Tuesday, June 24, 2014

Income Inequality: The Obvious Answer

by posted in Banking, Economics and Mises.org

In this post by Bob Murphy, some commenters disagree with the use of the early 1970s as the point when income and wealth inequality started to become a problem.

Thomas Piketty has recently gained some fame for pointing this out. His sometimes co-author Emmanual Sanz has done a lot of work pointing to this same conclusion.

The income and wealth divide that is now seen as a problem did start right around 1970 (depending on what type of data you want to look at to judge this, it started as early as 1968 or as late as 1973). The income divide is not fabricated, nor are these dates just pulled from thin air.

Whether income inequality is a problem is another issue. Incidentally I don’t think it is, as I’ve argued here and here.

But rather than look at statistical work by economists, we can use some more common measures to make the point.

income inequality
The Gini index is a very simple measure that shows the degree of income distribution within a country. A Gini figure of 0 would mean that everyone earns the same amount. A figure of 1 means there is a maximum degree of inequality. By this very common measure income inequality in the US bottomed out in 1968 and has advanced ever since.

The ratio of the average wage to the minimum wage is a good way to gauge how much more the average wage earner makes relative to the bottom of the wage-earning scale. (Technically speaking the unemployed are the bottom rung of that ladder, but we’ll just deal with those with jobs.)

A rising ratio means that the average wage earner is enjoying more income growth than the minimum wage earners. Again, this figure was more or less constant until the late 1960s, before it jumped. It was only the outbreak of the crisis in 2007 that really compromised this advance, though even that is now bygone past.
In short, income inequality is advancing. It’s not necessarily a problem, but it has definitely occurred more-or-less starting around 1970.

When I say it’s not “necessarily” a problem I mean that earned income inequality is quite fair. Those who work hard, put in long hours, or have great ideas will see their incomes rise relative to those who lack those skills. They get richer as a reward, but we’re all better off because of them as well. The problem right now is with unearned inequality.

So what could be the source of unearned inequality? How could one group get ahead without having to put in the long hours, hard work or bringing forth great ideas?

How about we look at how income is defined – with money. The period of time right around 1970 was unique in recent history as it was the end of the Bretton Woods era and the start of a pure fiat standard by all the central banks of the Western world. It ushered in a period of unanchored central bank credit creation, and government deficit spending. If one wants to blame something for the inequality that coincided exactly with this momentous event, why not pick the obvious reason?

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