Inequality is Inevitable and Irrelevant (Part 1)


Part 1: The Inequality Demagogues

Lamenting income and wealth inequality is in vogue nowadays. President Obama made the fight against inequality his primary focus for the last four years of his presidency. Several books and news articles have been written and documentaries have been produced highlighting inequality. Noted and reputed economists have weighed in on why inequality is detrimental to human progress and why this issue should be tackled immediately.

The fight against inequality usually leads to imposing populist policies on people designed to redistribute income and wealth, which will only lead to more inequality and less prosperity.

In this two-part article series, I submit that inequality is an irrelevant topic of discussion, and that it is meant purely for political demagoguery

What is the goal of the “fight” against inequality?

What is not clear in all the hoopla is what the goal of this fight against inequality is.

First, let’s get one thing out of the way: No sane person advocates for complete income or wealth equality. The communist societies, the Soviet Union in particular, carried out a massive experiment on human beings and delivered an unambiguous lesson: Equality is neither feasible nor desirable in human societies.

Then the logical next question is: How much inequality is good?

The answer to that question is hard to come by. Nobel laureate and noted crusader against inequality, Joseph Stiglitz, wrote a 560 page book titled The Price of Inequality, wherein he has hardly any discussion about the level of inequality that a society should aim for. Stiglitz does allude to the Scandinavian countries as role models. I will discuss that later in this article.

The typical progressive answer to the question of ‘How much inequality is good?’ is: less.

Let’s look at a couple of other enlightened causes of liberal-progressives.

“Rich should pay their fair share.” What is fair share? 30 percent of their income? 50 percent? 90 percent? The answer and the follow-up justification are always vague. The real progressive answer is: more.

“CEO salaries are too high.” The typical statistic thrown around is that CEO pay is 350 times higher than that of an average employee. So, what is the correct ratio for CEO pay to average pay of employees? Once again, you will see various numbers thrown around without sound logical justification. The real answer is: less.

How much Inequality is good? Less!

The main ingredient in the argument of a political demagogue is the lack of a clear objective. In other words, fuzziness is the objective. An issue that lacks clarity lends itself to give rise to eloquent speeches. Inequality, fair share of taxes, and CEO salaries all fit in this category. That is why they are the favorite go-to topics for political demagogues like Elizabeth Warren, Bernie Sanders and Michael Moore.

If we agree that equality is not a feasible and desirable outcome and also claim that current levels of inequality are high, then by corollary there must be a level of inequality called the optimum level of inequality.

What is the optimum level of inequality?

A 2014 OECD publication, “Does Income Inequality Hurt Economic Growth?,” puts forth the argument that an increase in inequality leads to significant reduction in GDP growth. “Rising inequality is estimated to have knocked more than 4 percentage points off growth in half of the [OECD] countries over two decades.” Many experts have cited this study to advocate for income redistribution policies.

The OECD argument doesn’t bother to check its premises on cause and effect. Is Inequality indeed the root cause of slow economic growth? Or are both Inequality and slow economic growth the result of bad economic and public policies?

The logical inference of the OECD article is that the Optimum Level of Inequality is where the rate of economic (GDP) growth is maximized. Note the inherent vagueness in this argument. What is the maximum rate of economic growth?

Developed countries like US would consider 3 percent growth as healthy. China has been growing at around 10 percent, whereas India has been growing around 7 percent. What does it mean to maximize rate of economic growth? Is there a specific value for optimal rate of economic growth? This rabbit hole will only lead to more questions and vague assertions.

Another argument uses the GINI Coefficient, which is a widely used metric to measure inequality. A GINI Coefficient of zero represents perfect equality (everybody has same income), and a value of one represents perfect inequality (all income goes to one person). Many argue that the GINI Coefficient of Scandinavian countries which is around 0.25 represents the ideal or optimum level of Inequality. If you ask ‘Why?’ you will once again get vague responses.

If we want to achieve Scandinavian levels of inequality in all societies, then we should also bring about conditions prevalent in Scandinavian nations such as low population density, high availability of natural resources and, most importantly, a near-homogenous population.

The key to low levels of inequality in Scandinavian countries is the homogeneity of their populations. In homogeneous societies, people are more tolerant towards income-redistributive policies such as high taxes, universal healthcare, and social security. In these societies, government doesn’t need to impose income and wealth redistribution via lies, deceit and force.

Nations like USA and India have highly diverse populations where policies that promote income redistribution lead to severe public discontent and violent civil unrest. This seems to be the case with many Western European nations today, where discontent seems to be increasing with the sudden influx of immigrants from the Middle East.

Should we then aim to reduce the diversity in United States? What level of inequality is right for USA and India? How do you argue that GINI Coefficient of 0.4 is bad when USA has one of the highest GDP growth rates among developed nations, and the highest per capita income among all major nations? A valid argument, then, could be that the GINI Coefficient is a factor of demographic diversity. Higher diversity leads to higher GINI Coefficient.

There are several other factors that determine the GINI Coefficient of a society. One major factor is public policy. Bad economic policies of government lead to high GINI Coefficients even among homogeneous societies such as Cuba, even though the communist government of Cuba uses income redistribution as the primary public policy tool. Stiglitz explicitly states in his book that government policies are the primary cause for high levels of inequality. Yet, his prescription is to double down on same type of populist government policies.

Inequality is inevitable, and also irrelevant

Inequality is inevitable for two reasons: Human beings have ambition, and each is endowed with a different set of skills. Both these traits vary with genetic makeup of individuals. One way we can reduce inequality among societies is by reducing the variation of these genetically-driven qualities. That is, by making the population more homogeneous, which is not such a desirable outcome in modern societies.

Liberal-progressives want to achieve homogeneity by redistributing income from rich to poor. However, such socialist policies have failed to produce the desired results. Many Western European nations that are championing such flawed socialist policies are today staring at a future characterized by high unemployment rate and sluggish economic growth, which will only lead to higher poverty and inequality.

So, what should we do then? Should we just ignore inequality? Yes.

Inequality is a great topic for demagogues, but it is an irrelevant issue for ordinary people. Leave the talking to the demagogues. We have more important things to do. In Part 2, I will discuss what should be the real focus of public policy.

This article represents the views of the author, and not those of Being Libertarian LLC.

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Satish Bapanapalli is a freelance writer and ardent admirer of the great economist and Nobel laureate Milton Friedman. Satish’s ideas closely resonate with libertarian or classic liberal thinking.