Good Inequality, Not Bad Inequality

Inequality of results is often viewed as a bad thing, as though the good fortune of one comes only at the expense of others. It is the “fixed pie” or win/lose concept of society. Under this type of thinking, the ideal situation is a perfectly even spread of income and wealth, with nobody poor but, necessarily, nobody rich. It is, undoubtedly, rooted in good intentions, where the proponent wants to help the poor, but helping the poor in this way can only come about by hurting the not-poor, hindering economic vitality.

Another way of looking at inequality is that any time one person becomes very successful and prosperous, other not-as-successful people are left behind. He or she makes society less equal. That, in itself, is never a bad thing. Think of the many young, upstart tech giants. They became wealthy because they offer something that millions of people are willing to pay money for. Progress in society comes from people figuring out how to make a profit serving others. The more people that they can serve at a profit, the more profitable they will be. Profits are the fuel for growth, the resources for innovation.

Even with the second scenario, there is a dark side. All too frequently, people get rich through connections with politicians, through protectionism, through legalized monopolies, through subsidies funded by taxpayers, and a host of other methods. It is the redistribution of wealth from the not-rich to the rich. One important source of this kind of inequality that most people don’t consider is the constant devaluation of the currency and the economic booms and busts caused by monetary manipulation that disproportionately hurt the not-rich. Some people get very wealthy at the expense of others. The problem with this kind of inequality is that it is parasitic. It is the win/lose variety. To complicate matters, even some of the legitimate market winners also engage in politics of win/lose, so some of the inequality they cause is good, some of it bad.

Angus Deaton, a Nobel Laureate in economics, spent much of his career studying consumption, poverty, and welfare. His latest book, “The Great Escape: Health, Wealth, and the Origins of Inequality,” refers to the old book and movie, “The Great Escape,” in which several hundred prisoners escape from a Nazi prison camp by digging tunnels. He noted that those who escaped were free, their lives were made better. Those who stayed for whatever reason, were left behind. The freedom of the escapees did not make those who stayed any more captive or less free. One group getting better did not make the other group worse.

That is similar to those who escape poverty. Those who are left behind are not hurt in any way by those who move on. There has been talk of the hollowing out of the middle class in America, but what has happened to a large extent is that more people moved out of the middle and into higher earning and wealth brackets. The same applies. The movers don’t hurt the stayers.

He also discusses, however, bad inequality, when those who escape destroy the escape routes behind them through protectionist politics or imposing tax burdens on the masses so they can enrich themselves with taxpayer handouts and all forms of corporate welfare.

As more people escape lower levels of income and well-being, they blaze a path for others to do the same. We need to avoid blocking escape routes through over-regulation, over-taxing, and over-protecting. The job for us is to try to ensure that bad inequality is minimized, which can only be done my minimizing the power that politicians have to sell to those who already escaped.