Is income inequality the biggest economic threat to the USA?

Money Scale

Most people have no clue as to their true income level or how they stack up against other Americans.  But politicians and political activists seem to be fixated on exactly how much money people are making relative to their peers.  Liberal economists are claiming the biggest threat to our country is income inequality and they have a bunch of charts that show it’s becoming a bigger and bigger problem.

Income inequality is the relative extent to which income is unevenly distributed among individual members of some specific group.  All such references herein apply to U.S residents, unless explicitly stated otherwise.  Income distribution is derived from comparing gross revenue generated among an entire group of individuals during a specific time range to proportional revenue generated by subgroups within the same population.

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For example, suppose 20 people earned a total of $100,000 during 2015.  Assuming everyone earned $5,000, income distribution among the entire group is dead even, as each member’s earnings were exactly proportional to their individual share of 5%. Now, suppose the same 20-member group once again grosses $100,000 during 2016.  But assume just one person earns $81,000 of that total sum. Income distribution is clearly uneven among the entire group in 2016, as one member earns 81 times what everyone else did whose gross income is only $1,000 apiece. Moreover, that one person gets to pocket gross revenue equaling more than 4-fold that of all 19 fellow group members combined during the same timeframe.

U.S. income gap has grown

Many expert sources have advised concerned US citizens that income gaps have steadily widened to a progressively greater extent over the past several decades.   Income disparities have become so pronounced that our nation’s top 10% now make an average of 9-fold what the average citizen takes home.  The top 1% earns over 38 times the average income level – more than double what the top 1% made in the 1950s.  The 2008 Great Recession brought top income levels down for a while and reduced the disparity, but shortly after stock market recovered and the top earners started earning more and the income gap increased again.

How did average citizens fare?  Not so well, as lower-income earners held a much bigger share of gross U.S. income in the 1980s vs 2016.  If income was distributed in 2016 like it was in 1979, the average American would be earning between $3,000 and $17,000 more per year than they currently do.

Why worry about income inequality?

Growing debate has ensued among government bureaucrats over the true impact of income inequality.  One prime case is Chief U.S. Presidential Economic Advisor Alan Krueger who stated his views in a 2012 speech based on recent research findings.  Krueger posited more gross income shifting to wealthy consumers results in decreased percentages of each post-tax dollar spent, thereby stifling macroeconomic growth.  Moreover, severely impeded parental income mobility exhibits consistent adverse predictive effect on their children’s future ability to succeed. Besides that, these impacts feed greater need for middle and lower-class families to borrow to maintain the same consumption level, hence being a major contributing factor in endemic financial crises. 

Finally, the extremely wealthy gain political leverage that in turn biases official policies to slow macro-level economic progress even further.  Krueger made full note of such retrograde dynamics in a verbatim quote that, “Ris[ing] inequality in the U.S. over the last three decades has reached the point that … is causing an unhealthy division [of] opportunities, and [become] a threat to our economic growth.”  Accordingly, Krueger opined that restoring a “degree of fairness” to the U.S. job market would be good for businesses, the economy and the country.

Indeed, former U.S. Supreme Court Justice Louis D. Brandeis explicitly cited income inequality as a primary cause of America’s Great Depression in a 1933 landmark decision <i>Liggett Co. v. Lee</i> (288 U.S. 517).  By the same token, current President Barak Obama stated that income inequality has become the “defining challenge of our time”.

Of course, all of these examples are the opinions of liberals that believe in liberal economic policies.  Conservatives do not share these beliefs and instead believe that there is an economic benefit to the country and to the average person when the income levels of the wealthy increase.

Why should it matter to the average citizen if Microsoft, Apple, Facebook and Intel employees have huge salaries?  It’s not like tech companies would be giving other average workers in America that don’t work for them more money if they didn’t pay their own employees so much.  It makes no sense at all.  How does it affect the typical worker in the country if other people are making lots of money?  Doesn’t it make sense that those wealthy people would then spend more money on services that average workers provide?  They all tend to buy houses, cars, clothes, food, entertainment and luxury goods.  If anything it would seem to be a good thing for the average worker if other people made more money.

Income inequality instead seems to be way for liberals to advocate for Socialism.  After all wouldn’t zero income inequality mean that everyone makes the exact same amount of money for their work?  Socialism has always failed as it keeps people from working hard and risking their time and money.  Why would anyone work hard and risk their livelihood if they knew they would get paid exactly as much as their neighbor that was lazy and sat around all day on their couch? Income inequality might indeed be the biggest economic threat to our country, because the solution to it is Socialism.