The Current Situation

Causes of Income Inequality

Similarities Between the Great Depression and Today

Does Income Inequality Cause Financial Crises?

The Gini Coefficient

Arguments Against Fixing Income Inequality

The U.S. Educational System and its Role in Perpetuating Inequality

Possible Solutions




In the scheme of United States politics, many conservative politicians believe that income inequality is not a problem and not worth solving. Primarily, this relates back to the importance of the free market in conservative politics. Because fixing income inequality almost inevitably means a much greater degree of government intervention in the markets, especially via taxation, most conservatives stand firmly opposed to it. Their primary arguments are as follows:

Main Argument: Inequality is a natural part of free markets.
This argument is the most widely used and comes down to basic conservative principles. The main ideas are as follows:

  1. The United States is a meritocracy. People earn money according to how hard they work and not everyone is going to earn the same amount of money ever, nor should they. We have a free market capitalist system based on the idea that some people will earn more and that innovation should be rewarded.
  2. If people believed that their investments and innovations would not result in a huge income change for themselves, but that the income would instead flow to a large number of people (including themselves, but to a lesser extent), their motivation to invest and/or innovate would decrease greatly.

And the counterargument…
This argument, while the most rational of the three, is largely invalidated by the fact that there is data showing that the United States is not actually a true meritocracy. While the question, “I worked for my money. Why shouldn’t I be allowed to keep it?” is a fair one, the truth remains that there are many wealthy people whose money is largely inherited, not self-made. Those wealthy tend to represent the top 1% of the population, those with exponentially more money than their more normal-earning counterparts. Unfortunately, the ways in which the tax and inheritance systems are set up in America, it is quite possible to be extremely wealthy having done little to nothing to earn it yourself.

In contrast to that, there are a large number of poor people who work very hard, often working multiple jobs at a time, who try desperately to make a better life for themselves, but who find it to be a near-impossible task. The inherent advantages that the wealthy are born into in this society, including access to better education and better healthcare, having more attention from caretakers who have more time, having access to food of a better nutritional quality, and so forth, allow them to jump on the fast track to making a better life for themselves from the start. In a true meritocracy, a person who started out poor and worked much, much harder than a person who started out wealthy, would theoretically end their life in a better social class than the person who did not work, because they would have pulled themselves up by their bootstraps and gone the distance. In reality, as income data (and stories from day-to-day life) makes clear, this is rarely the case.

Contrary to popular belief, income inequality is not increasing
This is a lesser used argument, but one that is still used by many to argue that income inequality, in fact, doesn’t exist. One of the most recent publications arguing this came from Alan Reynolds, a Senior Fellow at the Cato Institute. (See his full publication here.)

He argues that the figures that show rising income inequality are based on federal income tax return data, which are inaccurate because of changes in U.S. tax rules over the last thirty years or so, which he believes have changed what is reported as income. Basically, his argument is that changes in the way that people file taxes has caused changes in what people perceive as income in looking at data. Primarily, he says that while corporate executives used to accept stock options which were capital gains, they now get nonqualified stock options which are taxed as part of their salaries. He also argues that things like 401K’s have caused a lot of investment income to vanish from tax returns and that tax return data usually excludes transfer payments, meaning that people on the bottom are earning more than one might guess from tax returns.

And the counterargument…
In short, whether this particular argument is valid depends upon whether or not one believes that the figures on tax reports, in combination with other income information (for example, from the census) is accurate at face value or not. Many other conservative economists cite this argument or similar ones, while liberals tend to argue that none of the so-called “hidden” factors is influencing income values greatly and that inequality is just as much of a problem as the figures would indicate. However, when thinking this argument through, I would strongly urge people to consider the fact that this argument is much more reliant on finding flaws in data that is widely accepted by economists and by the government to be accurate than it is in presenting its own data to make a legitimate case.

Income inequality isn’t a bad thing, as long as the overall standard of living is good
This is also pretty self-explanatory. Many people argue that measures need not be taken to reduce income inequality, given that the United States has a high standard of living to begin with, so someone at the lowest end of the income spectrum in the United States would be better off than someone at the lowest end of the income spectrum in a developing country. They argue that income inequality is still an overall good thing for the economy, as it means that the highest earners are being extremely productive and that overall economic growth is a good thing for everyone, including the people at the bottom, because it advances the standard of living, which means that we, as a society (including the poor) live better by virtue of living in the United States.

And the counterargument…
The counterargument is really just a question of human rights. Yes, obviously even the poorest people living in a highly developed country (such as the United States) are most likely not living in the same unsafe and completely unsanitary conditions as someone who is among the poorest in a highly undeveloped or war-torn country. That being said, if we can try to help people in our nation who are living in extreme poverty according to our own standards, shouldn’t we, even at some cost to those of us who earn more? This is really not a question that can be answered, as the answer depends largely on one’s value system, but it is something that must be thought about.