Thoughts on Income Inequality

March 31, 2014

With President Obama calling inequality "the defining challenge of our time," much of our political discourse of late has focused on income distribution in the United States. But what most Americans understand about inequality is based on three false assumptions: that inequality is inherently unjust, that it is bad for the economy and that government redistribution is the best remedy. Based on these assumptions, advocates for greater equality push for tax increases and minimum wage hikes in order to narrow the gap between the wealthy and the working classes, say researchers with the American Enterprise Institute.

  • Research on income inequality often varies because there is no common definition of "income," says American Enterprise Institute Resident Scholar Aparna Mathur. Some researchers use pre-tax income data, for example, failing to account for transfer payments such as food stamps or Medicare. Instead, living standards is the better metric. Are people's lives today better than they were yesterday? Yes. Mathur says that Americans at all income levels have access to more material goods than in the 1980s, and the gap between high- and low-income earners in terms of the ownership of these possessions has shrunk.
  • American Enterprise Institute Fellow Jonah Goldberg explains that liberals, in general, view inequality as a systemic problem -- that income is a sort of common good that should be distributed evenly. If it is not, the government or the system messed up. The right, he says, tend to see inequality as a symptom: if the poor are falling behind, it could be the result of poor job creation or stagnating wages. But Goldberg notes that inequality can largely be driven by non-economic issues. Family structure and values, he says, are much more strongly correlated with economic mobility than is income inequality.
  • If Obama has called income inequality the "defining challenge" of our time, James Pethokoukis of the American Enterprise Institute says that it is instructive to look at all the things that President Obama sees as less important than income inequality: chronically weak economic growth, an employment rate that has barely moved from recession lows, and the breakdown of the traditional family unit (as research on both sides of the aisle confirms that the children of intact, nuclear families fare better educationally, emotionally and financially than others). There is little evidence that higher top-end inequality has slowed economic growth, hurt middle class incomes, or reduced mobility.

In fact, while income differences are inevitable, they are not a problem as long as the opportunity to succeed and move up the income ladder is available to everyone. The free market is not a zero-sum game.

Source: Kevin A. Hassett et al., "Opportunity for All: How to Think about Income Inequality," American Enterprise Institute, March 19, 2014.

 

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