Tuesday, November 1, 2011

Should Christians Be Concerned about Income Inequality?

I am amazed, not only at how many people think that the answer to this question is yes, but at how many people think it is obviously and incontrovertibly yes and that anyone who can not see how blindingly obvious it is that justice requires income equality is either stupid or evil.

Actually, income inequality is not a very important issue at all for those concerned about the well-being of the poor. It is a red herring, a distraction from the main issue, which is poverty and its causes. There is such a fog of unwarranted assumptions surrounding this idea that it is second only to the phrase "social justice" in being useless if clear thinking is the goal.

I want to try and untangle some of the issues surrounding the question of whether or not Christians should be concerned about income inequality and it is going to take some time. The position I am putting forward is based on logic, facts and historical evidence and, unlike the opposing position, cannot be reduced to a few slogans ready to be chanted by mobs. (I am not going to document every assertion but if challenged on a particular point I will point you to some resources.)

The position I will put forward requires careful thinking and the ability to follow a chain of argument for several steps before arriving at the conclusion. If you wish to argue, you are welcome as long as you stick to actual arguments.

1. Defining Poverty:
First of all, we need to understand that there are two ways of defining poverty: absolute measures and relative measures. To measure poverty in absolute terms is to list what a family of four needs in order to have the necessities of life but no luxuries: shelter, transportation, food, clothes, education etc. This amount will obviously vary from place to place and can be skewed by such factors as amount of real estate owned if any and so on. The analysis can get extremely complicated but for measuring differences over time it can be simplified and standardized.

The other method is to peg the poverty line to a percentage of the median income. This means that the poverty line will go up and down depending on the income of the highest earners in society, which often fluctuates from year to year depending on the state of the economy. All sorts of distortions occur in this type of measure. For example the poverty line may go down in a year like 2008, which would mean that a family of four living in Toronto might be considered no longer to be under the poverty line even though its income for that year actually dropped due to the loss of an extra part-time job. But chances are, food etc. is no cheaper, so common sense tells us that can't be right.

2. The Goal: Helping Poor People Become Better Off
Another problem with the relative measure of poverty is that it has a buried assumption that income equality ought to the be long-term goal of our society. But let me propose a different goal: helping poor people become better off. You might say that you thought pursuing income equality automatically does this, but the example I gave above shows that this is not true. If we want to succeed in social policy, our goals must be crystal clear.

I suggest that if the average income of the poorest 20% of the population increases over time relative to inflation and the number of people living in poverty declines, we should count that as progress even if the average income of the middle 60% or the top 20% grows even faster. Why? Because the goal is to make sure that the average income of the bottom 20% does not drop.

3. What makes the poor even poorer?
Well-intentioned social democratic economic policies that involve high taxes and large social welfare programs can hurt the poor even more than benign neglect. The fact is that policies intended to help the poor often end up hurting the poor. Let me give two examples from the past; they are not theoretical but actually happened.

First, there is inflation. When budget deficits are high due to high government spending the temptation is very strong for governments to let interest rates rise, increase the money supply and pay off debts (or, more realistically, continue to increase deficits) using devalued currency. Thus 2011 dollars are borrowed and spent but repaid in devalued 2021 dollars. But, surprise, surprise, lenders are wise to this game (which we saw played out horrifically in the 1970s) and demand higher and higher interest rates.

Meanwhile, ordinary people (the bottom 60% especially) are hurt the most by high inflation. Wages seldom keep pace with inflation and most people see their purchasing power eroded. Those living in the tightest margains (the bottom 20%) suffer the most. So keeping government deficits low, national debt low as a percentage of GDP and inflation under control is extremely important. High inflation over time can undo the net effect of higher welfare payments and leave both those on welfare & unemployment, as well as the working poor, worse off despite ever growing government spending on poverty.

Second, the Great Society programs in the 1960s in the US destroyed the black family. Young women were given a financial incentive to move out on their own and have babies without being married. The gap between white and black income had been closing the late 50s but immediately and permanently (so far) began to widen. The gap between white families headed by single mothers and ones with married couples raising their biological children also widens steadily, suggesting that the cause is family structure not race.

The socialists and liberals who supported welfare saw themselves as compassionate and generous, but they hurt ordinary, working class people, diminished economic mobility and created a multi-generation underclass. This is tragic. Poverty rates for intact families has long been in single digits, while the rate for families headed by single women is north of 35%. Obviously, liberal support for the sexual revolution has contributed to the problem as well; sexual liberation for white, upper-middle class women is much more benign in terms of economics than it is for those in the bottom 20% of income levels.

4. Another Problem in Measuring Poverty:
It is a truism that you will never be able to fix a problem you can't even define. And defining poverty is tricky. If you divide the population into 5 groups by annual income: bottom 20% etc., then it is easy to forget that most people move through different income brackets as they move through the life cycle. Young people in their twenties typically do not earn as much as those same people do in their forties and fifties. And retired people don't earn as much as they did previously and they don't need to in order to maintain the same lifestyle.

In order for poverty statistics to mean anything they must measure two things: the number of people who never move out of the bottom 20% and how much mobility there is between the five groups. If a society has high mobility (eg. 60% of those in the bottom 20% in 1990 are in the highest or second highest group in 2010 and only 10% are still in the bottom 20%), then you are looking at a just society in which most people are getting ahead during their lifetimes. If an individual does not make it up the income ladder under those conditions, then the fault likely lies with the individual's lifestyle or character or some sort of physical or mental handicap. Prison may be the only alternative for some and charity will be necessary for others.

My retirement adviser tells me that most people only need about 65% of their pre-retirement income in retirement. Most retired people have their mortgages paid off, do not have the expenses associated with working and are not saving for retirement. My point is that they do not live on two-thirds of their previous income by eating cat food. Their lifestyle is roughly the same. Such people should not count in statistics defining poverty. Another example is a family in which husband and wife both work for 3 years after marriage and live on one income while saving up a down payment on a house. Then the wife gets pregnant and quits her job. Their income drops and they go out and buy a house! Like a long-anticipated retirement, this is not a failure in terms of a family dropping from one income group to another; it is a good planning.

5. Defining poverty not entry level job compensation:
So my point is that we need to focus on what happens to the bottom group, but even there we can let our romantic notions trump good economic sense. A good example of this is the fallacy of higher minimum wage laws helping poor people. Any solid economics textbook (like Basic Economics by Thomas Sowell) can explain in detail why raising the minimum wage does not help the poor.

Think of it this way. Not all jobs play the same function. Some jobs are good entry level jobs that pay low wages but offer the opportunity for young people to gain invaluable work habits, experience and content for the resume. Such jobs need to pay low enough wages so that there will be lots of them around for young people just starting out to get a first job. They should also provide incentive for people to gain marketable skills and try for better jobs.

If the lowest wage jobs are converted to high pay jobs there will be fewer of them. That will make the statistics look like income went up for the bottom 20%, but in reality what went up was unemployment and that is not good for poverty reduction.

6. What about those filthy rich?
I've saved the most important point for the last: isn't it unfair for the rich to get richer faster than the poor get richer? No, it isn't unfair, it isn't bad for society as a whole and it is actually a good thing for the poor. Let me explain.

For most of human history income disparity was not as great as it is now for a very good reason: the total wealth of the human race was only a tiny fraction of what it is today. In the past 2 centuries - for the first time in all of recorded history - billions of people have moved out of abject poverty and the middle class has exploded. What is the cause of this? It is not socialism, but rather capitalism - the biggest and most successful anti-poverty program in human history!

Throughout human history most people (over 90%) lived a hand to mouth subsistence lifestyle. Only a wealthy, privileged few lived anywhere close to the level of lower middle class working people today. And even when the king and nobility amassed most of the wealth in a given nation, they still didn't have that much compared to the Bill Gates, Steve Jobs, Warren Buffets and so on of our day. The gap keeps getting bigger because of the success of capitalism and we should not be concerned about that reality.

A much bigger concern should be the possibility of economic policies that prevent people from rising from the lower income groups to the top 1% of income earners by inventing useful goods that people want or need and are willing to pay for. In fact, I suggest that income mobility is far more important as an indicator of whether a society is just than poverty measures in themselves.

The poor need rich people to be rich and to grow richer by investment. Why? As Thomas Sowell might put it: "A poor man never gave me a job." The engine of economic growth in a just society is small businesses and the biggest problem entrepreneurs with a good idea face is a lack of capital investment. If capital gains taxes are too high (they actually should be abolished) then investors will not be able to get a rate of return sufficient to justify the risk.

If an investor wants to invest in 10 companies that want to start up or expand, he knows that 3-4 are likely to go bankrupt. Some of the rest will stagnate and provide little return and hopefully a few will be successful and provide a high return sufficient to cover the losses and give an overall rate of return higher than less risky investments like government bonds. If not, investment capital will dry up, businesses will stagnate, and employment will go down instead of up.

Who gets hurt in such a scenario? The person looking for a job who is unemployed is hurt significantly. The rich, on the other hand, have options. They can buy real estate or gold, invest off shore, or invest in the government bonds that are paying ever higher rates because the federal deficit is exploding. The point is that economic policies that appear to help the rich actually help the poor. The Democratic Party in the US and the Liberals and NDP in Canada successfully demagogue those who argue for business-friendly policies as insensitive to the poor when their opponents are, in fact, the ones promoting policies that help the poor. When the Republicans and the Conservatives promote policies that help small and medium sized businesses, they are doing the best things possible to help the poor.

Of course, Big Business and Big Government often are in bed together colluding to stifle competition and replace capitalism with mercantilism or state capitalism (which is not really capitalism) or cronyism. They often keep small businesses down by increasing regulation that the bigger corporations can afford to comply with but small ones cannot. Excessive government regulation of all kinds can damage the economy and hurt the poor. I do not understand why those who profess to care about the poor are not as suspicious of government as they are of business. Both need to be controlled and watched. Governments do not operate under market discipline so they are prone to do stupid things to the economy and voters are often so uninformed and unthoughtful that they are easily manipulated by slogans and heartfelt assertions of good intentions. Only results should be considered, not intentions.

Countries that pursue high tax policies that keep the rich from amassing large pools of capital in the name of "social justice" and "income equality" are successful in damaging the economy, increasing unemployment, creating inflation and freezing income inequality into rigid classes that keep people from being able to advance in life by hard work and individual initiative.

Governments have no money of their own; all they have is what they take from citizens. But governments famously waste about half the money they tax and spend, which is a tremendous drag on the economy. Private individuals and businesses, guided by market disciplines, create much more of real economic value for every dollar they spend than governments do. Yet every welfare state or socialist policy idea ever advanced advocates increasing the size of government.

Rich people invest their money, when tax and other government policies are rational enough to encourage them to do do, in money-making endeavours that are also job-creating endeavours. We should not "eat" the rich; we should honour them and respect them.

If people get rich by doing illegal things, that is of course different. But working hard, having good ideas, starting and growing businesses are all socially beneficial behaviours that ought to be encouraged.

As Christians, we should think more about how to create a business friendly environment, how to increase economic mobility and how to reward socially beneficial behaviours than about income inequality. As long as the poor are getting ahead in real terms and opportunity exists for all, we have as just a society as is possible under the conditions of the Fall.


DanO said...

You do know that your boys in the Vatican have a pretty different stance than you on this matter? For example, they back the Tobin tax, whereas you seem pretty set against that. Here's the text, as you seem to have missed it:


Not exactly socialists and liberals, eh?

Craig Carter said...

Obviously, you have no way to refute the argument in my post. All you can do is change the subject. I bet you didn't even read it.

DanO said...

You're right, I didn't read it. Just skimmed it to see if you picked up on the stuff that the Vatican has been saying as it seemed relevant to the subject at hand. The concern, of course, wasn't to refute what you said. It was to point out that others whom you regard highly may have already done that for me.

Really, I've mentioned that Vatican stuff twice because I'm genuinely curious as to how you might respond to what was presented by that Office given that (a) you've spoken very highly of the current RCC authorities; and (b) they have now positioned themselves in a different camp than you when it comes to these matters. I wasn't sure what you would do with that... repentance, after all, is only one of several possible options. ;)

Edward said...

Great post questioning the common assumption that increasing income inequality is always bad, without consideration of such factors as absolute growth and income mobility (which some data indicate to be high: http://blog.american.com/2011/10/tracking-the-same-households-over-time-shows-significant-income-mobility/ ). But from a Christian standpoint I think the biggest problem associated with this phenomenon and its constant heralding in the press is, as economist Samuel Bowles put it, that the perception of “inequality breeds conflict, and conflict breeds wasted resources.” This conflict stems from human vices, eg, envy and greed, that Christians can and should address.

Peter W. Dunn said...

Craig: Nice post. One nickpick:

"or invest in the government bonds that are paying ever higher rates because the federal deficit is exploding"
The federal deficit is exploding to be sure, and it is sucking up the available capital to waste on government spending. But government bonds are neither paying higher rates nor are they paying more interest. By keeping rates impossibly low rates, the central banks abet government into paying much less interest and thus they impoverish the seniors who have depend on pensions which are invested in bonds.

Bonds are the last investment I would make in the upcoming hyper-inflation. I am invested in commodities (oil & gas, and mining stocks), which kills me during times like these, but I see them as far safer than fiat currencies which central banks are debasing with QE and zero interest rates.

Peter W. Dunn said...

Here is a video to go with your point that capital gains tax should be abolished:


The point is that the tax is on imaginary gains in a nominal world. But if you take into account inflation, capital gains are next to nothing.