What Every Christian Should Know About Income Inequality

Ten Facts concerning income inequality.

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.

 

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.

 

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