Briefly summarizes current controversies of income inequality in America, and then analyzes it in terms of economic principles of tradeoffs, governmental policies, and employment. The author argues that income inequality isn’t necessarily big a problem and can actually give people a chance to gain jobs and employment and why taxing the rich and raising the minimum wage aren’t the best “one fix” solution to this problem.
Summary of the Issue
Currently in America, there is a vast income inequality and a big gap between the rich and poor. In 2014, according to Sarah Glazer, author of “Wealth and Inequality” in the CQ Researcher magazine, “The world’s top 1 percent owns about half of global wealth and the bottom half less than 5 percent.” In 2008, in the article “At Issue: Economic Inequality”, “According to the Organization for Economic Co-operation and Development (OECD), the average income of the top 10% of Americans in 2008 was nearly 15 times higher than that of the bottom 10%.” This means that in the past six years alone, we have seen a vast growth in the gap of income inequality. While there are possible solutions to fixing this problem, politics and the laws of economics is a major reason why we are unable to work the same policy to fix the issue leading to this continuous result.
The centerpiece of President Obama’s plan to fix the issue is to raise the federal minimum wage from $7.25 to $10.10/hour and finally index it to inflation. Unfortunately, a consequence to this would be lay-offs, which would lead to even more inequality as the people at the bottom wouldn’t be making money, which could thus slow down the economy.
“Employment is essential to mobility. You know that; but while you have rightly tried to bolster the demand for labour, you have neglected the supply. The CBO says that, by 2024, fewer people will work because of the disencentives embeddded in Obamacare” (Economist).
“So what would happen if we jacked up taxes on the rich, just to be ‘fair’? The rich would pay more, certainly. But the non-rich would feel the pain. High-earners also happen to be business owners, investors and entrepreneurs — the people who take risks that create opportunities for the rest of us” (Glazer).
Principle 1:People Face Tradeoffs
To get one thing, you have to give up something else. (Rich business owners provide the opportunity for people to work for them.)
The theory of supply-side economics is at play here. While the well-off people in the economy may be better suited to pay additional taxes than the bottom of the society, Increasing the rich people’s taxes would put the workers for the business owners in a world of hurt because the owner wouldn’t be able to provide opportunities for labor. If the government puts too much tax on these entreprenuers, they will fall down and thus be unable to provide for the working class their jobs, so both groups would be losing money, compared to what they originally had; Upperclassmen would lose money from taxes and the working class would lose money due to less jobs and therefore less wages being available. However, there is another side to this dillema. Suppose the minimum wage were to be increased, one of President Obama’s plans as of March 2014. Then if businesses didn’t somehow simultaneously gain more revenue, then the business would lay off workers, leading to an increase in unemployment and thus more inequality. When the minimum wage increases significantly, unmotivated workers would gain an incentive to work and thus the labor force participants would increase, also causing unemployment.
Principle 2:Governments Can Sometimes Improve Market Outcomes
To say that the government cansometimes improve maket outcomes is a true statement. For example, during the Great Depression, the economy healed due to extreme government spending and World War II. However, a consequence to this was the fact that many people ended up in a sense working for the government because according to CQ Researcher, during FDR’s presidency, the top tax bracket increased to 63%. Now the government is running into problems such as disagreements on policy, especially with one main issue of Obamacare, which could make people cheat the system and live off of that. As mentioned above, changing the minimum wage has vast increases on the whole economy, of how the people and firms react to this change. To say that governments can sometimes improve market outcomes means that they can also make them worse, including putting the market for labor at a responsible or irresponsible level, depending on the situation. Also, one thing we must ask ourselves is whether government action is necessary. For example, consider the results of this case study done in 2003 by two economics professors at the Paris School of Economics and UC Berkeley
“The chosen starting point for the most-quoted part of the Piketty-Saez study is 1979. In that year the U.S. inflation rate was 13.3%, interest rates were 15.5% and the poverty rate was rising, but economic misery was distributed more equally than in any year since” (Gramm).
This shows the consequences of having too much widespread equality.
Principle 3: There is a short-term trade off between inflation and unemployment
Although there may be moone may think that more people can get paid, this is incorrect because when the value of money inflates before everyone catches up, businesses, firms, and people have to take spending cuts from what they could originally buy. In the statistic above where Dr. Pikkety and Dr. Saez conducted a case study, one can see that the inflation rate was 13.3%, which is almost triple the amount the Fed targets now. The US may have been more equal but we were all in economic misery. Another example of this statistic is that, according to Scott Winship of the Manhattan Institute, “economic growth has benefited from rising inequality” by leaving poor andmiddle-class households “with a smallershare of a bigger economic pie and no worse off for it” (Glazer). Winship was one of the sources Dr. Picketty cited in his case study. Economic growth could rise due to a greater economic inequality.
I recommend as a solution to this problem that to solve the problem of this inequality, citizens by giving those who are less fortunate and have young kds in school money with lots of strings and conditions attached to it so that the system doesn’t get misused. This will grow the economy and make it so that the costs of school are more affordable for the students before they reach college, so that they won’t feel discouraged and drop out early from school to work as an unskilled laborer.
I feel that if college were to be made free, people wouldn’t take college seriously and thus not work hard.
As a result of this, the US would need to tax the rich somewhat, but that wouldn’t necessarily be a problem because the US has the largest number of billionaires than any other country. For example, Paul Krugman shows two examples of high taxes and low inequality leading to economic growth in the article“Is Vast Inequality Necessary.”
-“Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.”
-“In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking: People may be willing to prospect for gold, even if a successful foray won’t make them quite as rich as before, if they know they won’t starve if they come up empty.”
From this, he concludes that although inequality is inevitable, the vast inequality we have now in America isn’t.