What’s the Real Story Behind Income Inequality?

In recent weeks, progressive socialists, socialists, and Marxists have been decrying income inequality as a critically important issue to the world.  According to these socialists, the rich are getting richer and the poor are getting poorer.  In fact, it had been reported at the World Economic Forum held in Davos Switzerland in late January that ”growing income inequality” was one of the top four issues discussed at the forum.  Of course, as expected, socialists blame capitalism and economic freedom and free enterprise as the causes of this so-called terrible problem.  But, what’s the real story about income inequality?  Is it real?  Is it bad?  What’s the real cause?  Let’s discuss income inequality and its close cousin, wealth inequality, right now …

What is Income Inequality and the Closely Related Wealth Inequality?

Income inequality is the economic condition in which different people have different incomes.  Wealth inequality mirrors income inequality.  It’s the situation where some people’s wealth exceed the wealth of others.  What bothers socialists so much is that income inequality and wealth inequality are not FAIR.  Socialists believe (or at least they state) everyone should make the same income and have the same wealth, or at the very least, be reasonably close in income and wealth.

Shouldn’t a heart surgeon earn more than a hamburger cook?  Shouldn’t the founder of Google (a service used by millions around the world) have more wealth than someone who cleans dishes?  Isn’t it FAIR that different people earn more or less than others based on their efforts and work?

What are the Two Types of Income Inequality?

Income inequality comes in two flavors: static and dynamic.  “Static income inequality” is very bad and is caused by progressive socialism and socialist policies that eliminate the middle class with high taxes, high spending, and burdensome regulations that prevent new business creation and growth.  In America today, I believe there is a shrinking middle class.  In static income inequality, a country has primarily two groups of people: (1) the high income, wealthy, ruling elite and (2) the poor, who are supported by welfare programs (similar to Medicaid and Food Stamps in America).  (Note the vast increase in Food Stamps in recent years, a sign of a shrinking middle class in America.)

Static income inequality is a sign of a stagnant, lackluster, feeble economy.  People get stuck in economic ruts and tend to lack true hope for the future.

“Dynamic income inequality” in contrast is very good and is caused by capitalism, free enterprise, entrepreneurship, and economic freedom.  It’s a sign that an economy is continually growing and continually renewing itself.  Recall Joseph Schumpeter and his reference to capitalism as ”Creative Destruction.”

Dynamic income inequality results in a fast turnover of income quintiles.  Think of income quintiles as five buckets of income: top income earners, upper middle income earners, middle income earners, lower middle income earners, bottom income earners.  With dynamic income inequality, 50% of bottom income earners can move up to a higher income quintile within ten years.  Many move even more quickly.  This is characteristic of a vibrant and dynamic economy.

With dynamic income inequality, the difference in incomes actually serve to motivate people to take actions that will move them up the economic ladder, such as getting more education, applying for a better job, starting their own business, saving money, and investing that money in tangible assets such as real estate or stocks or bonds or mutual funds.

What Do Socialists Really Want When They Complain about Income Inequality?

Simple.  It’s another excuse to increase taxes on the private sector, and to spend money on additional socialist and welfare state programs that inevitably fail miserably.  Socialists never seem to give up looking for ways to make big government even bigger.

To illustrate, consider the financial transaction tax being proposed by some socialists.  It would tax every financial transaction made when stocks, bonds, currencies, derivatives, etc. are bought and sold.  The proceeds from the tax would be redistributed to various “social justice” programs.

How Do We Respond to Socialists Who Complain about Income Inequality?

First, you need to ask them if they are complaining about static income inequality that is caused by socialism.  If it is, suggest they drop their socialist policies and programs and instead, adopt economic freedom and free enterprise as their model for an economy.

Second, you need to ask them if they are complaining about dynamic income inequality, that is the driving force and motivation for more economic growth and prosperity.  If it is, tell them everything is good and the economy will lift all boats.  The truly poor will always be with us.  Targeted and focused help should always be directed to meet their needs.  However, it’s better for everyone to help the poor come up economically, than it is to drag everyone down into poverty to achieve a punishing income equality.

You might also suggest they promote freedom – religious freedom, political freedom, and economic freedom.

Where Can People Find More Information?

You can learn more about income inequality in my book: America’s Economic War. You can also learn more about economic freedom in my book: Renewing America and Its Heritage of Freedom. You can also go to my website: GerardLameiro.com or RenewingAmericaBook.com .

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