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Considering Ways to Look at Income Inequality

9:35 AM, Jul 17, 2014 • By FRANK LAVIN
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The discussion over economic inequality in the United States seems to have captured the public imagination, at least on the political left.  President Obama has called it “the defining challenge of our time,” and Secretary Clinton has deemed it “a cancer.” Given the shorthand manner in which politicians sometimes refer to policy matters it is not always clear if Obama and Clinton are referring specifically to inequality, the ratio or distribution of wealth in society, or to raw poverty—the fact that millions of Americans live in impoverished circumstances. There is a keen difference in which of these two approaches one takes to the challenge of alleviating misery. Here, I’ve devised a simple test to understand the issue:

Barack Obama and Hillary Clinton in the Oval Office

Scenario one: A two-class society.  Imagine a society in which half the population earns $15,000 a year and the other half earns $150,000 a year.  In other words, half are in poverty and half are doing well.  Consider some permutations in this scenario.

1.  Poor people triple their income to $45,000, but wealthy people quadruple their income to $600,000. This is:

a.  Good, because the poorest have been largely lifted out of poverty.

b.  Bad, because wealthy people had their income go up considerably more than poor people.  They received a raise of $150 thousand and the poor received a raise of only $15 thousand. Income ratios have deteriorated from 10:1 to 13:1

2.  It is the same society but there has been a stock market crash and depression.  Poor people have their income cut in half, to $7,500, but wealthy people have 90 percent of their income wiped out, reducing it to $15,000.  This is:

a.  Bad, because society is significantly impoverished.

b.  Good, because now the income ratio is 2:1 instead of 10:1. Inequality has been reduced.

c.  Good, because impoverishing the wealthy is a worthy policy goal.  Now they are exactly where the poor half was before the crash.

Scenario 2: A jobless society. Imagine a different scenario in which there are two identical societies, with only one difference. Society A is the U.S. without Steve Jobs.  No Apple and no Apple products.  Society B is the U.S. with Steve Jobs, in other words the U.S. as we know it today.

a. Society A is a better society. It has less income equality, with fewer billionaires and fewer millionaires.

b. Society B is a better society because it has greater innovation and a reduced cost of music and audio products, providing greater access to poor people. We are not bothered by additional millionaires or billionaires, even if they insist on turtlenecks.

Scenario 3: Bad math. Warren Buffett is going through the Berkshire Hathaway accounting books at the end of the year and he discovers his accountants have made a huge mistake, but he cannot tell exactly what the mistake is—there are two possibilities. In situation A, Berkshire Hathaway actually sold exactly twice what was originally thought, so Buffett has earned twice the amount through his stock holdings, as has everyone else who owns Berkshire Hathaway stock. In situation B, Berkshire Hathaway actually sold exactly half what was originally thought, so his profits are exactly half.  Your conclusion:

a.  Situation A is bad because it promotes inequality and reinforces theories of popular French economists. Buffett does not need any more money.

b.  Situation A is good because it means more wealth has been created, society is more prosperous, thereby reinforcing theories of long-dead Scottish economists. Consumers have benefitted from twice as many products and services. Even if the gains for the additional economic activity flow disproportionately to the owners of Berkshire Hathaway stock, this is still good for society.

Scenario 4: The coffee chain.  Scenario A: A well-known chain of coffee shops announces it is expanding and will create 1,000 new jobs, but these jobs are just 20 percent above minimum wage. Scenario B: The same coffee chain announces it had a bad year and it is shrinking, eliminating 1,000 jobs at 20 percent above minimum wage

a.  Scenario A is good because it creates jobs and helps people enter the workforce, even if it might create greater income inequality.

b. Scenario B is good because it promotes income equality. Moving people out of minimum wage jobs builds a better society.

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