Inequality: not to worry...

In my search for enlightenment on the nature of income inequality, I have run into some innovative and intriguing slants from those who don't see a big problem.  A new one, which has been approved for general consumption by some libertarian thinkers like Will Wilkinson was penned by Scott Winship.

First his conclusion:

It is not immediately clear what to think about income concentration being confined to the very top.  Would it be worse if income were becoming increasingly concentrated in the top half of the distribution at the expense of the bottom half or if it were becoming increasingly concentrated in Bill and Melinda Gates's household at the expense of everyone else?  Does the answer change depending on whether the "losers" are experiencing strong income growth or not?  On some level, as long as incomes are rising for everyone, it matters little how much more the Gates's income is rising.  They cannot price others out of markets for goods and services by themselves.  On the other hand, if the top fifth of the income distribution is pulling away from the bottom 80 percent, then the consequences for those falling behind could be profound.  The top fifth might be able to sort themselves into the best neighborhoods with the best schools, and they might bid up the cost of higher education to the point where the best schools become unaffordable to most families.

The evidence indicates that patterns of inequality more closely resemble the Gates scenario than the bifurcation scenario.  It is unlikely that the rise in inequality, then, has had much practical impact on the quality of life of middle-income or poor Americans.  The exception would be if rising inequality had spawned competitive spending patterns to maintain relative standing in such a way that families end up worse off as a consequence of trying to keep up with the Joneses.  For now, however, this possibility remains largely untested.

Finally, the magnitude of the increase in inequality and its nature might be of little practical importance even as the level of inequality has deleterious effects.  In other words, what may be relevant is that the top ten percent has received at least a third of all income in every year since 1980, not that it increased from a third to nearly half by 2007.  But if that were the case, it would have different implications for American society, politics, and economics than if growing inequality is a trend to be viewed with alarm.  Indeed, we would be in worse trouble if the levels of inequality prior to the run-up of recent decades were as consequential as the level we have today, for we are unlikely to ever see inequality levels so low in the foreseeable future. [More]

As this graph shows, his assertion (I believe) is that income gains are not being hogged by the upper 10%.  They are mostly going to the upper 1%!  

This is viewed - stay with me here - as better, for the reasons he outlines above. Indeed, the casual acceptance of this lopsided economic outcome gives one pause. As Wilkinson puts it,"And what we know is that almost the entire increase in inequality since the 1980s is attributable to a stupendous rise in incomes at the top of the top of the top of the income distribution.".

Added to the argument that since the cost of living for the poor has risen less than the cost of living for the rich (there's no Walmart for Gucci bags, I guess), these assurances seem to skirt one larger problem for me: How the heck do we grow the economy if the vast majority see no real income growth?

I saw Michael Swanson from Wells Fargo put the formula for GDP up in his presentation at The Elite Producers Conference:

GDP = C + I + G + (X-M)

C = consumer spending (72%)
I = Investment   (~10%)
G = Government (~25%)
(X-M) = Net exports (-3%)

Swanson then pointed out the key to growth in his opinion was to increase "I", investment.  OK, I'll buy that, but it's going to be really hard to move GDP much if you don't increase "C" in my thinking. 10% growth in C produces 7% GDP growth; 10% growth in I gets you 1%.

So if income is almost entirely absorbed into folks who aren't going to consume, but just invest, it will be hard to see much economic growth, simply because of the relative importance of the two factors.  This is my issue with growing income inequality.

As the folks in the dairy industry struggled to find ways to increase demand and prices, it seems stagnant income for most Americans will undo their efforts.  With flat income growth, food sellers have to take sales from housing or clothes, etc. to grow.

Maybe there is nothing morally wrong with lopsided income distribution.  Maybe it is ordained by religious adherence to Capitalism as inscribed in Leviticus or the Bill of Rights or somewhere.


But it's not going to help our economy grow.  Humanitarian issues aside, our system won't work if all of us don't see income progress.  This is the real headache for livestock and dairy.  Bill Gates can't eat all the meat and milk he can afford.