A Prominent Economist Says That Income Inequality Is Not America's Greatest Problem
The rising gap in wealth in the United States, and around the globe for that matter, has been a point of contention in economic debates for quite some time.
Following the onset of the Great Recession in 2008, the issue became a topic of popular discussion, particularly when one looks at the Occupy Wall Street movement, for example.
Recently, a French economist named Thomas Picketty wrote a book on inequality that basically catapulted him to rockstar status in the economic world. Picketty argues that economic inequality has been rising for decades, and we must institute high global tax rates on the wealthy to bring things back into balance.
Likewise, economist Paul Krugman contends,
It's true that market economies need a certain amount of inequality to function. But American inequality has become so extreme that it's inflicting a lot of economic damage. And this, in turn, implies that redistribution — that is, taxing the rich and helping the poor — may well raise, not lower, the economy's growth rate. ... There is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.
Indeed, inequality is a problem around in the world. In the United States, the richest 1 percent make more than one-fifth of the nation's income.
As the graph below highlights, the richest fifth in the US is 8.5 times wealthier than the poorest fifth.
It's readily apparent that there is a dramatic gap in wealth between the rich and the poor in nations across the globe.
However, is focusing overwhelmingly on inequality the solution to improving people's lives?
An economist named Tyler Cowen believes that we are granting far too much attention to income inequality and missing the root of the problem in the process. Cowen, a professor of economics at George Mason University, argues that global inequality is falling.
Simply put, Cowen contends that by grouping many complex economic and social issues under the simplified label of "inequality," we are making an enormous intellectual error. He may have a point.
When a problem is large and complex, it's very difficult to attack it head on, and it's often much better to chip away at it, piece by piece. In the process, one can ensure that nothing is overlooked.
Likewise, Cowen argues that in order to help the people at the bottom, we need to increase the quality and affordability of housing, healthcare and education.
Indeed, the US healthcare system is one of the most expensive in the world, yet the high costs do not reflect high quality of care. In a study done by the Commonwealth Fund, out of 11 developed countries, the US healthcare system ranked dead last.
Furthermore, the costs of a college education in the United States have increased by an alarming 500 percent since 1985, making higher education in this country exceptionally expensive.
Additionally, as the chart below from Bloomberg reveals, the costs of housing (shelter) have risen steadily along with healthcare and education over the last 20-30 years.
Hence, if we were to make housing, healthcare and education more accessible and affordable, then it would greatly decrease income inequality across the country. Basically, an individual's level of income is directly tied to his or her level of education.
Thus, when education becomes so expensive that only the wealthy can afford it, it becomes an exclusive privilege that prevents the advancement of the poor and perpetuates inequality.
Ergo, Cowen seems to be correct in his assertion that we need to reduce the costs of healthcare, education and housing. However, he is not entirely correct about trends surrounding inequality. Inequality has risen steadily in recent times, and this must be acknowledged.
Moreover, inequality is bad for reasons beyond business, as it creates political instability and social unrest. People will rebel in one form or another in countries with high rates of inequality -- history has shown that. Does the French Revolution ring any bells?
In essence, we need to reduce consumption inequality, or the ability of people to purchase goods and services while still creating incentives for people to work hard.
Simply put, if subsidies inspire people to work less, and for less pay, it will not inspire economic growth. In general, this is not good for an individual, or the economy. It's bad at a micro and macro level.
Hence, Picketty was correct in arguing that inequality has risen over the last several decades, but perhaps wrong in suggesting such excessively high tax rates. France, his country, is proof of that.
High tax rates have crippled the French economy, and unemployment is now above 10 percent. Things have gotten so bad that a prominent economic minister just resigned amidst disagreements with French President Francois Hollande.
Consequently, the French government is in a state of complete disarray. Economic woes often translate into political and social discontent.
Accordingly, as Stephanie Flanders of the Guardian highlights,
Piketty deserves huge credit for kickstarting a debate about inequality and illuminating the distribution of income and wealth. But when it comes to the forces driving growth and wealth accumulation in our modern economy what he has probably done most to bring out into the open is our collective ignorance and confusion.
Simply put, if businesses are taxed at high rates in certain countries, then they are not going to want to operate there, and they will go elsewhere.
In essence, high tax rates often result in fewer jobs and a more stagnant economy. So, a healthy balance has to be found between providing incentives for those at the bottom to work hard, while still providing assistance and promoting economic growth.
The debate surrounding inequality has often become as polarized as the gap in wealth between the rich and the poor, but this does nothing to eradicate the issue and only serves to perpetuate the absence of substantive solutions.
Balance is key in all walks of life. This is particularly true in a nation's approach towards economics. It's important to correctly identify larger trends and problems, while also realizing that the solutions will often be convoluted and multifaceted.
Photo Courtesy: Paramount Pictures/Wolf of Wall Street