Actual gain vs. relative gain

New figures from the Treasury Department indicate that the economic policies of the last 10 years have done overwhelming amounts of good for the poorest in our society.   Incomes from the lowest quintile (an arbitrary categorization in 5ths of wage earners) increased on average by 90%!  In layman’s terms, most of the poor in the U.S. have almost doubled their income in the last 10 years, while the top 2 quintiles even took a hit….

All of this certainly helps to illuminate the current election-year debate about income “inequality” in the U.S. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn’t remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.

The great irony is that, in the name of reducing inequality, some of our politicians want to raise taxes and other government obstacles to the kind of risk-taking and hard work that allow Americans to climb the income ladder so rapidly. As the Treasury data show, we shouldn’t worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.  (WSJ)

What I find most interesting in this report is that the quintiles are continually in flux; the poor are moving up and the rich are moving down on a continual basis.  As the Journal editor pointed out, there is REAL opportunity for the poor in this country; the concept of a permanent underclass is simply an inaccurate representation of our society.  

For that matter, the notion that the “rich” are getting “richer” — the implication being, of course, that some closed group of identifiable individuals is hoarding vast quantities of wealth for themselves and no one else — is also fundamentally wrong.  The “rich” are only those people who, in a given time period, happen to be making enough to be in the top percentile.  The facts indicate that individuals are falling out of this group just as quickly as new ones enter.  Is this continuous upward movement by the “less fortunate” something we should dis-incentive, or is this what makes our country great?  Discuss…

Some, such as John Edwards, Hillary Clinton, and others have argued that the wealth ‘gap’ is getting bigger because the increases in the higher quintiles, despite their lower percentage, translate into larger dollar figures.  I’m not going to debate that assertion, it is a fact.   However, to claim that that this is somehow unfair to the poor or is an outrageous claim. 

Say, for example, that one person from each quintile put 10% of their yearly salary into a bank account to earn interest.  After one year, the person in the highest tax bracket (who also put the most total $ into the bank) would have gotten the largest $ figure return on their investment.  Are we to believe that this practice is “unfair”, or that we need to remedy the situation so that the time value of money is less for people who put more cash into the system?  Is the time value of money working against the poor?  Of course not!  The investment system treats all money equally, and the people who invest more, very often get greater returns because of their volume.  Should those investing in higher volumes be treated less favorably simply because they have more money in the system?  Discuss…

My main point is that while ACTUAL gain of those in the top quintile is more, their RELATIVE gain is much less (and has been a net loss according to the data).  If the rich were almost doubling their income, I would be worried. However, this is not what the data shows and it is not the way a market system works. Making a breakthrough is much easier than staying in the lead.

When you boil it down, the income inequality arguments can be simplified to a single statement: “it is unfair for the rich to have more money than the poor”.  Period.