Three questions for the inequality campaigners

Inequality hit the news again last month, when Oxfam published their annual study of global inequality, which labelled the state of affairs “obscene” and “grotesque”. And Oxfam is not alone in denouncing the unequal distribution of wealth, with equality economists such as Thomas Piketty reaching global celebrity status as a consequence of his work in the field. But are the income inequality crusaders right when they point to the distribution of income and wealth as the defining problem of our ages? Here are three questions which challenges their logic.

Is the real problem not poverty rather than inequality?

Equalising measures from the government, mostly taxation, is largely levied on income rather than wealth, but it is one of the two which campaigners usually refer to when speaking of inequality and claiming that it is on the rise. But even if it is, is numeric statistics like that what is important? Rather, is what really matters not whether people’s lives are improving?

If it is, then inequality is on the vane. The great advances of the capitalist economies in the last couple of centuries have benefitted the poor to a much higher degree than the rich. Transportation, healthcare and information technology have brought seminal changes to the lives of rich and poor, but many other things have brought revolution primarily to those less well off. Clean water, insulated housing, leisure time, universal education, a varied and plentiful diet are all things which have been available to the rich for many centuries, but have only recently become widely available to the great masses of people who enjoy them today. In terms of how we live our lives, at least in the western world, we have never been more equal.

And the fact is, poverty continues to decline, globally and by every measure.

Does inequality lead to poverty?

If we accept that it is poverty is the real problem, then the Oxfam study’s inferred accusation against the richest members of society – that they are somehow responsible for the low income of everyone else – becomes relevant. So is that correct? Does inequality in itself lead to increased poverty?

The most commonly used income inequality measure is the Gini coefficient, where zero denotes perfect equality (where everyone enjoys the same income) and one is complete inequality (where one person or household receives the entire income in the area in question). In a study from 2014, Scott Winship of the Manhattan Institute looked at the Gini coefficient’s power to predict middle class income and found no evidence – in other words, whether a society is more or less equal has no impact on the income levels of the middle class. And, as Winship notes, “that Manhattan and South Africa possess similar Gini coefficients does not imply that one ought to be indifferent between living in the two places.” Winship also found no evidence that inequality causes low growth, financial instability, economic immobility or any of the other problems often cited as reasons why a more equal society is preferable.

What about social mobility?

A separate, but related, problem with the inequality debate is that it mostly focuses on the wrong data. Indeed, while income statistics may show increasing difference between top and bottom, it doesn’t tell us how people move around within the income spectrum over their lives. But they do, and it matters. A medical student who subsequently becomes a doctor will at various times in his life be found in the very low and very high income categories. So this person adds to statistical inequality throughout his life, but is it reasonable to interpret him as contributing to increased real inequality?

Thomas Sowell looked at this in his book Wealth, Poverty, and Politics: An International Perspective, where he analysed data from the IRS from 1996 to 2005. What he found was that people who had income in the bottom 20% in 1996 saw their income rise by 91% over the next decade, whereas the people in the top 1% saw theirs fall by 26%. Probably part of the first group grew up and got (better) jobs, whereas part of the latter retired. In fact, 56% of Americans have incomes in the top 10% at some point in their lives and 12% reach the vilified 1%. These numbers clearly demonstrate the flawed logic in drawing conclusions from standard inequality statistics.

Much more could be said about this highly controversial topic, but the bottom line is this: the inequality crusaders simplistic arguments should be challenged. The facts are not supportive of their narrative, and their proposed measure – increased taxation – would be a counterproductive solution to a non-existent problem.

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