Oversimplifying Income Inequality
Clemens, Jason, Winnipeg Free Press
Writer H.L. Mencken noted that "there is always an easy solution to every human problem that is neat, plausible, and wrong."
There may be no greater contemporary illustration of Mencken's warning than the debates surrounding inequality. People on both sides of the political spectrum repeatedly get this issue wrong, which risks solutions that could make matters worse.
Let's begin with those who consider themselves more conservative or libertarian. Their overwhelming response is to deny or ignore inequality as an issue. Their operative assumption is that much of the inequality observed is temporary and, at its root, a function of economic success. They are certainly correct on the former but view inequality too narrowly on the latter.
According to Statistics Canada, one-quarter of those who started in the lowest income quintile (bottom 20 per cent) in 2008 moved to a higher quintile within a year. When the period is extended to five years, 43 per cent of those in the lowest quintile had moved to a higher quintile. One could say that the solution to much of today's inequality is tomorrow's income mobility. The worst possible solution, then, would be to implement policies that impede such mobility.
Inequality, however, is not always a result of successful entrepreneurs and businesses providing citizens with goods and services they want at a price they're willing to pay. Indeed, inequality that results from hard-won economic success is not all that troubling. In fact, substantial amounts of inequality are a result of government protection (monopolies and trade restrictions) and other special privileges (cronyism) bestowed on individuals and businesses by government.
Conservatives make a terrible mistake when they are complacent about inequality arising from such special privileges. No less an authority than Adam Smith, intellectual father of modern economics, warned sternly against the dangers such abuse of government power entails.
While the dismissiveness of inequality by those on the right is unacceptable, the over-simplification of inequality by the left is potentially much more damaging.
Those who want more redistribution of income and wealth tend to put every inequality statistic to work in the service of this goal. Inequality is not at all simple, but is rather terribly complicated. If we don't go to the trouble of understanding how it works, our solutions will be ineffective at best, and deeply damaging at worst.
Consider just a few of the many complications that exist in analyzing inequality. First, many of the inequality comparisons used are based on income before the effects of taxes and transfers are factored in. Yet the whole edifice of transfers, and the progressive tax system that finances it, is one of the most important ways in which inequality is tackled. …