Monday, August 22, 2011

Economic Freedom vs. Income Equality

Recently, in the "Comments" section of my post, The Immorality of Taxation, some clips of Jon Stewart discussing his views on taxation and income equality were brought to my attention. One thing that really caught my attention was Stewart's citation of the Index for Income Equality and his mockery at the United States' position at #64.


What I'm referring to starts at minute 2:55. (By the way, the data he shows  doesn't seem to gel with the table at Nationmaster.com, which ranks the US at #52. Is his information not quite up-to-date? But I digress.) "The United States of America is not a Third World Country, by any measure, except perhaps Income Inequality, where we rank worse than the Ivory Coast..." states Stewart, to the applause and laughter of his audience. To take this at face value, to accept that we aught to be ashamed of ourselves for this ranking, would be premature. Let's take a closer look.

Income Equality: What does it mean?

In a free market economy, there will naturally occur differences in income. Some jobs are higher paying than others (brain surgeons versus ditch diggers, for instance). Likewise, companies who are able to best provide what a willing and able consumer wants to buy will make more money than companies that don't. The ability to provide something that people want, whether it's a service or a product, is rewarded in proportion to the value the market places on it. Income inequality, therefore, is the result of a system of values made by consumers who vote with their dollars. So far, so good.

What happens when this free system is frowned upon, tampered with, and controlled, in the name of equality? The market is no longer allowed to make value judgments. Companies are no longer rewarded for making more of the things that people want when their profits are taxed away. Businesses that fail are bailed out by the State at the expense of the taxpayer. The ability for companies to attract the Best and the Brightest to work for them and increase their competitive advantage is diminished.

But Equality is Good, Isn't It?

Equality, as in our Natural Rights, the rights to Life, Liberty, and the Pursuit of Happiness that we all have, is a good thing. But the rights to Life, Liberty and the Pursuit of Happiness, though they do apply to one and all, do not mean that we will all achieve the same things and realize our highest potential as individuals.

Income equality, specifically, demeans the individual by failing to reward hard work, achievement, and the realization of potential. It says to the brain surgeon, "we as a society do not value the years of hard work and dedication to the medical field that you have demonstrated in the name of saving lives." It says to the wealthy entrepreneur, "we as a society love your products that you've made available to us at prices we're willing to pay, but don't feel that you should be rewarded for them." It says to the high school dropout living on welfare, "your lack of ambition and self-motivation is nothing to worry about, because someone else will take care of your basic needs for you."

Economic Equality Does Not Equal Prosperity

One of the best indicators of the prosperity of a nation is not income equality, but rather economic freedom. The freer the economy, the healthier and more prosperous the economy, and the higher the overall standard of living. Call it the "rising tide that lifts all boats" (Melissa trivia: this was the title of a paper I wrote on School Choice for one of my college economics classes). "Inequality of wealth and incomes is the cause of the masses' well-being, not the cause of anybody's distress. Where there is a "lower degree of inequality," there is necessarily a lower standard of living of the masses."[1] So let's compare two indices: The Income Equality Index and the 2011 Index of Economic Freedom. Lets take a snapshot of the countries that rank first and last on the each of the two indices. I'll allow the data to speak for itself.

Country

Equality Index Rank

Freedom Index Rank

GDP per capita
Namibia
1
73
$6,614
Denmark
125
8
$35,757
Hong Kong
42
1
$42,748
Zimbabwe*
26
178
$355


*As you can see, North Korea, Afghanistan, Iraq, Liechtenstein, and the Sudan do not provide enough data to be counted on the list, so Zimbabwe is at the bottom of this list.

So, Jon Stewart, our levels of income inequality don't equate us with Third World Countries. On the contrary, it's one thing that keeps us from being a Third World Country.

Extra Credit:

[1] Inequality of Wealth and Incomes [The Freeman, 1955]

How do the 50 United States compare in Economic Freedom? Click here!








6 comments:

  1. Great points, and flawless analysis. Personally, I don't think in dualistic extremes. One thing that these facts and figures, based on a completely theoretical approach, conveniently overlook is that the income "equality" is not talking about such extremes as comparing brain surgeons to ditch diggers. There is "absolutely" plenty of room for some normalization - the call of the hour is not taking the word "equality" literally, rather to reconsider (and overhaul) an inexplicable and ever-widening (and unjustified) income gap, that is "not proportional" to the abilities of and contributions made by the lower income groups of society. There has to be income inequality, yes - but the amount of it needs to be brought down. And the way USA is headed, especially with the social injustice inflicted on repressed minorities, in the name of liberty and persecution by the obvious majorities, I won't be surprised if the economy reaches at least a second world status in my lifetime! I know barely anything when it comes to theory, but from whatever little I know just by observing people and world affairs, and approaching the issue with common sense (though I know my quota is limited :-)), I know that there is another approach instead of this continuous protecting of the ultra rich in the name of free economy or class warfare. This is headed to a tipping point, and when it goes over, then the same people who are sheltered behind logic such as "lower degree of income inequality is good for the masses" will feel the backlash of the same masses. Personally, I don't see any reason to sympathize with the ultra rich, because for me, human reasons also factor in my opinion, and because I cannot, even when I try my best, justify the disproportionate income distribution that exists today.

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  2. Thanks for your thoughts. Naturally, given what I've already written in my "flawless analysis" (thanks!) I disagree.

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  3. I find it absolutely absurd, how people continue to irrationally equate freedom with this unrealistic definition of entitlement that they so arrogantly support. Interestingly however their is a hint of humor that,fortunately has alluded the right in their nebulous quest for Fascism. When capitalism collapses, (which it most definitely will) It will not be at the hands of Marxist Communist like myself, nor will it be at the hands of the spineless reformist Democrats, no when Capitalism falls it will be at the hands of the right, and their nebulous supporters. Their unrealistic approach to economics has failed time, and time again, their so called trickle down approach has resulted in little more then a rapidly increasing wealth gap, and an economy so cannibalistic, that even the most ardent liberal reformist cannot turn it around. I think the Fascist Right would also be interested to know that they have had our vote ever since Regan. Sam Webb may claim to stand behind the democratic party, however any true anti capitalist realizes that the best way to legally bring down capitalism is to leave it to the extremist. Why the concept of pushing for a apathetic, content lower class of Americans alludes the Fascists is beyond me, however I'm thankful that it does. So keep up the good work, hopefully it will be enough to help get an actual idiot into the white house soon before Obama has a chance to stabilize things, which would unfortunately drag the inevitable out for far to long. Anyway thanks again, and I know we can count on you guys to truly make a muck out of everything... 2012, my votes for Bachmann, since unfortunately the biggest idiot doesn't appear to be running now.

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  4. Interesting! Actually, freedom is the antithesis to entitlement. No government handouts, nothing given that wasn't earned and worked for and traded for by consenting individuals, with the exception of charity given in a spirit of compassion and love. The fascism of which you speak is really what we now think of as corporatism and corporate cronyism, not capitalism, and is indeed an evil thing and extremely detrimental to society. But your post did give me a good laugh, so thanks for that! :)

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  5. Hello.
    Something missing in your analisys is that economical equality doesn't equal nonprosperity. I do agree that forcing people to contribute with the product of their labor unproporcional to others does not encourage innovation or excellence, however this is not the case, usually the very rich get lower taxes, creating an unhealthy economical inequality. I also consider that the free market should be regulated, because it does not include humanistic interests, or ethics, the free market could easily turns into a for-profit only machine instead of a for-human mainly.

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  6. I'm not saying economic equality "equals" nonprosperity, it just makes it much more likely... but I'm sure I'll touch on aspects of your comment in future posts :)

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