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President Obama has recently claimed, and reiterated in his state of the union address, that income inequality is the defining problem of our time. Inequality is more harmful to humanity than terrorism, tyrannical governance, nuclear proliferation, disease, etc. Yet, even if we agree with Mr. Obama the questions of why there is such inequality and how to create more income equality (assuming this is the goal) seem to be lost on the president. In fact, Mr. Obama must know that his “solutions” to this problem have much political weight but little hope of a practical impact.
Why is there so much inequality? Depending on who you ask, the answer is typically some version of the following: Individuals can attain higher incomes via hard work and productivity yet many others don’t have the knowledge or skills to do so, and this is the way it should be OR there is not enough income redistribution. The U.S. is going to have wealthy people and poor people (no one disputes this), but the question is should government do more to close the gap between these two groups. If you look at all the developed countries in the world that have more equality than the U.S., they are mainly concentrated in Europe and they all have significant redistribution programs in place.
The irony here is that in the president’s state of the union address this week, despite all the talk about working and work ethic, his solutions to inequality are impotent to actually make a difference. What’s more, income inequality is not the same as poverty (which he seems to conflate). Many countries have more income equality than the U.S., but overall they are much poorer.
Yet, even if the President believes we must close the gap so that incomes (he is not claiming wealth should be more equal) are more equal, will his proposals have any affect? Raising the minimum wage will impact a tiny portion of the labor market. Extending unemployment benefits will not even make a dent income inequality, and the modest increase in taxes on the rich proposed by the president will lower their income by a few percent. Mr. Obama seeks to pray on zero-sum thinking. If one person has a higher income than someone else must earn less, so it is only fair to take from those who have more and give to those who have less. This is a fundamental economic fallacy that unfortunately many believe. Wealth is not static, and people who earn high incomes are often creating new wealth.
Maybe the president should focus his attention on how the government can incentivize job growth and not income equalization. It should be clear to the Obama administration, that without a job Americans have no hope in attaining a more equal income.
Megan McArdle writes about the connection to wages and productivity, and markets.
When comparing Wal-Mart wages to those of Costco employees, the business model explains, in large part, why workers at the world’s largest retailer earn a much lower hourly rate.
A similar story will likely explain much of the difference in wages between McDonald’s employees and those at other retailers.