Income inequality has always been a part of the human condition. When men hunted for food for their families, the families of the best hunters always had more to eat than their neighbors. Under dictators and kings, friends and family have comprised the wealthy while most of the rest of humanity under their rule have been peasants, paupers and slaves.
While living in the Czech Republic in the early 1990s, the inequality of Communism was quite clear. When entering a neighborhood of party officials it was obviously different, and erased any confusion over the myth of equality in a system where a few ruled the rest by force.
Today is no different. Individual ability, motivation, education and access to power, especially government power, often differentiate the top strata from the bottom in any society. The question is which of these factors we want most prevalent in our society when success is determined – those indicating merit or those indicating the right government connections, i.e. corruption.
When government is allowed to determine who succeeds and who fails, not only are the least competent often elevated to the top, but the incentives for producing the best product, offering the best service, and meeting the needs of the customer or client become warped. For those who think they already are, I would argue that not only is government already too involved in picking economic winners and losers today, but that the alternative to what we have is substantially worse.
According to a report by the OECD released in 2008, the three countries that have bucked the trend of growing inequality from the mid-1980s through the mid-2000s are Greece, France and Spain. None of these countries are exactly models of fiscal sustainability, and none have been able to create an environment where businesses are encouraged to hire for any reasonable period of time.
In all three countries during the period beginning in the mid-1980s, the rate of unemployment has ranged anywhere from 8 percent all the way up to 25 percent with few exceptions. Crisis rates of unemployment in the US are the norm for these countries.
Greece has generally hovered around 10 percent, while enjoying a multi-year spike now over 20 percent. France has historically been in the 8 – 10 percent range with a few dips below for short periods. Spain has seldom fallen below 10 percent, generally in the 12 – 17 percent range, and has had three climbs to nearly 20 percent within that period.
The report also pointed out that the increased differential in incomes isn’t because the poor and middle-class are becoming poorer, rather it is because the upper class are becoming richer. This would seem to indicate that those societies that are decreasing the gap between rich and poor are generally doing so because the rich aren’t becoming richer and suggests a lack of dynamism, creativity, and vibrancy in those economies, at least when compared to other developed nations.
Beyond the idea of income inequality it is interesting to note that, “the difference between income and wealth disparities is largest in countries with relatively equal distribution of incomes, such as Germany and Sweden.” In countries where the government provides more services and benefits for the lower-income population, while at the same time potentially disincentivizing growth for top wage earners, there remain the largest differences in wealth accumulation.
In other words, those who earn their own money, even while being forced to support large percentages of the population with that money, are still substantially better at saving and investing it than those who are simply given benefits. This has led to a greater disparity in income “from capital: dividends, interest, rent, capital gains and so on.”
Two factors significantly improve one’s chances of living above the poverty line. The first is marriage before children; single-parent households are three times as likely to be poor. This means that other workers in society take the place, financially, of the missing parent, which takes money out of the pockets of families often already struggling to make ends meet. The second is work; households with at least one working adult have very low rates of poverty.
The greater the dependence on government for support and subsidies, the greater will become the gulf between the rich and the poor, as well it should be. It is a consequence of comparing relatively stagnant wealth transfers meant for short-term use to keep people from starving to death with what ought to be dynamic, innovative economic transactions.
The alternative is a quasi-socialist economy that closes the gap between rich and poor just before the whole structure crashes and burns or the government is forced to do what socialist Spanish Prime Minister Jose Luis Rodriguez Zapatero has been doing: drastically cutting spending in order to “avoid bankruptcy.”
Let’s not play the game of the Greeks, 75% of whom want to stay in the Eurozone while at the same time casting 70% of their votes for anti-austerity parties, but rather face what is rather than imagine what can never be.