Tuesday, December 6, 2011
The Power of Inequality
As the Occupy Wall Street movement fizzles out with the approach of colder weather, it is worth revisiting the Occupiers’ central argument. Namely, that income inequality between the top 1% and the rest is somehow relevant to the present economic crisis. However, this is a dangerous diversion from the heart of the problem. Instead of focusing on income inequality, we as a society should be focused on improving economic growth.
Income inequality is an inescapable reality. Even in famously egalitarian countries like Sweden or Norway, there is no such thing as perfect equality. Whenever people engage in economic activity together, there is some element of wealth creation over what could be achieved if each person had to fend for himself. Although on a small scale it is possible to apportion wealth creation evenly to all participants, history has shown time and time again that it is more efficient to apportion the rewards of economic activity in proportion to individual contributions.
Furthermore, according to recent economic data from the CIA Factbook, there is no real correlation between income inequality and economic growth. As an example, both South Korea with a low Gini coefficient of 31.4 and Mexico with a very high Gini of 51.7 have similar growth rates. Conversely, Japan and India have similar Gini coefficients, but the annual GDP growth for India is more than double that of Japan. Indeed, an academic paper on the subject concludes that, “Evidence from a broad panel of countries shows little overall relation between income inequality and rates of growth and investment.”
Worst of all, policies which are intended to promote income equality are not always successful and almost never contribute to greater prosperity. When pursued on a large scale, such policies can result in economic disaster as was the case during Stalin’s infamous five-year plans and Chairman Mao’s “Great Leap Forward,” both of which lead to crop failures and the deaths of tens of millions of people from starvation.
Income inequality is a distraction from policies which contribute more directly to promoting prosperity. Numerous studies have demonstrated the relationship between strong property rights and economic growth. As the evidence shows, Americans do not need the government to tell them how to live their lives. If the government fulfills it central purpose of protecting our long-cherished rights of personal liberty and private property, Americans will be free to pursue their own aspirations of happiness and prosperity in whatever way they see fit.