Ongoing economic growth produces growing inequality

August 22, 2023. NOTE: 98% of the following was written in 2015-16, during my final sabbatical from teaching, written as part of a complete manuscript for a book on "Managing sustainable development." I had an 'offer' to publish the work, but it was for $1200 to convert my draft into a final, copiously edited manuscript...and nothing else. No royalties. No grant. In essence, no reason to do the work for the publisher to profit. Immediately below begins my analysis of the impact of economic growth on poverty and income inequality.

The nature and history of poverty. Poverty is a harsh reality. The bad news is that for many – perhaps a billion people -- poverty persists around the globe. The good news is that

the percent of the people in the world living and dying in poverty has declined in the past two hundred years, from over 90% of people living in poverty to less than fifteen percent now living in poverty and, prior to the pandemic – that low percentage had been continuing to decline. The fundamental harsh reality is that poverty is the natural state of man and the nature of birth. Every person is born poor – helpless, with no personal resources, completely dependent on others for survival or otherwise without hope – and to be sure, every person dies poor, since at the moment of death all hope, possessions and opportunity disappear. Of course, parents or society can have great wealth, but outside parental instinct or social conscience, there is no obligation to share wealth with the child. And of course, at death material wealth transfers to one or more parties. If a billionaire worth $7.8 billion died and her wealth was distributed evenly to all the people of the world, the one dollar each person would receive would represent less than enough to survive one day and after that day, the wealth would be gone. This is the worst form of social justice: Equally shared wealth consumed in a day.

Poverty is an absence of resources or opportunity; it is an absolute term. Some cultures and countries prefer to define poverty in relative terms, e.g., income less than half the national average income. As absolute poverty has declined worldwide – by almost 70% in the last thirty years – relative poverty and income inequality have become – for some – the ‘new’ measures of social justice.

On Jan. 8, 1964, President Lyndon B. Johnson used his State of the Union address to announce an ambitious government undertaking. "This administration today, here and now," he thundered, "declares unconditional war on poverty in America."As LBJ stated it half a century ago: "to give our fellow citizens a fair chance to develop their own capacities." He sought to give poor Americans "opportunity not doles," planning to shrink welfare dependence not expand it.

The collapse of marriage in low-income communities has played a substantial role in the declining capacity for self-support. In 1963, 6% of American children were born out of wedlock. Today the number stands at 41%.[1]

Social justice is often mistakenly defined as relatively equal incomes – ‘fair’ income distribution or income equality -- within a country. The problem with this definition is that ‘fair’ is a vague, personal term and applying the measure to a single country is arbitrary and misleading, i.e., some countries will ‘do better’ than others, half of the countries will be ‘below average.’ Social justice is better understood as equal treatment before the law or within the culture or as the presence of opportunity. Social entrepreneurship – micro funding, teaching the village, providing products, services and opportunity for the poor – is sustainable social justice.

Income inequality refers to a perceived ‘unfair’ distribution of national incomes. The popular measure of this construct is the Gini index.[2] The “Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.”[3] Surprising[4] (at least to some), income inequality increases as economic growth increases. There is an apparent trade-off between income growth and income equality; which better serves “the poor”?

In The Price of Inequality, Joseph Stiglitz asserts that income inequality causes stagnant economic growth. The last two hundred years of global income, wealth and poverty evidence defy this hypothesis. Instead the evidence suggests that economic growth increases income inequality. Further, as Toynbee noted years ago, economic growth declines when wealth reaches a level that increases leisure. Smaller, poorer economies grow faster than richer, larger economies, especially when the rich economies have ‘peaked’ and they shift from producing to consuming wealth. Thus, the better explanation for slow economic growth is strong economic growth in the past.

Perhaps more important than the global economic history of the past two hundred years has been the growth in political freedom, from a world dominated by monarchies, despots, dictators, and the military, to a global politic moving strongly – although not always monotonically -- towards markets, political freedoms, personal liberty, and elected leadership. And freedom begets income inequality.

“The fundamental producer of income inequality is freedom.” If you have freedom, you will also have inequality. It’s part of the natural order of things. It does not follow that if you take away freedom you will thereby produce more equality, though that is a logical fallacy (or a cynical rhetorical gambit) employed by socialists.[5]

Why does the majority of complaints about the inequality of the one percent come from the five percent and not the bottom fifty percent? Most likely, those at the bottom are more concerned with improving their own lives, prospects than they are in reducing the gap between rich and poor, or in increasing taxes on the wealthy (rightfully assuming that that increase will not improve the lot of the poor anyway), or in destroying the “one percent”. The wealthy complain most about the wealthier. Re-distribution of wealth and income through taxation does not improve wealth or income of the poor. Entitlements, charity, benefits, subsidies, and other forms of short-term or one-time fixes does not increase income and the increase in wealth is temporary.

Immigration-fueled inequality. With 45 million people living in the United Sates who were not born in the United States, one in three people in the United States not speaking English at home, and the vast majority of minority births and child-rearing occurring in fatherless households (see below), the lowest income quintile in America faces unprecedented challenges in providing educational and economic benefits to the ‘new poor’. Traditional opportunity in public education has been seriously eroded: Public school systems have students speaking over a hundred different languages, students in homes less able to support education, childhood hunger, ethnic clashes and increased levels and magnitudes of school violence. Families provide the greatest opportunity for success and, in their absence, the greatest threat to income and social mobility. A two-parent family (see below) with an employed adult provides a significant head start in the race for personal prosperity.

In broad strokes, childhood poverty is primarily present in single-parent households which are, in themselves, low-income households. These poor single parent with poor children may explain half of poverty in the United States today. The second large factor in poverty is low-skilled immigrant persons and households. While there is a media narrative of the successful immigrant entrepreneur or single immigrant mother working three jobs or immigrant children with superb academic achievements, this is probably not representative of the forty-five million people not born in the United States. The remaining significant factor would be the homeless, the chronically ill, those living off government support alone, and those able-bodied unwilling to seek employment. In a country of almost 335 million people, the 'working work force' remains close to 140 million people, supporting themselves and almost 200 million people not in the work force, primarily those over age 65 (50 million), those under eighteen (80 million) and full-time college students (12 million).

Equal opportunity and due process do not lead to equal outcomes.

Equality advocates ignore the differences among (1) equal opportunity, (2) equal treatment in process, and (3) equal outcomes. You could give every marginalized minority group a free public education and admission to Harvard, but that would have little to do with how well they succeed in school, in life, in incomes or in their careers. The dirty secret of equal opportunity is that it does not produce equal effort, equal results, or equal outcomes in wealth or income. As long as people make choices with their opportunities, there are going to be great differences in the outcomes.

Economic growth can be facilitated by equality in opportunity, e.g., property rights, and equality in process, e.g., rule of law. Growth can also improve equality in both opportunity and process. As either a cause or result of equal opportunity and equality before the law, economic growth is still most likely to increase income variation. And the starting line of equal opportunity will never be perfectly equal. People come to the starting line with personal, social, financial and cultural differences, some of them advantageous and some of them problematic.

The original United Nations’ Millennium goals focused on the eradication of absolute poverty. The resultant success in reducing global poverty was due, in part, to increasing inequality, as all income quintiles worldwide increased. Now the United Nations has shifted its attention to relative poverty, failing to recognize that strong economic growth helped all income quintiles.

Disingenuous Gin

The Gini coefficient (or Gini index) is a statistical measure of dispersion used to indicate the income distribution of a country’s residents. The Gini coefficient is the most commonly used measure of inequality. Ranging in value from 0.0 to 1.0, a higher score represents a higher level of inequality. A score of zero indicates perfect equality of incomes within that country.

1. While perhaps a strong majority of Americans agree that more equality is better than less equality in incomes, there is not a useful benchmark as to the appropriate level of equality, as measured by Gini.

2. Gini is most often used to measure within-country disparities. While global Gini estimates – between 0.6 and 0.7 -- have been offered, they remain estimates across over seven million people.

3. While Gini often includes the effects of taxes and transfers, it does not measure non-cash benefits, e.g., educational expenditures per person, healthcare.

4. Income and wealth distribution can vary greatly within a country. Sweden can show a low Gini coefficient for disposable income of 0.31 thereby appearing equal, yet have very high Gini coefficient for wealth of 0.79 to 0.86 thereby suggesting an extremely unequal wealth distribution in its society.

5. Gini is a point-estimate of equality at a certain time that ignores life-span changes in income. Increases in the proportion of young or old in a country will suggest changes in equality, because people generally have lower incomes and wealth when they are young than when they are old. The age distribution within a population and mobility within income classes can create the appearance of inequality when none exist taking into account demographic effects. This is especially noteworthy in the United States, where taxation, transfers, benefits college debt, and entitlements have shifted wealth away from the working, poor young (ages 23-28) to the retired wealthy (ages 65-70).

6. The Global Rich List[6] offers an alternative measure of global income distribution, asserting that an American’s income of $33,000 places him or her in the top one percent of global incomes.

7. Gini may be informative within a country but it tells us less when making comparisons across countries. A high level of equality is of little value if there is a low average income. while both Bangladesh (per capita income of $1,693) and the Netherlands (per capita income of $42,183) had an income Gini index of 0.31 in 2010, the quality of life, economic opportunity and absolute income in these countries are very different, i.e. countries may have identical Gini coefficients, but differ greatly in wealth.

8. Equality in poverty drives economic immigration. Gini does not appear to matter to economic refugees and an influx of economic refugees will also likely increase the income gap in the short term.

Does income equality impact prosperity? Yes, if you include Gini in your calculation of a prosperity index. Equality in opportunity and social mobility do impact prosperity but that does not necessarily reduce income inequality. Social mobility is a two-way street, and for someone to climb from the bottom income quintile to the top quintile – upward social mobility – requires downward social mobility, or recent, poor immigrants to take their place on the bottom quintile. The former middle class, built on the wages of large industrial corporations, has experienced significant downward social mobility, while the educated and political elite have prospered. Manufacturing wages have declined while wages in the high-end service industries – software development, technology and the like – have provided significant upward social mobility. Basically, social mobility is a zero-sum game, especially when mobility is measured across countries, and not just within countries.

In 1815 we had a more equal world but only because of the one billion people, more than ninety percent lived in poverty. In 1815, global GDP was about one trillion dollars; today it is about $75 trillion. Today there are a comparable number of people in poverty in the world, but we have more six billion people who are not poor. Population increased by a factor of 7.5 while GDP increased ten times faster.

A popular yet disputed [7] treatment [8] of wealth inequality in the United States fails to understand the impact of equal opportunity and due process in generating significant variance in outcomes, e.g., wealth. Even President Obama has difficulty with these possibly conflicting rights when he decries income inequality yet acknowledges, “Here in America, we don’t guarantee equal outcomes,” Mr. Obama said. “But we do expect that everybody gets an equal shot. We do expect everybody to go as far as their dreams and hard work will take them.”[9]

Despite large pockets of war, corruption and despair, life is generally improving for most people around the globe. Increased political and economic freedom trends have led to strong global economic growth, even as the developed economies have stagnated or slowed. Low birth rates in developed economies and high birth rates in less developed economies have concentrated wealth for the rich while diluting wealth for the poor. Yet with strong economic growth across the board the rich are getting richer and the poor are getting richer, while income inequality increases. Rather than being a hindrance to economic growth, income inequality is the result of strong, consistent, global economic growth. Countries with the greatest growth are likely to show the greatest increases in inequality while those with low economic growth – and often low population growth – demonstrate less income and wealth inequality.

The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.[10]

Mitigating, facilitating and concluding thoughts

The calculus of economic growth and inequality is quite simple. Economist John H. Cochrane noted that had the American economy had grown at its present 2% rate since 1950, income per person by 2000 would have been $23,000 and not the $50,000. Instead, stronger growth led to higher average incomes and greater variance and inequality. While the math is quite simple, political reality is not. Economic growth is not the only factor in changing the likelihood of more or less equal incomes over time. Other factors can facilitate economic growth and equality. These include political freedom, property rights, the rule of law, education, social mobility, and wealth transfers. Government policies and politics will most likely inhibit economic growth, often in the name of promoting economic growth and equality while often achieving the opposite results. And the real impact of growth can only be appreciated over a relatively long time horizon – at least ten years and preferably twenty or thirty years – and can be distorted in the relatively short period of a presidential term.

Immigration, retirees, single-parent households, structural unemployment, and working age adults not in the labor force have made dampened upward social mobility; these are more a matter of personal choice than public policy decisions. With increased political and economic freedom comes an increase in the ability to fall down the social ladder; new and growing economic segments are becoming entrenched in the lower income quintile in spite of progressive taxation, liberal policies, and economic freedom.

Free-market capitalism requires two fundamental rights, the right to own and the right to trade. A variety of factors, including political rhetoric, taxation, the social culture, and antisocial individual behavior, can reduce the economic potential of these two conditions, sometimes as a result of attempts to counter real or imagined externalities of the free market. A culture of entrepreneurship can leverage these two fundamental rights, just as excessive government intervention in the economy can stifle their effects.

A contrast between the American and French 18th-century declarations of independence shows that the French declaration of independence espoused natural rights and equality in process or treatment ("All the citizens, being equal in the eyes of the law”). The declaration emphasizes the supremacy of the common good and limits liberty to behaviors that do not harm others. This allows a definition of equality that places individual freedom secondary to pursuing outcomes for the common good.

Any asserted immorality of income inequality remains problematic when, for the vast majority of people and an even larger majority of the poor, absolute poverty, not relative inequality, remains paramount. The poor, in effect, desire more to be better off, not equal to the top fifty, ten, five or one percent. And there are profound cultural differences as to both the magnitude of and solution to inequality. The Irish music legend, Bono, noted, “In the United States, you look at the guy that lives in the mansion on the hill, and you think, you know, one day, if I work really hard, I could live in that mansion. In Ireland, people look up at the guy in the mansion on the hill and go, one day, I'm going to get that bastard. It's a different mind-set."

And with equality, the math works against re-distribution. As an illustration, the total financial worth of the 2015 Forbes 500 wealthiest was just over $7 trillion. If their entire fortunes were to be re-distributed in shares to the ‘lower’ seven billion, each person would receive shares worth $1,000 which would generate an annual interest income of about $30, which is about the average global daily wage. And much of that wealth was created – not inherited -- in the last fifty years, including Microsoft, Apple, Google, Amazon, Uber, Facebook and other firms and fortunes that did not exist fifty years ago. Such a top-down re-distribution of wealth is similar to the distribution of energy resource shares used to privatize national resources for the opening of the post-Soviet economy. The long-term result is that the public sold their shares and Russian energy wealth accumulated in the hands of few individuals.

The fundamental issue remains: Somewhat heroically assuming a common understanding of and agreement an ideal level of global equality and global economic growth, governments will continue to face the difficult trade-off produced by global expansion of personal liberty and free markets that produce the economic growth can increase inequality, while also struggling to reconcile domestic and global differences in levels of equality and economic growth.

[1] http://online.wsj.com/news/articles/SB10001424052702303345104579282760272285556 [2] Google images: gini index 2012 [3] http://data.worldbank.org/indicator/SI.POV.GINI [4] http://planetsave.com/2012/01/29/rising-tide-sinking-boats-economic-growth-in-g20-nations-is-increasing-inequality-and-driving-climate-change/ [5] Roger Kimball. Why the left hates freedom. http://pjmedia.com/rogerkimball/2015/10/18/why-the-left-hates-freedom/ [6] http://www.globalrichlist.com/ [7] Tom Tyler. Procedural Justice Shapes Evaluations of Income Inequality: Commentary on Norton and Ariely (2011). Perspectives on Psychological Science 6(1) 15–16. [8] Michael I. Norton1 and Dan Ariely. Building a Better America—One Wealth Quintile at a Time. Perspectives on Psychological Science 6(1) 9–12. [9] Douglas Belkin, Byron Tau and Caroline Porter. Obama Makes Case for Free Community College. Wall Street Journal. January 9, 2015. [10] James Madison. The Federalist, No. 10. http://www.constitution.org/fed/federa10.htm