Economic inequality

The dismal science Economics

Economic systems

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Major concepts

Welfare state Yanis Varoufakis Milton Friedman Great Depression Capitalism

The worldly philosophers

John Maynard Keynes Amartya Sen Ben Bernanke António Salazar v - t - e

“”There are many highly successful businesses in the United States. There are many highly-paid executives. The policy is not to intermingle the two.

—Norman Augustine, referring to the disconnect between company performance and executive salaries

“”There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.

—Warren Buffett

Economic inequality (also known as income inequality, wealth inequality, the wealth gap, or the gap between rich and poor) is a state of inequality in the distribution of income and assets in a population of a country or nation. While correlation does not equal causation, economic inequality provides a sociological gold standard^{[pun intended]} for predicting whether a population has or will have a more unhealthy populace, more suicides, more crime, and just more of garden variety social problems.^{[citation needed]}

No nation has anything that approaches an equal distribution of wealth and income, but in some nations such as South Africa, South Korea, Russia, and the United States, a tiny percentage of individuals control the vast majority of wealth and income. As a whole, the world has an unequal distribution of wealth, but contrary to popular belief, income inequality between countries is dropping. The years between 1988 and 2008 (that is, between the fall of the Berlin Wall and the Great Recession) might have witnessed the first decline in global inequality between world citizens since the Industrial Revolution as the income between rich and poor nations converged during the period. Paradoxically, that doesn't necessarily means that inequality has dropped worldwide in recent years (although there are some hints that this could have happened, they are not statistically significant), as, even though inequality between countries dropped, the inequality inside countries also rose.

On a completely unrelated note, about 46% of people in sub-Saharan Africa live in extreme, life-threatening poverty. It's what keeps Peter Singer up at night!

Effects of economic inequality

Wealth inequality vs. income inequality

Here you can see the difference in income inequality (light) and wealth inequality (dark) in several European nations, and especially The Land of Opportunity!

Wealth inequality and income inequality are often incorrectly conflated. In reality, wealth and income are distinct measurements, both of which are useful for estimating economic inequality. Many economists believe that income inequality provides an incomplete picture of economic inequality. The income of an individual does not necessarily represent their full economic potential, as money earned in the form of dividends from trusts or gains in the stock market are not included in most definitions of income.

Yet these "capital gains" are a major factor in increasing economic inequality. According to Robert Lenzner, the top 0.1% (one-tenth of one percent) of Americans make about 50% of all capital gains; 60% of the income made by the Forbes 400 is in the form of capital gains. Ridiculous tax policies make it even easier for the rich to use capital gains to create more wealth. In the United States, for example, the highest tax rate on capital gains is 15%, while on normal income it is 35%. The result of all this is that middle- and lower-class individuals tend to spend most of their income simply getting by while the wealthy can use their income and their pre-existing wealth to create even more wealth. This means that income alone often provides an inaccurate picture of the true economic influence of the wealthy.

Indeed, in some nations, wealth inequality is much higher than the nation's income inequality suggests. The United States, for example, already has a highly unequal distribution of income: the top 10% earn 48% of the nation's income. But the top 10% control a staggering 74% of the nation's wealth.

Economic inequality vs. absolute poverty

Counter-intuitively, absolute poverty has been shown to have less of a correlation with the dysfunction of a population than its economic inequality. In a 1996 Harvard and Berkeley study, median income by US state was not shown to be anywhere as much of a factor in predicting social problems.

Why is this so? One theory put forward is that the human brain rejects and is distressed by inequality. Another is that the prices of goods and services in a society are relative. That is, even as a society has a greater amount of absolute wealth, there will still be some resources that are out of the hands of segments of the population; even as apples and iPods are relatively cheaper, housing and education and health care are priced to service those at the top of the economic class and deprive lower classes of access. And yet another reason is that the minority with sufficient wealth use their status to acquire more power and even more wealth. This not only redistributes the money away from the people at large (defunding and depressing services and economic functions that would have otherwise helped), but also encourages the overclass to take escalating measures to hold onto their ill-gotten gains.

Economic inequality vs. economic mobility

High economic mobility, American style.

Some claim that a high income inequality can be justified with a high economic mobility. In reality, this is false for three reasons.

• The first is that no one chooses which family that they are born to, yet children belonging to poorer families still suffer from worse nutrition, health care, pollution, and education on average. Even if all of the children do eventually go on to be multi-millionaires, it's still completely inexcusable to force children to live in conditions that will shave years off their life, and it ain't very economically efficient, either.
• Advantages accrue on top of other advantages. Imagine if you were playing a series of Monopoly games (the game in which the only person not to go bankrupt, wins) such that the winner got to keep 25% of their winnings to use for the next game. While it could be anyone's game in the first few sets, after a certain point, the winner will have so much monetary advantage that they will be all-but-assured to win all games henceforth and the previous games' losers will be assured to lose future games. Unless you're randomly assigning incomes, this is almost impossible to achieve. Thus high economic inequality almost assures low economic mobility.
• Finally, depending on how bad off the poor are, this kind of trade cannot be justified. A 10% chance to become a millionaire in return for spending your life slogging through a lower class is all well and good as long as your basic biological and sociological needs are met — but a 20% chance to become a billionaire in return for living your life in a Dickensonian or Uncle Tommish hellscape is completely indefensible even for the people who make it.

Economic inequality and economic development

Studies are beginning to show that income inequality can hinder long-term economic development. A study by the International Monetary Fund analyzed the economies and wealth distributions of nations in an attempt to find significant patterns. The researchers found that while high wealth inequality could be associated with a short-term economic boom, in the long run, inequality was “a significant hazard to growth sustainability.” The study attempted to assess the impact of certain factors on the length of economic growth spells finding that income distribution is the most dominant factor in economic growth they studied — more than trade openness or political ideology. This is because the more fragmented a society, the more prone it is to economic shocks — whether this fragmentation comes from ethnicity, religion, or wealth distribution. If the correlation is true, shouldn't even supply side economists get behind wealth redistribution?

Economic inequality vs. life expectancy

As economic inequality has pretty much conclusively shown to result in higher citizen and especially infant mortality rates, a society that intentionally chooses to pursue policies that ignore or exacerbate it should be accused of killing its citizens to line the pockets of the haves. But if they don't mean to and kind of look sad/feign ignorance when the subject is brought up, it doesn't count, right? The World Food Programme estimates that only 3.2 billion dollars is needed every year to "reach all 66 million hungry school-age children." By contrast, 1% of the world's population controls $110 trillion.

Economic inequality and political inequality

The concentration of wealth tends to lead to concentration of political power in the hands of the wealthy, plutocracy. While wealth does not necessarily equal power, it can go a very long way toward acquiring it. According to the Business Insider, 95% of United States House of Representatives elections in 2012 were won by the candidate with the most money. Further, less than 1% of Americans contribute 68% of all election funding. The troubling implication is that a very tiny percentage of Americans are controlling a very large part of the political process. Martin Gilens and Benjamin Page of Princeton and Northwestern Universities conducted a study in 2014 analyzing the political effectiveness of groups of American citizens. Those in the top 10% of income earners were by far the most likely to have policies they supported enacted: 45% of the time. But if they opposed a policy, it was defeated 82% of the time, even if a majority of Americans supported it.

The domination of the political sphere by the wealthy further marginalizes minority groups. Whites make up 82% of the top 1% of wealthiest Americans. The difference between income for whites and blacks actually increased by 27,000 dollars from 1967 to 2011.

Causes

Globalization

The go-to reason to blame everything on, Globalization allows a company to replace workers in an OSHA-compliant air conditioned union-shop factory with a Bangladeshi factory with an endless supply of workers to replace the fallen. But when the millions of jobs went overseas, they went somewhere, the result being that today there are only 700 million people in extreme poverty compared to 1.9 billion people in 1990. So technically, world economic inequality has decreased as a result. And this is in spite of the world population growing by about 2 billion in that time! So the elites in the Western world and the massive numbers of poor throughout the rest of the world have benefited, while the majority of people in the Western world have not. It's a bit of mixed news, but for the most part it's good. Plus, the race to the bottom has already been run: there is virtually no place left for industries to flee to for cheaper wages; wages are rising even in China and Bangladesh. It does have one extremely bright spot; an engineering prodigy born into African poverty can be discovered and given education and so forth, something that wouldn't have been realistically possible centuries ago. Since the main driver of economic growth (per capita) is technology, this means that the total wealth can massively increase and more people could live a "western" lifestyle even if inequality increases.

Idiotic tax policies

One can readily discuss economic inequality in terms of left vs. right, but there has been very little analysis done into why we have economic inequality, including by virtue of complex tax-codes that hurt the working poor and benefit the rich. It is unfair and inaccurate to blame the current tax-code solely on the conservatives or solely on the liberals.

Take, for example, New York City (NYC). Here is a city that is supposedly one of the most progressive, but is also one of the most unequal. But why?

Take a look at New York City's tax structure. It is extremely regressive, and not just regressive in terms of its sales tax, but also in terms of its property and income taxes. Since local income-tax is deductible at the federal level, this makes New York City's almost flat (but high) income tax at the city and state level regressive. Also, for some god-unknown reason, townhomes are taxed at a 1% property tax and apartments are taxed at a 5% property tax.

New York provides generous benefits to the poor too, including public housing. While these programs do a somewhat decent job to combat gentrification of New York City (gentrification can give the illusion of economic equality at the local level), they also generate huge disincentives to increase income at the margins for the lower-middle class (upwards of 90% marginal tax) because of phaseouts. The earned income-tax credit is grossed up at both the state and city level and thus phases down at the same grossed-up rate. Also, New York State has opted in fully to Obamacare, whose tax credits phase out steeply as income rises. Furthermore, NYC gives extremely generous public-housing opportunities to people in very narrow income-bands. All these benefit phaseouts hurt the working poor.

Moreover, the subway system benefits corporations way more than individuals by giving corporations a source of cheap labor that can come into the city cheaply and then go home and not bother the rich people at night.

And then there's the lunacy of payroll taxes such as Medicare and Social Security (called "FICA" for some reason). FICA is a roughly 7.6% withholding on income, but another 7.6% withholding from your employer and a small percent for unemployment insurance, meaning that you are taxed 7-8 cents before you even see your first dollar. This tax is only levied on the first $117,000/yr, meaning that income earned above that amount is basically taxed at a lower rate than the income slightly below. Did we mention this tax is only levied on earned income and not income from interest, dividends, capital gains, and inheritance?

Marriage Patterns

A less obvious cause is changing marriage patterns. No, not that or the other thing; marriages between people of the same status. Consider a village with 4 people; two doctors and two janitors. If each doctor marries a janitor, there is little income inequality by household. But if the doctors marry each other and so do the janitors, then there is one really rich household and one really poor household.

In the dark ages before the internet, people tended to marry younger such as their high school sweetheart, meaning that you often chose your spouse before you knew for certain what that person would end up doing. Or you had an accident due to a lack of knowledge, and didn't have any other options. Nowadays, it's much easier to find someone of similar background thanks to the internet, or marry a college sweetheart instead; to the point where half of the financial benefit of a college degree is better marriage prospects. Which is just more evidence that the Ivies are really just an upper-class breeding program.

Another impact of changing marriage patterns involves how income is reported. Most of the time it's the median household income. What happens when two people co-habitate instead of marry? Well, the household becomes "two" households, and as poorer people are less likely to get married than in the glory days decades past, this pushes the median household down.

Redistribution of wealth and income

“”Wealth is the vomiting of Fortune.

—Monimus

Many people believe that highly unequal distributions of wealth are an injustice that governments should intervene to fix. Some have gone so far as to say that all assets should be owned in common, which is a totally equal distribution of wealth. Nobody has actually had the balls to do this on a large scale, although plenty of dictators have pretended to. Most modern nations are quite capitalist, but almost all still engage in wealth redistribution through taxation and welfare. Advocates of wealth redistribution do not necessarily want “equal” distribution of wealth, but a distribution of wealth that gives more people a chance to exercise significant political and economic freedom. Those that oppose redistribution, on the other hand, seem to value the "right" to collect unlimited amounts of money above this.

It should be pretty obvious by looking at history that no matter how much bloviating people do about crap like predestination and Objectivism and how its alternatives will lead to a slippery slope to Marxism, a society simply won't willingly tolerate such a structure for long. Examples abound in history of the citizenry violently rebelling against an economically stressed and/or unequal society when sufficiently prolonged. Faced with such choices, the government has either been forced to modestly redistribute the wealth, get overthrown, clamp down on dissenters with increasing authoritarianism, or hope that some positive black swan alleviates the social stressors and bails out the aristocracy for a few more decades.

Arguments for

Supporters of wealth redistribution are Godless communist bastards who want to take your hard-earned money and give it to the pothead next door believe that societies with more equal distributions of wealth are more just than highly stratified societies. They further argue that all human beings in a society should be cared for, and that everyone should pitch in through taxation to pay for programs that aid the less fortunate. This necessitates redistribution, as it will transfer wealth taxed from everyone to services provided to only a few. Supporters point to the benefits of economic equality on the economy as further incentive for redistribution of wealth.

Of course, this is all naked socialism and the poor should just grin and bear it. After all, talking about alleviating class warfare (or even acknowledging its existence) is much more evil than the actual class warfare.

Arguments against

Some who oppose wealth redistribution do not recognize wealth inequality as the massive problem that distributionists claim it is. If anything, they view progressive taxation and transfer payments as impeding the "natural distribution" of wealth (a.k.a. in the hands of a few WASPs).

• "Redistribution is basically exactly the same as stealing!"
• "It disincentivizes hard work and economic risk. Once welfare programs are available, nobody will have any incentive to get a job and society will collapse!"
• "Let people get as rich as they possibly can, they'll spend a little bit of their money and it will trickle down to the homeless."
• "It's not the government's (the people's) responsibility to take care of the poor!"
• "Everything the government does is evil."

Others argue that problem or not, government redistribution of income forces the most valuable members of society have under-representative earnings, and gives the least valuable members of society over-representative earnings, and is therefore immoral as it forces the most valuable members of society to let the government decide how most of their money is spent.

More educated and serious arguments generally revolve around the idea that income equality is not an accurate method of measuring a nation's prosperity. For example, Afghanistan has a more equal distribution of income than the United States, but most people would argue that the United States is a better country to live in, even if you are poor. While not entirely invalid, this ignores the fact that many developed countries have income distributions similar to or more equal than Afghanistan's, and that the United States shares this advantage.

Methods of redistribution

The most common method of distributing income and wealth is through a progressive income tax (that taxes the wealthy more than the poor) which funds public services (which benefit the poor more than the wealthy). These "transfer payments" may range from relatively mild programs such as subsidies and vouchers (like Food Stamps), Social Security, and student loans and grants to a guaranteed minimum income, universal healthcare system, and free higher education system.

In the United States

Oh hi, Herbert Hoover!

Aw c'mon, why does the lower class get Texas?

Contrary to the ideals of the American Dream, the United States has a quite unequal distribution of wealth, and this inequality is increasing.

• According to statistics compiled by William Domhoff, in 2010, the top 20% of Americans controlled 88.9% of the nation’s wealth while the bottom 80% controlled 11.1% of the nation’s wealth.
• The 400 wealthiest Americans have more wealth than half of all Americans combined.
• Since the early 1980’s, the share of wealth held by the bottom 80% of Americans has almost halved, and the share held by the top 1% of Americans has doubled.
• The “Great Recession” that began in 2009 has accelerated this trend. During the recession, the median household income decreased by 36.1%. Yet the top 1% of Americans saw decrease of only 11.1%. This was the first recession or depression in U.S. history that has left the very wealthy better off than the rest of the nation.
• In 2013, a UC Berkeley study found that from 2009-2012, "top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% ... Hence, the top 1% captured 95% of the income gains in the first three years of the recovery."
• In a comparison of 35 "advanced" economies, the U.S. ranked 34 out of 35 in child poverty, indicating an increasing wealth gap.

Public opinion

• According to a recent Gallup poll, 61% of Americans believe that wealth in America should be redistributed by the government. 83% of those people were Democrats. When polled, most Americans laughably underestimate the actual distribution of wealth in the nation.
• As of November 2015, all the contenders for the Democratic nomination have said that income inequality is an issue that needs action and that the government should address it. They differ in the scale of the response that they are calling for, with Bernie Sanders taking a plan of action that he has called Democratic Socialism, Hillary Clinton calling for a moderate plan of action, and What's-his-face is just happy that he exists.

See also

• The American Dream
• Occupy Wall Street
• Plutonomy
• Social democracy
• Supply-side economics
• Wealth inequality in South Korea

External links

• Myth: Income inequality is not the cause of the nation's social problems
• Conference Board's analyses of how income equality shapes economic trends
• Four Ways to Visualize US Income Inequality
• The science of inequality, Science Magazine
• The Inefficiency of Inequality, Foreign Policy
• The key to our economic advantage over the United States? Less income inequality, the commies at the National Post
• Who’s Your Daddy?, The New York Times
• Wealth Inequality in America