Sunday, October 17, 2010

The Flaw in the Income Inequality Argument

There have been two similar blogs/columns on income inequality in the last week:
These opinion pieces have several elements in common:

They imply that the rich don't deserve the money they've earned. Without actually stating it, both articles imply that there was something unseemly in the increase in income going to the rich. They imply that the rich didn't earn their increase in income. By continually drawing the contrast to the middle class and claiming that middle class income didn't increase, they imply that the rich benefited at the expense of the middle class.

But there is no data or analysis provided that proves that the rich obtained their riches through means that were illegal or improper. It's important to the columnists to imply that the rich somehow cheated, because they need that implication to support the conclusion of their argument, which is that the rich don't deserve the money they're earned as much as the middle class does.

They mock the rich. Along with implying the rich didn't actually earn their money, they make lots of unsubstantiated assertions about the rich "wasting" their money on 30,000 square foot mansions, expensive hair cuts, and so on. The details provided in the mocking don't support any logical; they are provided simply to undermine people's empathy for the rich and to further the impression that the rich don't really deserve their money.

As an aside, a person could reasonably ask the question, "If the rich were financially savvy enough to become rich, then how is it that, according to these columnists, they become fools when they start to spend their money?" The answer is, they don't. They were smart and disciplined in earning their money, and the cartoonish characterization of how the rich spend their money is just that -- a cartoon that has little basis in reality.

They never identify who "the rich" are. These columns refer to "the rich" as a statistical group, without actually identifying any specific members of the group. Why is that? It's because if they identified specific rich individuals the flaws in their arguments would become all too obvious.

Are they talking about Bill Gates, founder of Microsoft? He's the richest man in America. Did he somehow not deserve the money he earned? Be careful how you answer that as you read this column on your Microsoft browser, running under Microsoft Windows. Gates created thousands of millionaires in addition to himself. Does that somehow imply he doesn't deserve his money? And is Gates wasting his money on fancy haircuts? No, he's spending his money on the Bill and Melinda Gates foundation, whose mission is to eradicate disease in the third world.

Are we talking about Warren Buffet, the 2nd richest man in the US? That would be the man who had read every book on investment in his community library by the time he was 12 years old. Do you think he somehow doesn't deserve the money he's made? This would be the same Warren Buffet who has pledged to give away 98% of his inheritance to charity, and has created an initiative to encourage other billionaires to do the same.

What other billionaires might have lied, stolen, and connived their ways into earning their fortunes? How about the third richest man in the US, Larry Ellison, founder of Oracle. Be careful how you answer that question too, as you surf the internet, in which many of the most popular websites are driven by Oracle databases.

Others in the top 25 richest people. The Waltons, heirs of Sam Walton. If you think Sam Walton didn't deserve his fortune you'll have to stop shopping at Walmart.

Larry Page and Sergei Brin, founders of Google? Better not count on doing any more web searches if you think they don't deserve their money.

Jeff Bezos, founder of Amazon? I think you get the idea. The rich in America don't get to be rich based on corruption. They get to be rich based on creating value -- creating something out of nothing, something that people want and are willing to pay for. If there has been wealth transfer from the middle class to the rich it's because we the middle class have decided to vote with our dollars by buying computers running Microsoft software, searching for items we want to buy using Google, then going shopping at Walmart and The rich have accumulated their wealth because we gave them our money for things we wanted, and most of us believe the world is a better place with the products they have created than without them.

The conclusion of the columns is a non sequitur. The whole line of argument in these columns is building to a specific conclusion: "The rich don't deserve their money, and so we, the people, should take it and give it to ourselves instead."

The problem with this argument is that even if income inequality has grown steadily since WW2 because the rich are getting richer and the middle class has stayed the same, that does not imply that the right solution is to tax the rich more and just give the money to the middle class. It could imply any number of other conclusions:
  • Opportunity for the middle class needs to be increased, so that more people in the middle class can become super rich.
  • People in the middle class need to be taught better how to become super rich.
  • The standard of living for today's middle class is so comfortable that fewer people than in years past have the desire to take the risk and invest the personal effort that it takes to become rich. Hey, I've got my iPhone, my iPod, my XBox, my DirectTV, and my 50" flatscreen TV. As the columnists themselves point out when they ask "how much is enough?", maybe that's enough for most people. Most people simply don't have the desire to risk more or work more to earn more because they already have enough.
  • The fact that some people have accumulated massive wealth in their own lifetimes is a sign of strength and opportunity in our economy, not a sign of weakness. In our economy ordinary people like Bill Gates, Warren Buffet, Sam Walton, Larry Ellison and others can become fantastically rich through their own efforts in their own lifetimes.
The columns implicitly argue that the way to correct the income inequality issue is to increase taxes on the rich, and give the money to our all-knowing, all-wise, and all-powerful federal government to benevolently spend in our best interests -- the conclusoin of their argument is a non sequitur and stupid.

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