Does Income Inequality Matter?

Not really … Absolute Income and Consumption Equality are what count.

The history of mankind shows that poverty for the common man has been the norm. It is the norm because oppression of the many by the few has been the norm. Prosperity for the common man is an aberration that seeks an explanation: The hillberncartoonrise of a free society has enabled free market capitalism and the rise of entrepreneurs whose fundamental skill is creating wealth.  By any measure, capitalism has been a blessing to America. Here are two of countless measures:

Only 3 percent of American homes in 1900 had electric lights but more than 99 percent had them before the end of the century. Infant mortality rates were 165 per thousand in 1900 and 7 per thousand by 1997. (Thomas Sowell)

Entrepreneurs are the driving force behind capitalism, but some condemn capitalism because it can create wealthy entrepreneurs. Critics claim extreme disparity of income is unfair and immoral. Is it really? They use “income inequality” as an excuse to foster greed and division in our society, and advance their own power. Hypocritically, they ignore the far greater income inequality produced in socialistic schemes as in Mexico and elsewhere.

As a measure of prosperity however, income inequality is irrelevant. Two people can have significant differences in income and both still be poor, or both can be rich, or one can be rich while the other is in the middle class. They choose to ignore the real measures of prosperity created by capitalism.  There are two:   Absolute income and the level of consumption equality for all citizens.

Let’s consider “absolute Income”
Suppose as an employee I earned 20 dollars the business owner and earned 100 dollars.  Suppose he expanded the business so that now I earned 40 dollars and he earned 200 dollars. Suppose our incomes increased again and now I earned 80 dollars while he earned 400 hundred dollars. Income inequality increased dramatically but so did absolute income. I am more prosperous with 80 dollars than I am with only 20 regardless of the fact that business owner also prospered.  Rather than being upset or greedy, I should rejoice at my new prosperity.  However, as prosperity and income inequality increase, critics become increasingly upset.  In effect, they would prefer the poor be poorer if it means the rich can be less rich and inequality is less.

What really is “poverty” in America?
As absolute income in America increases, poverty declines. As poverty declines, the government redefines upward what it means to be poor. “The typical American defined as poor by the Census Bureau has a car own a car, air conditioning, and cable or satellite TV. Half of the poor have computers, 43 percent have Internet, and 40 percent have a wide-screen plasma or LCD TV. Far from being overcrowded, poor Americans have more living space in their home than the average non-poor person in Western Europe. Some 42 percent of all poor households actually own their own homes; on average, this is a well-maintained three-bedroom house with one and a half baths, a garage, and a porch or patio” (Robert Rector of the Heritage Foundation)

Mexico also has income inequality and a much lower absolute income. Mexico is an oil rich country. Its people are hard working people and should be prosperous. Absent American style free market capitalism in Mexico, increases in prosperity benefit those at the top at the expense of the common man. Unlike America, poverty in Mexico is real, widespread, and structural. Many are fleeing poverty in Mexico and coming to the United States: “The official poverty level in the United States is the upper middle class in Mexico. The much criticized market economy of the United States has done far more for the poor than the ideology of the left” (Thomas Sowell)

Now consider “consumption equality”
Entrepreneurs like Steve Jobs and Richard Branson certainly become billionaires thanks to us. Wealth however tends to have diminishing returns in terms of personal consumption. Billionaires spend very little on themselves, in proportion to their wealth. Most of their wealth is reinvested in an ongoing cycle of innovation and wealth creation that provides jobs and prosperity for everyone else. Therefore, as income inequality increases, our personal consumption increases. In effect, consumption equality increases.

How is it that so many “poor” own a smart phone, a personal computer, car, and big screen TV? In the 1987 movie “Wall Street” tycoon Gordon Gecko used a portable phone that then cost about $4000.  Given its memory, a similar smart phone today with 32 gigabyte would cost about $1 million. Only millionaires and billionaires can afford to buy inventions for which there is no mass market. They subsidize the research that lowers the price to levels you and I can afford. When we buy similar products and services, consumption equality again increases and tends to become the norm. The smart phones we use are no different from those used by billionaires.

Here is the bottom line:  The super wealthy contribute to wealth and prosperity for the rest of us. They increase our absolute income and enable us to buy things that make our lives better.  They enable ordinary people to live like the nobility of yesterday.  They do what they do because they have the right to reinvest what they create or if they please, to give it away. If greedy kleptocrats seeking personal power in the name of equality take away this right, entrepreneurs will cease to create or go elsewhere. Greed is foolish. It is far better to admire their accomplishments and learn from them.

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