The life enhancing, unrelenting brilliance of income inequality

March 4, 2013, 12:14 pm John Tamny Forbes

Why the growing gap between rich and poor is a good thing for all of us.


If there’s one thing that’s certain about media coverage of periods when the Liberals are in power in Australia or the Republican are in the White House, it’s that copious amounts of ink will be spilled decrying “rising levels of income inequality” that allegedly threaten economic health. The assertions are economically bankrupt, but what’s interesting now is that some on the right are now using the same illogic to bash the the current crop of left-leaning governments in Australian and America.

That there’s much to criticise Obama and Gillard for is to state the obvious, but income inequality should not enter the discussion.

Lost on the economic illiterates that populate both sides of the commentariat is the simple, life enhancing truth that when the wealth gap is increasing, that’s a certain signal that the lifestyle gap is shrinking – rapidly. Though the politically correct on both sides are loath to admit it, income inequality is beautiful.

Most readers are at this point familiar with the arguments in favour of wealth differentials, but for those new to the discussion, here are some of them:

  • Income inequality would only matter to a small degree if the proverbial team picture of America and Australia's rich were a static one. That it’s not is a happy reality that both sides dare not mention, but if the fluid nature of rich is doubted, readers need only visit a library in order to peruse various copies of the Forbes 400 over the decades to see that the 400 is a club that constantly adds and subtracts members.

  • Importantly, if we didn’t have income inequality we’d have to invent it. As McGill University economist Reuven Brenner pointed out so brilliantly in his essential book History: The Human Gamble, it is gaps in wealth that drive creativity among the citizenry. Seeing the immense wealth possessed by the most successful, those not in the rich club strive mightily to join the wealthy; their innovations redounding to individuals of all income classes.

  • Luxury is an historical phenomenon. The baubles of the rich merely predict what we’ll all have if politicians do not erect barriers to production. The best example of this is the cellphone. Back in the early ‘90s individuals walking while talking on wireless phones were a source of awe, and to some degree ridicule about the plastic nature of Beverly Hills. The great Christopher Buckley had a running joke about cellphone use (for it being so rare) in his classic novel, Thank You For Smoking. Fast forward twenty years, and to walk the streets of any city in the U.S. is to see Americans of all income classes listening to music, texting, searching internet sites, and watching television on small rectangular objects that also serve as the once much coveted wireless phone.

Thinking about wealth creation in the U.S. and Australia and the ever-growing wealth gap, Apple Inc. co-founder Steve Jobs died worth billions; his staggering wealth a signal that he’d greatly reduced the lifestyle gap. Music that used to be expensive, and that required the buyer to purchase much that was unwanted, now costs .99 cents. Wireless phones that were once the obscure property of the superrich are now positively pedestrian.

Patrick Soon-Shiong made his billions for inching us ever closer to the still distant cure for cancer. Soon-Shiong’s company developed a drug that invades cancerous cells only to kill those cells once the invasion is complete. Figure John D. Rockefeller in the early part of the 20th century spent $500,000 to unsuccessfully find a cure for a grandson who ultimately died of Scarlet Fever. Today, Americans of all income classes don’t even consider the once fatal disease; Rockefeller’s ability to at least fund the initial fight against it having resulted from his unrelenting and successful efforts to democratise access to reading light (kerosene), and then eventually the petroleum that made Americans already relentless amid abundance even more mobile.

Naysayers will point to billionaire John Paulson, and argue that his billions are the result of him having profited from the inability of financially strapped Americans to stay current on their mortgages. The latter is a very simplistic argument. In truth, Paulson’s billions provided to the marketplace precious signals telling investors that further commitment of capital to the housing space would prove destructive. In short, Paulson’s financial success was a big positive for an economy always limited by access to growth capital.

If the above is not enough, it must be remembered about Paulson that, if the markets had been allowed to work their magic, that his successful bet against housing would have very much reduced the lifestyle gap that is always the certain result of economic achievement. Indeed, Paulson’s successful investments foretold what could have been a severe correction in the housing market that would have enabled prudent Americans to achieve the dream of homeownership on the cheap; that is, assuming politicians had gotten out of the way and allowed overextended sellers to put their homes up for sale.

Instead, the very politicians who express fear about income inequality expropriated the funds of the careful in our midst in order to paper over the mistakes of lenders and borrowers alike. The imprudent were bailed out on the backs of the prudent, and a lifestyle gap in terms of house that was set to shrink didn’t reveal itself thanks to allegedly compassionate politicians. Not asked enough then or now is what’s compassionate about taking from the careful (I’m neither rich, nor do I own a home) in order to cushion the egregious errors of the prodigals in our midst.

So while expansions in the wealth gap have become sport for the partisan and economically illiterate on both sides of the political divide, the real truth is that the sentient among us should cheer every time they read of rising inequality. The sentient should cheer because it signals enterprise being rewarded, freedom to keep the fruits of one’s labour, and then for all of us not rich it signals that our lives are getting better and better; the lifestyle disparity between us and them (the rich) shrinking precisely because economic achievement is taking place.


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