Economics: Inequality

Economics:
The Purpose of the Economy
A Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

We keep hearing these days that a very small percentage of people in the world own a large percentage of the wealth, and those numbers are getting more extreme. Usually, this is meant to shock us, assuming we will automatically see it as an indication that our economy is unfair. But does it really mean that?

The first time I heard about economic inequality, it was in a bar graph in a college textbook. It was relatively flat for most of the space, shooting upward at the rich end. The final bar, the one percent, went all the way to the top of the figure, wrapped around to the bottom, and stretched to the top again. And then again. Five times.

I was surprised, but I didn’t feel it was necessarily unjust. As long as things were getting better for everybody, I thought, what did it matter if the people at the top had a million, a billion, or a trillion dollars?

We might naively think we can see how the average person is doing by dividing the GDP over all of the people, the GDP per capita. But that would only be valid if the GDP were proportionally spread across all of the people in the country, and that is not the case. To get a better picture of what is happening with the average person, we need to look at the median income. Median income takes the person directly in the middle, with an equal number of people in the country who are richer and poorer.

US GDP, adjusted for inflation, since 1993.

Median income in the US since 2000.
The red line is raw dollars, and the blue line is adjusted for inflation.

In the United States, adjusting for inflation, the GDP has been on a fairly steady upward trend, but the median income has remained about even. The amount of wealth in the country is increasing, but it is not getting distributed to the average family. This means all that extra wealth is going to people who are already in the upper brackets. This is disheartening for many people, and makes them lose motivation and fear for their financial security.

Despite this, it is still possible that the average person’s condition is improving. This is because as technology and manufacturing improves, stuff gets cheaper. With the same amount of money, people can afford more, better stuff. On the other hand, some things are getting more expensive, like healthcare and college, so that argument is somewhat flaky. We would also hope that people accrue money over time, and the median is preserved by older people passing away and younger people coming into the workforce, but that doesn't always work out.

Inequality feeds on itself. The more money you have to start with, the better education, tools, facilities, resources, and services you can afford, which allow you to live healthier, longer lives, and make even more money. The richer you are, the more influence you can have on politics and the media, turning them in your favor. Add to this the fact that there is wealth inequality between races and genders, and we have a recipe that readily triggers a lot of people’s sense of injustice.

If we see inequality as a problem, how can we go about fixing it? First, we have to ask what we are aiming for. It’s very hard to find a reasonable goal where we can say we have solved the problem. So perhaps the answer isn’t to try to make a paradise, but just to strive to make things better than they are now.

Since the problem is inequality of wealth, an obvious solution is redistribution. One way to do this is through philanthropy. It may surprise you, but there are a lot of rich people who see inequality as a problem, and donate their money to help. Another way is through government taxation and distribution programs at the city, state, or federal level, depending on the specific problem in question.

The goal wouldn’t be just to give outside assistance, but to create strong, prosperous communities. This can be done by supporting local businesses, supplementing underpaid jobs, and empowering individuals through a basic income. And there are surely many other options I haven’t thought of.

When we talk about economic inequality, we mean more than just the difference in wealth between the rich and the middle class and its rate of  change. It also matters whether the average people are getting better or worse off, and how likely that trend is to continue in the future. As are all things with economics, it’s a complicated subject, and we shouldn’t settle for answers as simple as “it’s a disgraceful injustice,” or, “it’s nothing to worry about.” It’s a real issue, not just philosophical, and that means we have to look at the real consequences, both intended and collateral, of our solutions.