Thursday, January 9, 2014

The Economics of Inequality

Imagine that two families, otherwise identical, have substantially different savings rates.  One family saves twenty percent of their income annually and invests that money in a stock market index fund.  How do they save?  They buy used cars, shop at discount stores, and take fewer and less expensive vacations.  The other family settles for nothing but the best.  They buy the latest fashions in cars, clothes, electronics, and they take very expensive vacations in posh resorts.

What happens thirty years later?  The frugal family, assuming they make $ 50,000 per year in income, will have millions of dollars in wealth accumulated from their thirty years of thrift. They have joined the "one-percenters" through thrift and abstinence. What about the other family?  They will have nothing, except what government entitlement programs provide. 

We now have substantial wealth and income inequality that arises because of the difference in thrift habits of two, otherwise identical, families.  Is this unfair?  Should the profligate family now be given half of the wealth accumulated by the thrifty family to "balance things out" and "restore fairness?"

People make decisions and those decisions have outcomes.

The fact that there is income and wealth inequality tells us very little.

Imagine the poorest citizens in America had an income of $ 1 million per year and a net worth of $ 10 million, while the richest had 1,000 times these numbers (in 2014 dollars).  Is this a cause for alarm?

Would it be an improvement if the poorest Americans had $ 10,000 in income and no net worth, so long as the richest Americans had only $ 11,000 in income and $ 100 in net worth?  Is this a better outcome?

What really is the goal of economic policy?  Is it better to impoverish everyone to achieve a more equal distribution of wealth and income?  That seems to be the current mantra of the Obama Administration.

Helping the poor achieve success is not what Obama has in mind.  Instead, reducing the wealth and income of the one-percenters is the Obama grand plan, even if the ultimate effect of such a policy is to make the poor worse off than they are now.  The new mayor of New York seems to follow this playbook as well.

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