Politics Ombudsman: Income Gaps and Society Safe Zone

Whats the problem?

TWO tries not to go overboard into political arenas, however one theme thats been repeated in articles and on television news has moved me to comment. This Washington Post article, discussing President Obama's tax plan, contains the following statement: "Few analysts dispute the notion that the gap between rich and poor has widened to a troubling degree over the past three decades."

This sort of "troubled by the income gap" statement is something that has, somehow, entered a "safe zone" that society saves for things that are totally beyond reproach... like telling people that U2 is your favorite band, admitting to drinking Starbucks and saying that you loved Heath Ledger's performance in Dark Knight - these are safe, safe statements. No one will question any of this, because its in the Society Safe Zone. You can know nothing about economics or politics, but if you say "you know, the gap between the rich and the poor is just getting too large" and then vaguely mention something about "economic injustice" everyone will nod their head.

Whats wrong with a little income gap?

An income gap is a direct consequence of living in a capitalist society. Picture a graph with income on the y access, and people in order of wealth across the x access. In a perfectly communal society, there is a horizontal line running across the graph - because there is no wealth differential for anyone. In any capitalist society, there will be an upward sloping line to some extent, rewarding those who, through hard work, luck, or a combination or both, create more value for themselves (and arguably for society as a whole). So the question is, how steep should that line be?

The truth is, no one knows. To be certain, you don't want all capital in the hands of a very few. On the other, you don't want to provide disincentives for innovation and success. While the matter can be debated, there is no evidence that the income gap is now "troubling" whereas 30 years ago, it was "fine."

TWO would also argue that income gap is not an overly meaningful statistic, short of the extreme examples mentioned above. A far more relevant measure of the strength of the economy is income relative to an indexed cost of living. Consider a situation where in year X, the cost of living for the poorest half of the country is $1. The poorest half of the country makes $1 per capita, and thus is just making enough money to survive. The richest half of the country makes $10 per capita, more easily affording and surpassing the cost of living. In year Y, the cost of living stays at $1, but the poorest half of the country is now making $5 per capita. The richest half of the country is now making $100 per capita. The income gap has increased in year Y as compared to year X, but the poorer half of the country is far better situated in year Y, earning 5 times more than the hypothetical $1 cost of living.

The fact is, the percentage of people below the poverty line has generally fallen over the last 20 years, prior to the current meltdown. During that same period, the poorest 3/5s of the country's per capita income has increased anywhere from $2k to $6k in real dollars ($10k to $30k in nominal dollars). While cost of living is inherently hard to measure, the poverty figures mentioned above would seem to suggest that adjusted rents and food baskets have not increased more than the adjusted incomes.

If anyone's wondering what I've done here, its that I've just dropped knowledge right in all of your eye pieces.

Times are tough - TWO thinks people should be asking the right questions and the government should be taking steps to actually help people and the economy in the long run. If the wealth distribution is not ideal, then TWO is all for taking sane steps to adjust it, but it is an issue that should be debated and researched. TWO is not, meanwhile, in favor of using buzz phrases and Robin Hood talk that distracts from the actual problems at hand.

In conclusion, Jim Cramer supports TWO as Fed Chairman.