Is Income Inequality Good?

Which is more desirable, an income spread in which the rich are far more rich than the poor, or a spread that is more even, in which the rich are merely several times more rich than the poor?

There is no question how conservative Republicans would answer this question. They want it like it is, with extreme inequality. Their theory is that this inequality is important for the economic health of the country, because investments by the rich are the engine that drives the economy, the “means of production”.

Liberals have quite a different answer. They point out that more equality results in higher tax revenue, upon which the operation of the government and the economic health of the country depends entirely. Who is right?

If conservatives claim to be right, they must then explain how it is that although income inequality is now the highest since just before the 1929 market crash that brought on the Great Depression, we are stuck in a serious recession and all their wealth has done nothing to change that. In my opinion, they are simply wrong that wealth drives the economy, because there are three other factors of equal importance: labor, material, and purchasing power.

The most important goal in overall economic health is to generate sufficient tax revenue, which is actually a secondary effect of high employment and good wages.

It is not the wealthy who drive the economy, it is the middle class, who pay most of the taxes the government collects. The middle class buys washing machines and televisions, goes to restaurants, sends their kids to college, and takes vacations. The middle class doesn’t just supply labor; it also provides the demand for goods. And to do that, the more income equality the country has, the more tax the middle class provides to the government. The more income they have, the more they can afford to buy, and the more stable the economy is.

Sort of the opposite of what we have now.

When employment and wages are low, as they are now, tax revenue becomes inadequate, as it is now, and we are in trouble, as we are now. The rich are doing absolutely nothing to get us out of this situation. Their Bush-era tax gift to millionaires cost the country 1.7 trillion dollars in lost revenue over a decade, from whence cometh much of the present budget deficit and national debt that are of such great concern to Republicans these days. Great wealth is quite obviously not the engine driving the national economy. It is the anchor holding us all at the bottom, running out of air.

The GINI Index is a measure of income inequality. The higher the GINI coefficient, the more inequality there is. But how unequal are we? ThinkProgress reports that income inequality in the United States equals that of Uganda, and is worse than in countries like Pakistan, Ethiopia and the Ivory Coast. Statistics from the CIA Factbook show that income inequality is also higher in the US today than at any other time since the 1920s.

The US ranks 39th of 136 in the GINI Index: 97 countries are better, only 38 worse. 14 of the worse are in Africa, 15 in Latin America and the Caribbean. We’re right in there with Uganda and Ivory Coast. Our income inequality is pretty high, pretty bad.

The real problem is not the GINI coefficient itself, however, because there are many other things that make a country desirable or undesirable. The real problem is that our present inequality explains much of the economic mess we are in, as it did in 1929, and that is because middle class pay has stagnated, and unemployment is high. The result is inadequate tax revenue and all the myriad problems that follow.

In other words, it is simply false that income inequality is good.


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