Friday, January 31, 2014

Income Inequality is not a Problem

David Brooks wrote a great column in the New York Times about income inequality.  I'd love to just copy and paste the whole thing, but he deserves the page hits for his work so I'll just grab a few tidbits.  Read the whole column here:  The Inequality Problem
If you have a primitive zero-sum mentality then you assume growing affluence for the rich must somehow be causing the immobility of the poor, but, in reality, the two sets of problems are different, and it does no good to lump them together and call them “inequality.”
If you're not familiar with the language being used, what that means is that there's not a fixed amount of wealth in the U.S.  So one person being rich does not take from you or anyone else--a rich person isn't making anyone else poor because she's rich.  A good idea and hard work will actually create wealth.  This is demonstrated by the fact that the wealth of Americans grows over time, or at least it has consistently through history.  The total amount of stuff and wealth we have is far greater than our grandparents had and there are more people here today then there were then.  Clearly, wealth grows if used well.  It's not a fixed amount that never changes.
...raising the minimum wage may not be an effective way to help those least well-off. Joseph J. Sabia of San Diego State University and Richard V. Burkhauser of Cornell looked at the effects of increases in the minimum wage between 2003 and 2007. Consistent with some other studies, they find no evidence that such raises had any effect on the poverty rates.
This is an odd one.  There are many reasons raising the minimum wage doesn't help people at the bottom, but despite the economic reality, people still think it's a great idea.  They're just not following the data at all.  Because it polls well, politicians keep doing it even though it seems to be hurting the poorest among us.  One big issue is that if you make it too expensive to hire an entry level worker, employers won't do that, so minimum wage jobs that teach the basic skills a worker needs to move on to better-paying jobs that require more qualifications disappear.
the income inequality frame contributes to our tendency to simplify complex cultural, social, behavioral and economic problems into strictly economic problems.

There is a very strong correlation between single motherhood and low social mobility. There is a very strong correlation between high school dropout rates and low mobility. There is a strong correlation between the fraying of social fabric and low economic mobility. There is a strong correlation between de-industrialization and low social mobility. It is also true that many men, especially young men, are engaging in behaviors that damage their long-term earning prospects; much more than comparable women.
In short, many of our own behaviors are the problem, not the wages being offered.  Young men are choosing to engage in criminal behaviors that make them undesirable to employers.  Poor life choices lead to low social mobility.

Brooks ends with a very strong conclusion:
If we’re going to mobilize a policy revolution, we should focus on the real concrete issues: bad schools, no jobs for young men, broken families, neighborhoods without mediating institutions. We should not be focusing on a secondary issue and a statistical byproduct.
I'd encourage you to go read the whole column.  If you're interested, I have more to say, too.

The term "income inequality" is ludicrous if you stop to think about it.  Pay is based on skill.  If you have rare and valuable skills, you'll be paid highly.  If you don't, you won't.  It's the same reason gemstones are precious--they're rare and desirable.

Obtaining those skills can involve a lot of effort.  A neurosurgeon will spend at least 4 years in college, at least 4 years in medical school and very likely 8 years learning to operate on a human brain.  She'll incur a lot of debt in the process.  With those valuable and rare skills she's learned, she should anticipate being able to pay back that debt and afterward, being able to live well.  Should she be paid the same as someone who's skill is to dig ditches and move rocks?  Or should the manual laborer be paid the same as she is?

Trying to insure equality of income is also known as enforcing equality of outcome instead of equality of opportunity.  To go by a shorter name, it's called communism.  How did communism work out the in the U.S.S.R.?  Ask anyone who went to a low-paid doctor or dentist under the system.  People who aren't paid well for the hard work of obtaining rare and valuable skills don't bother to work hard in the training process and they don't do good work once they have their substandard skills.  The result is bad for everyone.

So, yes, your airline pilot should be paid more than the guy who flips your burgers.  And no, entry level jobs shouldn't pay enough to sustain a family of 4.  They're supposed to provide training so you can get a better job.  Income isn't supposed to be equal, and when governments try to make it so, everyone loses.

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