The Top Five Myths about Economic Inequality
Economic inequality has risen to the top of the political agenda, championed by political candidates and best-selling authors alike. Yet, many of the most common beliefs about the issue are based on misperceptions and falsehoods.
Have you fallen for any of the top five myths about economic inequality in America?
- Inequality has never been worse in the US. The commonly used formulas for inequality are flawed. Most claims that income inequality is at a record high in the United States are based on a measure of “market income,” which does not take into account taxes or transfer payments (or changes in household size or composition). The failure to consider those factors considerably overstates effective levels of inequality.
- The rich have not rightfully earned their wealth. According to data, inheritance plays a very small role in wealth accumulation. While it is true that luck, privilege, and government policies certainly have their influences, for the most part, the rich become wealthy through their work and value creation to society.
- The rich get richer, while the poor get poorer. While economic mobility might not be as robust as in the past, research has shown that it is rare for someone to spend extended periods of time in any income bracket, rich or poor. Only about 2.2 percent of people spend five or more years in the top one percent of income distribution from age 25 to 60. Research also indicates that one out of every five children born to parents in the bottom income quintile will reach one of the top quintiles in adulthood.
- More inequality means more poverty. The idea that one person’s gains in wealth can adversely affect others does not reflect the reality of an economy that is constantly creating value.
- Inequality distorts the political process undemocratically. Activism of wealthy individuals is balanced across the political spectrum, and offset by groups that represent low income individuals and other non-socioeconomic specific groups.
Five Myths about Economic Inequality in America, a new analysis by Cato senior fellow Michael Tanner, breaks down the wrongheaded beliefs on income inequality that have been bandied about by academics, pundits and politicians on both sides of the aisle, concluding that America’s poor would be better served by politicians implementing policies that actually reduce poverty, not attacking inequality itself.
“While inequality per se may not be a problem, poverty is. But there is little evidence to suggest that economic inequality increases poverty,“ writes Tanner. ”Policies designed to reduce inequality by imposing new burdens on the wealthy may perversely harm the poor by slowing economic growth and reducing job opportunities.”
What policies do help alleviate poverty? Education reform, reducing occupational licensing and other regulatory barriers to entrepreneurship, reforming the criminal justice system, and eliminating the perverse incentives of the welfare state. Let’s stop worrying about inequality, and start actually helping people escape poverty.
