Economic inequality does not cause poverty

In December 2013, former President Obama called growing economic inequality “the defining challenge of our time”. Not nuclear proliferation or ISIS running amok in the Middle East. Nor, even, the shibboleth of Climate Change. The biggest problem facing the American people was, apparently, the fact that some earn more income and some own more wealth than others.

These are facts. But they aren’t necessarily problems. They are certainly not “the defining challenge of our time”.

Income inequality in Minnesota

Income inequality has risen in the United States in recent decades and Minnesota has been no exception. One commonly used measure of income inequality is the Gini coefficient. Under this, a coefficient of 0 would mean total equality, all households having the same income. A coefficient of 1 would mean total inequality, with one household having all of the income. Minnesota’s Gini coefficient has risen from 0.39 in 1979 to 0.44 in 2012, according to a report by St Paul based Growth and Justice. Our state was ranked 16th in the country.

A report from the Economic Policy Institute finds that the top 1% of income earners in Minnesota earn on average $1.04 million. The average earnings for the remainder are $52,689.

But how is this a problem at all, let alone “the defining challenge of our time”?

The non-issue of inequality and poverty

People who talk about inequality will often slip into talking about poverty. A causal link between one and the other will rarely be spelled out. It might seem to be a non-sequitur. Nevertheless, the idea that inequality is somehow a cause of poverty is common.

This is not true. After all, very few people became rich by making others poorer. In a free market economy, people gain wealth by providing a good or service that people will willingly pay them for. If people value the good or service a person provides highly, that person will be highly paid. Joe Mauer earns $23 million a year, and every penny is given to him willingly in exchange for his skills at the plate. We may look at some CEOs and wonder how they earn their salaries, but the shareholders who hand their money over to them clearly feel that they do. We may not agree, but we are not compelled to give the CEO our cash. Unless its the CEO of Solyndra or General Motors.

There are people who have got rich by the act of making other people poorer, think of Bernie Madoff. If someone has more than you because they took your money by theft or fraud, then that is a problem. But it is the theft or fraud that is the problem, not the inequality. That is just a symptom of the problem.

Low incomes are an issue. But the problem for poor people is that they cannot buy sufficient goods and services. It is not worry that someone else can buy a yacht. The solution to poverty is to raise the incomes of the poor, not to lower the incomes of the rich.

Simply put, the poverty of some is not a function of the prosperity of others. In the same way, their increased wealth will not be a function of the reduced wealth of others.

John Phelan is an economist at Center of the American Experiment.