Posted by: bkivey | 6 December 2010

Income Inequality Incoherence

New York Times columnist Nicholas Kristof wrote an essay titled “Nation’s Income Inequality an Insult to Banana Republics” in which he bemoans the difference between the upper and lower income deciles in the U.S.; comparing it unfavorably to equivalent data in selected South American countries. Apparently this was Mr. Kristof’s theme for the month of November, as he had written a similar essay less than two weeks prior. While some commentary on Mr. Kristof’s essay focuses on cultural and institutional differences between the United States and the comparison countries, my quibbles with his work are based on more fundamental questions about his premises and conclusions.

In his essay Mr. Kristof cites data from the Economic Policy Institute purporting to show that the top 1% of income-earners in America control 34% of private net worth and the bottom 90% of earners hold 29% of net worth. Because the public sector does not earn profit, I’d dearly like to see what Mr. Kristof calls public net worth. This disparity is presented as some sort of rapacious taking of resources from helpless victims where ‘their’ wealth is squirreled away, never to be seen again. Far better to have a benevolent and omnipresent government forcibly separate people from their earnings and redistribute them to those more deserving.

My primary problem with this thinking is: what business is it of Mr. Krisotof’s or anyone else how much someone earns? I’d like to see everyone make as much money as they can. If Jane Doe is pulling down six figures annually that doesn’t reduce one whit the opportunity for Joe Blow to increase his income. Compensation is not a zero-sum game. Employment compensation is a private contract between the employee and their employer. If a Wall Street broker makes $10 million annually, good for them, but it’s not going to affect the compensation I negotiate with my employer. There is nothing ‘unfair’ about one person making substantially more or less than another; but it’s grossly inequitable for someone to unilaterally declare themselves the arbiter of what constitutes a ‘reasonable’ income.

Further along in his essay Mr. Kristof includes the pro forma decrial of ‘tax cuts for the wealthy’ and their purported $700 billion cost to government. Mr. Kristof is a smart man, but many smart people demonstrate a remarkable ignorance of basic economics, especially and willfully so if they’re trying to sustain a particular narrative. Let’s go through this slowly:

  • The ‘tax cuts’ in question are not cuts. The current federal income tax rates were authorized in 2001 and phased in over six years. Most tax brackets saw a decrease of about 3% and the 15% tax bracket was lowered to 10%. Thus the current tax rates have been the law of the land for between 4 and 10 years. If rates are set to the pre-2001 levels, that’s a tax increase over the current rates.
  • People who make the claim that reducing (or in this case, maintaining) the current level of taxation ‘cost’ the government money fail to grasp the very basic fact that it’s not the government’s money. Government has no money of it’s own. Progressives paint a picture of government writing large checks to people who then take their limo’s to the bank and lock the money away in a vault, thereby depriving Bob Cratchit of the means to provide for his family. If government takes less money away from people, they get to keep more of what’s theirs in the first place.
  • Not receiving a source of income is not the same thing as spending money. There is an opportunity cost associated with any action, and jiggering the income tax rate is no exception. Some folks would like the electorate to believe that if the current tax rates are retained, then government will be writing checks. While it’s true that government tax receipts would not increase if the current tax structure remains in place, neither would they fall.

Mr. Kristof frets that wealthy individuals put some of their money into savings, rather than spend it. I sure as hell hope they do. Where does he think banks get the money with which to make loans? Going out and buying yachts and mansions doesn’t really provide too many employment opportunities; investing money in financial instruments used to back business loans does.

Much of Mr. Kristof’s experience has been in Africa and Asia, places noted for historically large disparities in wealth and minimal opportunity to improve one’s economic status. It seems he is judging and comparing societies without considering the why along with the what. He cites research purporting to show that economic opportunity in America is stagnant without naming sources, so it’s hard to judge the veracity of those claims. Yet millions of people come here precisely for the economic mobility this society offers. I would suggest that Mr. Kristof and his cohorts take off the ideological blinders that focus their attention on class envy, because that attitude doesn’t speak well for them or their intellectual acuity.

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