Like clockwork, the latest study has been issued complaining about the widening gap between rich and poor. Naturally, the authors think the government must do something about it. This is a bad diagnosis and a bad prescription.
The study from the Economic Policy Institute and the Center on Budget and Policy Priorities is a state-by-state analysis of the wealth gap. According to the authors, “Despite the strong economic growth and tight labor markets of recent years, income disparities in most states are significantly greater in the late 1990s than they were during the 1980s.” They blame the disparities on things such as immigration, the switch from manufacturing to service jobs, freer world trade, shrinking unions, and an ineffective minimum wage. In each case, they are wrong or have misinterpreted the data. Their solution is more government. Wrong again.
People are easily led astray by income analyses. For example, incomes are typically divided into five groups, each accounting for 20 percent of the population or of families. The latest study says that “the gap in incomes between the top 20 percent of families and the bottom 20 percent of families grew between the late 1980s and the late 1990s.” This gives a picture of a widening gulf between fixed groups of very rich and very poor people who are otherwise indistinct. But that is incorrect. To begin with, the top 20 percent includes people not commonly regarded as rich. A husband and wife making $40,000 each is in the top 20 percent. Who regards that as rich?
Another problem with such analysis is that the groups are not fixed. We may compare the bottom 20 percent of today with the bottom 20 percent of 10 years ago. But we’d better keep in mind that the statistical group does not contain the same people. There is tremendous mobility in this society. People move up-and down. Many studies indicate that the vast majority of people in the bottom 20 percent at any given time will move up as their lives proceed. Mobility produces an oddity when comparing the incomes of these groups over time. As people in the bottom 20 percent gain experience and income, they move into high groups, leaving the bottom group’s income little changed. But the people in the highest group can’t move any higher. So the group’s income will balloon. This will give the appearance that the poor are always getting poorer in relation to the rich. But appearances are misleading.
As W. Michael Cox and Richard Alm, authors of Myths of Rich and Poor, point out, there are many reasonable explanations for the widening income gap that should produce no alarm whatsoever. They note that the states with the biggest gaps are also states with fewer people in cities, fewer college graduates, and more immigrants, “who tend to cluster in low- and high-income groups.”
Finally, we must reject the study’s claim that economic inequality implies injustice. The authors state, “The economic prosperity of the 1990s has not been shared equally.” But neither has it been produced equally. People who are more proficient than others at creating value for consumers will earn higher incomes. Why shouldn’t they? It would be unjust to deprive them of their rewards. It would also hurt consumers. To complain that prosperity is not being “shared equally” is to betray a fundamental misunderstanding of a free society. In such a society incomes are not distributed from a common pot by someone who may be fair or unfair. Incomes result from countless transactions in which consumers reward the producers who improve their lives. It is an unplanned, decentralized process that recognizes people’s right to make economic decisions for themselves. The results will surely be unequal. That is not injustice. It is life. Interfering with it harms everyone, the poor most of all, because production is stifled.
The real lesson of the wealth gap is that if you want to help your chances of getting to the top, get an education and develop good work habits.
Government’s only possible assistance is of a negative kind: repeal taxes and abolish the rotten state school system.
