Environmental Economics

For some reason I have been thinking about income inequality lately.  I guess it could have something to do with unavoidable coverage of asinine opinions by politicians trying to get people to elect them by saying whatever they think will get them votes.  Rather than criticize the asinine opinions of others, I thought I would offer my own asinine opinion for your criticism.  So here is my asinine opinion as an economist*: Inequality is an individual problem, poverty is a social problem.

Some may be tempted to argue that the difference between inequality and poverty is semantic: when politicians and policy makers talk of inequality, they are really only concerned about those in poverty, right?  Well, no.  Because if real poverty were the concern, and inequality alleviation were really an altruistic endeavor, then politicians would be much less concerned with alleviating inequality in the U.S. and much more concerned about alleviating poverty globally. 

Let's take a quick example:  Consider a single U.S. citizen who falls precisely at the current U.S. guideline for poverty: $11,770 per year (according to the Department of Health and Human Services).  I think most of us can agree that that is a pretty low income.  And I think most of us would find it tough to 'survive' on $11,770 per year. But let's look at that number from a global perspective.  According to the Global Rich List**, an income of $11,770 would place that person in the 85th percentile (top 15% of incomes) of the global income distribution.  Just to be clear, that means 85% of the global population falls below the U.S. poverty line, while only 21.9% of U.S. income earners fall below the poverty line (at least according to this calculator at Political Calculations).   Twenty-two percent is a big number and cause for concern, by why are U.S. politicians only concerned with 22 percent of the U.S. population, when 85% of the world population is just as poor (or poorer).

The easy answer is 'We live in the U.S. dammit, we can't expect to solve the world's problems.  USA! USA! USA!'  But I don't think that is the real issue.  I think the real issue lies in how we perceive poverty.  I fear that even if we were to find a way to raise all U.S. incomes above the poverty line, we would still be hearing about and talking about income inequality.  Why?  Because inequality relies on relative comparisons whereas poverty relies on absolutes.  We can measure absolutes, but relative comparisons require judgments.

Let me give an extreme example to hopefully illustrate my point.  I live in a bubble–that's what we call our bucolic suburb, 'The Bubble.' It is one of the wealthiest towns in the state (if not the country).  If I were to compare my income to those in the bubble, I would probably fall somewhere near the median.  Not poor by any means, but the distribution of income in the bubble puts me in the middle.  The fact that there is a distribution means that there will be inequality.  Of course, this level of inequality is small relative to comparisons at the state or national level, but that is exactly my point.  There are times when I get jealous because my income doesn't match up to those around me.  It somehow seems 'unfair.'  They have more than me.  But I fully recognize that my jealousy is my problem.  This is not the result of any market or government failure.  It is a consequence of my own human condition–I am a sinner and I am jealous.  There, I said it.  Whew.

But seriously, I don't know how to make comparisons between income distributions.  If you look at my income at the national level, I am suddenly no longer in the middle of the distribution and I am rapidly sliding into that class of people who are the target of attack in political discourse: The X% (GASP!). 

But why stop at the U.S. borders?  If we look globally, suddenly most of the U.S. population falls into someone elses X%.  The World Bank sets the level for extreme poverty at $1.90 per day AFTER adjusting for differences in purchasing power. 

Read that again. 

$1.90 per day. 

That's $693.50 per year.

(After adjusting for differences in prices!)

Do you know what percentage of the U.S. population falls below this extreme poverty line?

I'll give you a hint.  The answer starts with 'Z'.

So what is my point?  My point is simple.  Income inequality is relative.  In order to solve the income inequality problem we have to answer questions like:

"What is an equal distribution?"  "How much is too much?"  "Should we care about the starving in Africa when considering the income distribution in the U.S.?"

And I don't know how to answer those questions–my economics training has failed me.  But neither do you.  And neither does Donald Trump, or Marco Rubio, or Hillary Clinton, or Bernie Sanders.  No one can answer those questions because there is no single answer.  The answer as to which income distribution is the best distribution is an individual answer.  It depends.  It depends on who you are and who you are comparing yourself to and how jealous of a person you are.

Inequality is relative, but poverty is not.

Is it reasonable to say that Warren Buffett, or Bill Gates, or the Walton Family should have less simply because they have more than most?  It might not seem 'fair.' but the fact that they have more than me or I have more than someone else is not a social problem, it is an individual problem: 'I don't like them having more than me.  It's not fair.'  Doesn't it seem more reasonable (more objective?) to say, let's make sure everyone has at least enough to survive and damn the distribution of the rest.

Now that I've convinced you that I am right, how do we solve poverty?

Ensuring a minimum standard of living for everyone requires one of two things: 1) Either finding more money for those who are below the standard without decreasing the income of anyone above the standard, or 2) Redistributing some income from some of those above the standard to those below the standard.

The first case requires finding money laying on the ground.  In other words, there has to be a way to rearrange things so that nobody is made worse off.  Economists call this a Pareto-improvement.  But to get a Pareto improvement, there has to be an inefficiency somewhere in the economy (resources left unspent).  But market-based economies work in such a way as to minimize inefficiencies; so there aren't a whole lot of dollars laying on the ground.  This is both the beauty and the beast of market-based systems.  Market-based systems ensure that the economic pizza is as big as possible, but the market doesn't give two craps about who gets what sized slice of pizza–and unfortunately some get very small slices.

So to fix the problem we need to figure out a way to cut the slices more evenly.  The problem is, as soon as you start changing the sizes of the slices of pizza, the whole pizza shrinks.  This isn't an opinion, or an argument against redistribution, but rather an economic reality–unless there are inefficiencies in the allocation of resources, redistribution of income will shrink the size of the economic pie.  The question is then, how much smaller of a pie are we willing to tolerate in order to generate a more 'fair' distribution of the pie?

My answer has already been stated:  We need to be willing to tolerate enough redistribution to ensure we maintain a minimum standard of living for everyone.  Beyond that, we need to get out of the way and let the markets do their thing and create as large a pie as possible given the no poverty constraint. 

But won't that allow inequality to persist?

Yes.  But inequality is only bad in a relative sense and the degree to which inequality is bad depends on how much inequality your own jealousy allows you to tolerate. 

I'd rather focus on solving poverty and then making sure everyone has equal opportunity to play equally in the market sand box.  Our focus should be on ensuring the minimum social safety net possible (what should Social Security, Unemployment, SNAP, Medicare/Medicaid look like to ensure a minimum standard of living for all?), eliminating inefficiencies (correcting market failures), and eliminating barriers to opportunity (end discrimination in all forms so that everyone is playing by the same set of rules and has the same opportunities). 

Beyond that, if you don't like the distribution of income, that is your problem…not the government's.

My name is Tim and I am NOT running for President of the United States–although you can feel free to write my name in because it would be cool to get a few votes.

*I do not speak for all economists.  I am simply basing my opinion on my own training and thoughts from an economics perspective. 

**I'm not sure I believe the numbers that this calculator produces, I am just using it to illustrate a point.  The actual numbers might be different, but the point still holds.