because it creates jobs and helps people enter the workforce, even if it might create greater income inequality.
b. Scenario B is good because it promotes income equality. Moving people out of minimum wage jobs builds a better society.
Scenario 5: The Schminternet. In the not-too-distant future, the tech community develops an improvement on the Internet, called the Schminternet. The Schminternet does everything the Internet does, but it is even faster and better, from making restaurant reservations to planning inventory systems for business. Eighty percent of society benefits directly from the Schminternet but some parts of society, such as the less-educated, the poor, and the elderly have trouble with access to the Schminternet or lack the skills to use it effectively. Some argue that these groups will nonetheless benefit indirectly from the Schminternet as it generates efficiencies and competition. For the 80 percent of the people who use the Schminternet, their earnings go up 10 percent.
The Schminternet is:
a. A good idea because it increases national welfare.
b. A bad idea because it enhances inequality.
Scenario 6: Societal problems. Pew Research relates that children who grow up with a working dad have an 8 percent chance of being in poverty, and those who grow up with a stay-home dad have a 47 percent chance of being in poverty. The proper policy response to this two-class society is:
a. Nothing, because the more affluent will pay more taxes in any event.
b. We should tax children with a working dad at a greater amount to promote equality.
c. We should adopt social policies to encourage the maintenance of two-parent families.
Conclusion: Essay question. Pick one topic and discuss.
a. The bell curve does not shift, it stretches. When societies become more prosperous, some people are better able to take advantage of this situation, such as the educated, the employed, and the risk-takers. People not in those categories have trouble improving themselves even during periods of general economic expansion. But these unfortunate groups are not necessarily worse off because of the shift; they just have more trouble becoming better off.
b. Concern over inequality per se is misplaced. Growing inequality might be prompted by technology or demographics, and it might reflect a general rise in prosperity. However, we should all be concerned over raw poverty and if there is a lack of socio-economic mobility.
C. We should want every American to go as far as possible in life. We should wish the best for everyone. We want a growing economy in which everyone can participate. We want to help those who are struggling, but we do not want to limit or punish the most successful in the hope this will help the least successful. We need more Steve Jobs and more Warren Buffetts. More coffee shops. More Schminternets.
Frank Lavin served in the Reagan and both Bush administrations.
