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Income Mobility, Not Income Gaps

By: Jay W. Richards
Townhall.com
April 1, 2012


Link to Original Article

 

Editor's Note: This column was co-written by Anne Bradley, PhD, who serves as Vice President of Economic Initiatives at the Institute for Faith, Work and Economics.

All-American rocker Bruce Springsteen has taken to the pages of Rolling Stone magazine to lament the existence of income inequality in our country today: “You cannot have a social contract with the enormous income disparity — you’re going to slice the country down the middle. It’s not going to hold.”

His viewpoint seems to be shared by more than six in ten Americans who think that “one of the biggest problems in this country is that more and more wealth is held by just a few people,” according to a 2011 poll by the Public Religion Research Institute. The Occupy Wall Street campaign only contributed to this sentiment, leading ordinary Americans to talk about the wealthy “one percent” and the presumably destitute “ninety nine percent.”

The reality is, almost all this is the result of economic illiteracy rather than careful moral reasoning.

First of all, not all forms of inequality are unjust. Rather, the Bible says that diversity is woven into the very fabric of our creation (Genesis 1:11-26). God has given blessings to all—it can rain on both the just and the unjust (Matthew 5:45)—but our gifts differ both in degree and in kind. In Jesus’ parable of the talents, a rich man gives his slaves different amounts of money, according to their ability. (Matthew 25:14-30)

Justice has to do with what each of us is rightly owed. If what is owed is equal, then justice requires equality. If what is owed is not equal, then justice requires inequality.

In market-based economies, we can exchange our labor—our time, knowledge, skill, willingness to risk, and effort—for other things we value. We each have different “comparative advantages,” to use a term from economics. Even as individuals, the value of our labor varies by time and place, and so does the income we can get for it. In the end, the value placed on our labor is assessed by the consumer. We determine whether an entrepreneur will be wealthy, and that wealth comes if and only if the entrepreneur has met the needs of the customers. Absent cronyism or corruption, this is just.

But what about that “gap between the rich and poor”? Is that fair? Actually, an income gap, by itself, is a non-issue. There’s a much larger wealth gap between Bill Gates and the average American dentist than between that same dentist and a Costa Rican farmer who earns $1,000 a year. Nevertheless, we are far more concerned about the second gap, because we understand that the farmer likely cannot meet basic needs like shelter and food.

Poverty—real, absolute poverty—is the problem. Gaps are a distraction. They seem unjust because we think, mistakenly, that an economy is like a cherry pie—if Paul gets a big slice, then Peter must get a smaller slice. But a “gap” doesn’t mean that wealth was transferred from the poor to the rich. In fact, it implies that the rich had to make others better off to become rich, that they had to serve their customers. Steve Jobs and his many well-paid employees didn’t get rich by stealing iPads from homeless people. Creating iPads made people better off than they were before both by creating a new product that was valuable and by creating jobs necessary to produce that product.

Wealth generation is the only antidote to poverty. So instead of fixating on gaps, we ought to ask: What is the level of flourishing of those at the bottom of the economic ladder? Do they have opportunities to move up that ladder, or are they trapped, no matter what they do?

If you look at the US Census Bureau stats, you find that every income category has gone up from 1967 to 2009, even though the population has nearly doubled and there has been stagnation in the middle incomes for the last several years. The rich did get richer, but not at the expense of the poor.

Even more important, the income categories don’t contain all the same people over the long run. In the US, there is widespread income mobility—millions of people move up the ladder over time. A 2008 report by the US Treasury found that between 1996 and 2005 more than half of all US taxpayers moved into a higher income quintile. Roughly half who started in the lowest quintile in 1996 moved into a higher quintile by 2005. To talk about five income “quintiles” of the population, as if they always contain the same people, is to fall for a statistical illusion.

In free societies, incomes are unequal, but opportunities are widespread, so people can work themselves out of severe poverty. Economic freedom allows people to freely use their gifts (in Bruce Springsteen’s case, his passion for music) to create value and serve others. It creates an opportunity society where people can lift themselves into higher levels of wealth. If wealth creation is the antidote to poverty, an opportunity society needs to be the focus. Societies that fixate on income gaps, in contrast, tend to find only equality in misery.

Jay W. Richards is the Director of Discovery Insitute's Center on Wealth, Poverty and Morality and is a Visiting Scholar at the Institute for Faith, Work & Economics.

 




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