Forget About Income Inequality

April 5, 2012

According to David Grusky, professor of sociology at Stanford University, the central problem confronting America is income inequality.  He argues that the root cause of this malady lies in how rich people acquire their pre-tax income -- by rigging the rules of the market to extract illicit "rents."  According to him, the economic system, not the tax system, is unfair, says Shikha Dalmia, a Reason Foundation senior analyst.

Grusky's problem is that he is using the wrong metric to measure market-generated income inequality.  He should be using individual income -- including paychecks, capital gains, and dividends -- instead of household income.

Grusky's argument on rising income inequality is overblown and his argument on income inequality constitutes a red herring. 

  • Even though the after-tax income of the top 1 percent of households grew 275 percent between 1979 and 2007, there was a 65 percent income gain in households in the top quintile, 40 percent gain for those in the middle three quintiles, and an 18 percent gain in the bottom quintile.
  • In short, no group lost ground.

Despite opportunity-restricting distortions, America has done a remarkable job at closing the personal well-being gap.  Indeed, because of technology-driven productivity increases and lowered trade barriers, almost every American can afford bypass surgeries, laptops with Internet access, cars, TVs and occasional air travel.

America remains a highly income-mobile society and Americans might be able to scale the income-mobility ladder faster and higher if there were even more opportunities for education and entrepreneurship.  As Grusky is right to point out, America's higher education industry is highly cartelized, creating an artificial scarcity of college slots. 

Source: Shikha Dalmia, "Forget About Income Inequality," Reason Magazine, March 30, 2012.

For text:

http://reason.com/archives/2012/03/30/forget-about-income-inequality

 

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