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How Bad is Income Inequality, Really?

By: José Azel - Aug 30, 2016, 12:08 pm
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Economist Angus Deaton claimed it is simplistic to think inequality is good or bad (wikimedia)

EspañolRecent reports on the global distribution of wealth show a trend of increasing inequality. According to a report by the Boston Consulting Group, the number of millionaire households grew by 6 percent globally in 2015, with their proportion of global wealth reaching 47 percent. China and India experienced large increases in the number of millionaire households, but Liechtenstein and Switzerland maintain the highest concentrations. Millionaire households represent 1 percent of world population but share close to one half of global private wealth.

In the United States, income inequality has been growing for some 35 years and almost everyone believes that income inequality is always undesirable. But, is it really? What matters is not inequality, but how that inequality came about.

First, let’s dispense with the inequality that results from government granted privileges, unfair practices, dishonesty, corruption, cronyism, theft or any wealth that is the product of illicit gains. This inequality is most definitely bad and should be prosecuted vigorously. What I am discussing here is only the inequality that results from the creation of goods and services. This inequality derives naturally from someone’s creation of value and is not a zero-sum game that results from one group taking from another.

Increased inequality is a natural phenomenon that flows from our diversity in talents, capacities, preferences, choices and more. When our activities create something of value and our wealth increases, we are better off, but so is society. Decriers of inequality incorrectly posit that the economic pie is fixed so that a bigger slice for some must come at the expense of others.

The evidence suggests that, in market economies, increased inequality and stronger economic growth work in tandem enlarging the economic pie. Patterns across developed nations show that higher inequality is accompanied by a richer middle class and richer poor population. Higher inequality is related to higher living standards for those below high-income levels as well as for those in the top levels.

The enormous financial success of businesses like Microsoft, Apple, Goggle, Facebook and many others have made their founders and investors enormously rich. Their wealth has certainly increased income inequality by increasing the ranks of the super rich. But we are also better off as a byproduct of their success, and our lives and opportunities have been enhanced by the products and services they created.

Angus Deaton, who was awarded the 2015 Nobel Prize in Economic Science and is known for his studies of inequality, urges us to hold a non-moralizing vision of inequality: “Inequality is very complex, and it is simplistic to think it is good or bad. It is nonsensical to condemn inequality. It is equivalent to saying that progress is bad. Progress has always been unequal.”

Professor Deaton emphasizes that inequality results when an individual or group progresses. As such, inequality is a metric of success and also an incentive to be successful. He argues we should focus not on inequality, but on injustice. The real measure of improvements in society is not vilifying the rich, but rather increasing the wellbeing of the poor. Natural inequality does not lower the standard of living of the poor. The increase in global inequality is driven mostly by the creation of new wealth such as rising household income.

Milton Friedman, also a recipient of the Nobel Prize in Economic Science (1976), argued that economic policy should focus on freedom as a primary value and not on income inequality. In his view, some degree of inequality is desirable in a well-functioning economic system and is unavoidable if we are to respect freedom. In Free to Choose (with his wife Rose Friedman) he explained:

A society that puts equality -in the sense of equality of outcome- ahead of freedom will end up with neither equality nor freedom…On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.

Freedom is an ethical value in its own right. Accepting freedom requires us to accept the results that arise from our voluntary transactions.

José Azel José Azel

Senior scholar at the Institute for Cuban and Cuban-American Studies at the University of Miami. Azel was a political exile from Cuba at the age of 13 in 1961 and is the author of Mañana in Cuba. Follow @JoseAzel.