In his recent State of the Union address, President Obama has signaled that income inequality will be his domestic focus during the remainder of his term in office. The fact that the president considers income inequality, rather than employment or economic growth, to be the most important economic issue is peculiar, though not really surprising. For the past few years the political and cultural elites have become obsessed with the issue.
But what should Christians think, and how should we approach the issue? Should we also be concerned? And if so, what should we do about it?
Here are ten points about income inequality that every Christian should understand:
1. Incomes are measured in money — and money is not wealth.
Income inequality is not in itself an economic problem. The simplest way to illustrate this point is to provide a simple “solution”, for there is a simple method that would lead to perfect income equality.
The first step is to calculate the number of earners and rank their incomes from lowest to highest. For example, let’s say a country has 100 million workers, with the lowest workers paid $10,000 a year and the highest earning an annual salary of $1 million a year.
The second step would be for the government to print enough money to equalize all the incomes. For instance, a worker who was making $10,000 a year would get a check from the government for $990,000 while the person making $1 million would get no check at all. Everyone else would get a check for the difference between their income and $1 million dollars.
The result is that all 100 million workers would then have an income of $1 million – the problem of income inequality would be solved!
If that seems a bit too easy, it’s because (a) income inequality is not in itself an economic problem, and (b) incomes are measured in money, and money is not wealth. A country’s primary economic goal is not to make sure everyone has an equal amount of money, but to improve people’s standards of living.
“The money itself is not wealth,” says Don Boudreaux, “Otherwise the government could make us all rich just by printing more of it. From the standpoint of a society as a whole, money is just an artificial device to give us incentives to produce real things — goods and services.”
2. The existence of income inequality is generally a sign of a fair distribution of incomes.
Would it be fair if, as in the example above, every worker earned $1 million? Most people (except perhaps committed Marxists) would admit that it would not be fair to pay everyone the same despite differences in such factors as experience, productivity, and work ethic. The existence of some income inequality is therefore a sign of a fair distribution of incomes.
While this may seem obvious, it’s necessary for understanding that discussions about income inequality are never really about equalizing some or even most incomes. Rather they are, as we’ll discuss in #8, an attempt to justify wealth redistribution.
3. Both low and high rates of income inequality can be signs of unfairness.
Income inequality is usually measured by the Gini coefficient, which measures the inequality among values of a frequency distribution for various levels of income. A Gini coefficient of zero expresses perfect equality, where all values are the same (as in our first example where everyone has the same income). A Gini coefficient of one (or 100%) expresses maximal inequality among values (for example where only one person has all the income).
As we’ve shown, it would be as unfair (and counterproductive) for everyone to make the same income as it would be for only one person to make all the income. So what would be the ideal Gini coefficient? There isn’t one, for that number alone tells us nothing about the living standards of a country.
For example, in 2010 both Bangladesh and the Netherlands had an income Gini index of 0.31. Yet while they had the same level of income equality, there is a vast difference between their per capita incomes: $1,693 in Bangladesh and $42,183 in the Netherlands. By itself income inequality doesn’t tell us anything about economic flourishing. A country’s Gini coefficient could fall and yet the poor get poorer, or the Gini coefficient could rise while everyone is getting richer
4. Income inequality is not the same as economic inequality
Some people confuse these two terms but they are not interchangeable. As economist Scott Sumner explains, you could have no economic inequality and still have enormous income inequality.
5. Measures of income inequality are meaningless because incomes are not zero-sum
At the popular level, almost all discussions of income inequality are based on the zero-sum fallacy.
“The Zero Sum Game is one of the great economic fallacies,” as Samuel Gregg explains. “It assumes that if one person gets rich, it must mean that someone else gets poorer. That’s reliant upon a static view of wealth. It’s like a pie; the idea that there’s just one pie, and the pie can’t grow.”
“In market economies and dynamic, open economies what you’ll find is that the pie grows. This is very important, because what that means is that everyone can start to get out of poverty.”
Imagine a country in which in Year #1 100 workers made $50,000 a year. In Year #2, however, 99 workers made $50,000 a year and 1 worker – let’s call him Bill Gates – made $1 million a year. For zero-sum income inequality thinkers, this is not possible. For Bill Gates to make $1 million, the 99 other workers would have to earn less since the economic pie is static.
Of course, that is not the way it works in the real world. Bill Gates didn’t take income away from other people, he created new wealth for both himself and millions of other people.
Unfortunately, many people base their opposition to income inequality on zero-sum thinking. Even worse, though, many economists and politicians exploit this particular form of ignorance for their own purposes (mainly #8).
6. Income inequality and poverty are separate issues.
The most charitable interpretation for why Christians believe that income inequality is an important issue is because they assume it is a proxy for poverty. If this were true, Christians would indeed need to be concerned about income inequality because concern about poverty is a foundational principle of any Christian view of economics.
Fortunately, there is neither a necessary connection nor correlation. A country could have absolutely no poverty at all and have extremely high-income inequality. The reason is because income inequality (measured by the Gini coefficient), measures relative, not absolute, income.
There are many Christians, however, who are committed to alleviating poverty who think income inequality is a non-issue (see point #10). While a high level of income inequality might (in theory) tell us something about the level of poverty, it more often than not tells us nothing at all about the material condition of the poor.
7. No one in America is really concerned about absolute income inequality.
If your income is $50,000 a year, you are making twice the level of income of a family at the poverty threshold. If you were to redistribute $12,500 to the poor family, you would then achieve a level of income equality between the two families since you both would have $37,500. Why then don’t more middle-class earners ask the government to redistribute 25 percent of their annual income to the poor?
The reasons are numerous and varied, but they reveal that most people are not truly interested in reducing absolute income inequality – or even income inequality relative to themselves. What they want is for the income of earners who make more money than they do to be redistributed.
8. Discussions of income inequality are almost always about redistribution of income.
Redistribution of money from the vaguely defined rich to the poor has always been a standard feature of egalitarian-based politics. That has been particularly true in America from the mid-1940s to 2014. Until about 1975, though, it was common for political liberals to propose both the problem (income inequality) and the solution (income redistribution) together.
However, after 1975 we see a shift in the rhetoric. While talk about income inequality continued to increase, discussing the solution — income redistribution — was significantly downplayed. The likely reason for the shift, as we see in point #7, is that the idea of having the middle-class income redistributed to the poor is very unpopular. But if income inequality is a problem, what other possible solution remains?
As we’ve found on the issue of taxes, there are not enough “rich” people to take money from. So income inequality is really a stalking-horse for policies that money away from worker on the middle and upper ends of the economic spectrum and redistribute them to those on the bottom (or, more often than not, to the middle-man: the government).
9. The only real threat caused by income inequality are problems caused by envy
Income inequality is increasingly described as a threat both to our country’s economic well-being and to democracy itself. But you rarely hear explanations for why exactly it’s perceived as a threat. The reason is because concerns about income inequality are primarily driven by envy. Envy is generated by positional concerns only when the individual’s current situation is below his or her own aspiration level. That is a fancy way of saying that the “threat” of income inequality derives from the fact that some people want what other people have.
Christians, of course, should recognize this is a problem that is rooted in the human heart and not the Gini coefficient. Even if we reduced the level of income inequality it would not reduce the level of envy for our neighbor’s wealth.
Here’s a thought experiment to prove the point. Imagine you are presented with two possible worlds. In world A, you earn $110,000 a year while colleagues earn $200,000. In alternative world B, you earn $100,000 a year but your colleagues earn only $85,000. Which would you choose?
World A seems to be the better option since, in absolute terms, you have more money to spend. But studies have shown that about 50% of people prefer world B. Relative position in a social group proved to be more important than absolute income.
As long as we think we deserve more, we will become envious of those who have what we want.
Since concerns about income inequality are generally motivated by envy, it’s not surprising that the group who are most envious of the “rich” are the “near rich.” For example, a study found that of the Occupy Wall Street protestors — a group obsessed with inequality — over a third had household incomes over $100,000. Said one of the authors of the study, Ruth Milkman, “It’s a pretty affluent demographic and highly educated. Many were the children of the elite, if you will.”
10. The focus on income inequality is at best, useless, and, at worst, immoral.
Because it is often rooted in personal envy or based on concerns about what will happen if envious people don’t get what they want, Christians should be very hesitant about legitimizing the issue of income inequality. Our primary economic concerns should be for the well-being of the poor and for the creation of conditions that lead to greater human flourishing for all our neighbors. Focusing on income inequality does neither. In fact, the focus on income inequality has become a distraction that has hampered our search for solutions to our true economic problems.
As with every aspect of economics – and indeed in all areas of life – it is not enough to support issues because they make us feel good about ourselves or acceptable in certain social circles. As followers of Christ we must champion economic policies and principles that are rooted in biblical virtues and beneficial to the flourishing of our fellow man. To do that we must refocus on what matters and stop becoming distracted by envy-driven concerns that some people are earning more money than we are.