Income Inequality is Not the Problem

Now Mitt Romney is getting a lot of criticism for saying that income inequality should be discussed in “quiet rooms” instead of in our public debates.   Mitt deserves this criticism.  It is absurd to say this does not belong in the public debate.

Apparently, the Obama re-election campaign is going to talk about income inequality a lot.  They may or may not be talking about it correctly.

Here is a chart I stole from TPM:


The chart shows that the problem is not income inequality.  The problem is income growth inequality.  From 1947 to 1979, all income groups saw roughly equal percentage growths in their incomes.  This still results in an increase in income inequality.  If you are making one million dollars, a 2.5% increase is $25,000.  If you are making $25,000, a 2.5% increase is only $625.  But that’s OK.

Income inequality, in and of itself, is not the problem.  In fact, it is an important feature of our economic system.   Incentive does matter.  Yes, many of the wealthy got that way by sheer luck or happenstance or accident of birth.  But I’m betting (willing to believe…willing to delude myself…too lazy to research it)  most of them achieved their wealth through hard work that contributed positively to the overall economy and that most of them did so because of the incentive of wealth (though I think many just were having fun and the wealth was simply bonus).

The problem is income growth inequality.  There is going to be a lot of discontent when the wealthiest continue to get even richer while the bulk of the population is treading water (especially relative to inflation) or getting poorer.

Note that the wealthy did better when everyone did better.



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