Is Income Inequality That Big of a Deal?

Ever since the CBO report came out on income distribution, the Left has once again bemoaned about income inequality.  Paul Krugman even came out with a piece very recently entitled "Oligarchy, American Style."  I'm going to forget that the report is misleading in the sense that it collected data up until 2007.  The reason for my accusation is because if the CBO bothered to look at the IRS data for 2008 and 2009, they would have found that the income for the 1% fell to 1997 levels (see Tax Foundation study for further info on tax burdens).

This led me to an important question: should we be worried about income inequality?  Just a few thoughts on the matter......

• Looking at income as an economic indicator for one's economic well-being is inaccurate as it is arbitrary.  Why?  Income is a relative measurement.  When the dollar is devalued or inflation increases, income doesn't mean as much.  Would you be more impressed with someone who makes $500K now or fifty years ago?  On the other end, when technology improves what we consume, we are able to consume more quantitatively and qualitatively, thereby increasing our purchase power.  As such, when having this discussion, we should look at consumption, not at income.  And when we do, it's amazing because consumption-based poverty is much lower than income-based poverty.
• Division of labor comes into mind during this discussion.  We all have different skills, levels of intelligence, motivations, and job preferences.  Some of us choose jobs that we like, but don't pay as much (e.g., social worker).  Other jobs earn a lot of money, and people are in that profession for that reason.  Do we think that a janitor should be paid as much as a doctor?  I certainly hope not!  Doctors are skilled workers that are in high demand.  If we hypothetically made everyone's wage equal, regardless of profession, doctors would hardly see the incentive to pay all those years of medical school just to get paid the same amount as a janitor.
• Income inequality is not an inherently bad thing.  You have cases such as Bernie Madoff and Enron.  They ruined the lives of many with their avarice.  And while these cases are unfortunate, they are by far much more infrequent than cases of people climbing to the top with innovation.  Take Steve Jobs as an example.  He spent 60-80 hours a week in the office to bring us wonderful Mac products.  Do we hate him for that?  A huge majority of us would answer in the negative.  He worked hard to bring many people Mac products, which have changed the lives of many.  Since he worked hard, he earned the money he made.  It's not so much where there is inequality, but how it is brought about.  
• This is why income inequality is not so much of a moral issue as is the topic of economic sufficiency, which is a point that philosopher Harry Frankfurt brings up.  "Do we have enough?" That should be the question, not "why does the millionaire have so much, and I have nothing [in comparison]?"  I'm not trying to belittle those who have genuinely suffered through this recession, or say that the unemployed need to "toughen up" or "grin and bear it."  What I can say is that many in America have lost perspective.  Rather than look at what we have and be grateful, we look at what we don't have in hopes to "keep up with the Joneses."
• We live in a materialistic society that over-emphasizes the individual to the point where many feel that the continual acquisition of more material goods will satiate their happiness.  I have bad news for you: money doesn't buy happiness.  Money is a means to an end.  I would be worried more about what makes me happy than if I have more money than my neighbor, especially if he is part of the 1%.      
• And if you need to put yourself into perspective, even the poorest American still has more money than three-quarters of the rest of the world.
• During the period of the CBO study, 57.5% in the lowest quintile jumped at least one quintile, and of those in the 1% during 1999, only 44.6% were still there in 2007.  So let's be thankful that there is economic mobility in America.

Postscript: This is not to say that those in Occupy Wall Street protests have a reason to be angry.  They do.  There is a political system that has failed them while it commits idiocies such as bailing out the banking industry.  If a bank such as Citibank is failing, it should be allowed to fail.  It shouldn't be bailed out because Big Government came to the rescue.  As Ronald Reagan once said, "Government is not the solution to our problem.  Government is our problem."  You want to create more economic prosperity so we can get our economy back on track?  Remove the red tape that inhibits small business from hiring.  Stop pouring money into energy plants like Beacon Power that file bankruptcy.  Enough with the bailouts already!  If you lift the restraints that constrain the markets, there won't be a need to occupy Wall Street anymore.  


8-9-2017 Addendum: A recent study from the National Bureau of Economic Research shows that while income inequality has risen over the past few decades, consumption inequality has stayed relatively stagnant.