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The Problem with Inequality

Posted by Chance on May 18, 2006

Many on the economic left often mention the increasing financial inequality between the rich and the poor when arguing against certain aspects of capitalism or arguing for higher taxes on the rich. However, I do not believe the difference in income inequality should matter, for several reasons.

Before I list them, however, I want to mention that I believe it is the government’s role to ensure that everyone is equal before the law. Inequality matters when it comes to how people are protected by the law. State employers and state educational institutions should not be able to discriminate on the basis of race, sex, etc… (I am uncertain about the role of the government when it comes to private employers) I do not believe it is the government’s role to ensure some sort of equality when it comes to what people have, and what their resources are.

Here is why I believe the difference between the rich and poor do not matter.

1) Social classes are not stagnant groups. People can move from the poor category to the rich category. When one looks at how the differential between the rich and poor change over time, they are not looking at all the same people in each category.

As Walter Williams states:

Only five percent of families in the bottom income quintile (lowest 20 percent) in 1975 were still there in 1991. Three-quarters of these families had moved into the three highest income quintiles. During the same period, 70 percent of those in the second lowest income quintile moved to a higher quintile, with 25 percent of them moving to the top income quintile. When the Bureau of Census reports, for example, that the poverty rate in 1980 was 15 percent and a decade later still 15 percent, for the most part they are referring to different people. Cox and Alm’s findings were supported by a U.S. Treasury Department study that used an entirely different data base, income tax returns…

So, the question should not be, what’s the difference between a rich and poor person at any given point in time, but how likely is a poor person going to become rich in their lifetime, or even, how likely are their children going to be better off?

2) Wealth is not a zero-sum game in which one person’s gain automatically means another person’s loss. At worst, a person getting richer does not harm the poor (Note: I do not consider selling an item or not paying someone exactly what they want as hurting the poor), and at best, some people gain their wealth by helping the poor. Sam Walton is an example of someone who became wealthy by selling products cheaper. The people who invested in computer companies are becoming wealthier while their products become cheaper, making it easier for the poor to have access to a wealth of information.

3) Ultimately, inequality should not matter. Not that I agree, but better arguments against capitalism and for higher taxes on the rich should focus on people receiving their basic needs. If I was playing devil’s advocate, I would argue for higher taxes or more government control because of the cost of education and health care. Instead of using the argument “the rich get richer, the poor get poorer”, why not say “the poor get poorer”, who cares about the rich? I would argue that government control should ensure that people’s basic needs are met, not that everyone has the same amount of money.

If someone has their basic needs met, it should not matter what other people have. If I have a shack over my head, why does it matter that my neighbor has a palace? If I have a Yugo that runs, why do I care that my neighbor has a Mercedes and a yacht? Why would I care about his house? Why would I care about his wife? Or his manservant or maidservant? Or his ox or donkey? Or, for that matter, anything that belongs to my neighbor?

I am not dismissing all arguments against the conservative/libertarian ideal of capitalism and tax rates. I think arguments concerning the poor themselves should be considered, and the fact that they have basic needs that must be met. Personally, I think the quality of life for all is improved with a more conservative/libertarian ideal, but we that is another topic. The fact that capitalism produces rich people that have their basic needs met, plus some, is unimportant.

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