The Benefits of Income Inequality
A favorite talking points of the liberal left is how “the gap between the top 1% of earners and the middle class is…”. Or how “the incomes of the top 1% are growing by x% compared to the working class”. As if the top 1% doesn’t work. These citations are laughable. Not because the person spewing them is ignorant of economics, or because the successful like to see people supposedly left behind by our economic system. No, the reason these sorts of statistics make are ridiculous is because they indicate that it is still possible to get rich in this country despite starting out, well, not rich.
When someone points out that incomes for the top 1% have increased, they want their audience to assume that over time, it is the same individuals occupying the positions that make up the top 1%. “The rich get richer” is a phrase most know and even take for granted, without ever asking what it means. For example, IRS data show that by 2005, most of those who were in the top 1% of wage earners in 1996 had been replaced. This doesn’t sound like a rigid class system the left wants us to believe is in place.
Another conclusion the liberal commentator is taking for granted is that viewers/readers think that income gaps are a bad thing. The fact that conservative politicians never defend income gaps lead me to believe liberals are winning this PR battle. But let me attempt to at least begin a discussion on the matter. First, if people earn higher incomes or hold more wealth, then in a free market this is a signal to anyone else that it is achievable for them too. I think it would be much more depressing to be the richest man in the world and living in a cave than an average wage earner living in an air conditioned house with a car and a refrigerator. For the guy in the cave there isn’t anywhere else to go. For me, well, I’ve met people who live well beyond any means by which I am currently capable. This is also not a permanent condition. If I work hard enough and want that lifestyle, I can have it.
A second reason income inequality, specifically expansion at the top, is a good thing, is that overall wealth is continuing to grow at a high rate. Wealth expansion, over time, benefits everyone. If wealth were expanding faster at the bottom of the income spectrum, it would mean a devastating lack of investment opportunities. Capital doesn’t operate in a vacuum, and those who possess it generally do not hoard it. Instead, they look to place it in the hands of the capable, who will, in turn, create future income streams. These are the entrepreneurs looking to create the next big idea that we will all wait in line overnight to have. And since they force nothing on no one, without them, we all lose. Without them, quality of life stagnates. There would be no iPad, iPhone, or even rotary phone. Innovation requires capital and carries risk, but this seems lost on our liberal commentator.
Finally, an assumption that those bemoaning the gap between rich and poor want us to make is that wealth is like a pie – the more you have, the less I have. While at any given time, in a momentary snapshot, it is true that wealth is fixed. But next year, next month, or even in the next second, total wealth in the world can expand or contract. Throughout history, it has expanded, with most all of it happening since the Enlightenment. Instead of a pie, it is more accurate to think of wealth as the number system. Any number you can imagine, no matter how large, there exists an infinite amount higher. It is the same with an economy. While all of the assets in the world are finite, there is always room to expand. We can all get richer, and despite efforts to convince you otherwise, we have all gotten richer. Life expectancy and quality are at all time highs. It can keep moving upward, although much more easily if people are encouraged to create, rather than made to feel jealous of those who have.