Income inequality is a touchy subject. It is a classification, a way of grouping people and dividing people. However unlike the color of your skin or gender, it is not an arbitrary division. An individual with a higher income enjoys better health, social mobility, political power, leisure. In contrast an individual in a lower income class has less, less social mobility, less political power, less leisure, and of course less access to health care. Inevitably this leads to resentment, resentment leads to bitterness, bitterness leads to anger, and anger may lead to a rise in arms akin to the French or Bolshevik revolution. It is in everyone’s best interest to kill this process before it begins.
It is not possible to achieve low income inequality in a free market. The top 20% of income earners are boundless. They can continue to reach new heights of prosperity. They imbue their children with every advantage that money can buy and their children raise the bar for the next generation. Meanwhile the bottoms 20% are more or less stuck on a baseline. Generally their wages increase at a similar rate as that of inflation. They may increase their income indirectly, by proving to their boss that they are impeccable workers. But even then they will simply receive a 7% raise as opposed to 5% that year. By all means it is possible for them to rise out of their income bracket. It just requires a tremendous amount of work that most people aren’t willing to get done. In summary this is just a way of saying that the rich get richer while the poor stay poor. This is inevitable in a free economy, or a relatively free economy.
In the ted talk given by Richard Wilkinson there was a lot of data put forth that suggested that income inequality was a drag on societal well-being. Some top notch scatter plots of seemingly unbiased data were presented in which quality of life factors were graphed against income inequality. His point was made that higher income inequality resulted in an overall decrease in societal welfare. However his shining examples of Sweden and Japan seemed to throw a wrench into his economic preaching. Sweden a shining example of low inequality achieves this status by heavily taxing and redistributing income in a ‘generous welfare state.’ This violates the free market axiom. A tax laden country leads the world in societal well-being with a socialist economy, how can this be? This causes me to believe that Sweden sacrifices efficiency for altruism. This is not the economically ideal situation but it seems to do wonders for societal well-being, as for Japan I still don’t fully understand how their income inequality is so low. The internet has not allowed me to find this information effortlessly.
Do we become more like Sweden, shall we fund a welfare state, tax the rich and distribute to the poor. This is a tempting idea that I would love to see a simulation of. However I do not think it is the best course of action. The free market economy tends to maximize efficiency and increase quality of life and as a result societal well-being. Inevitably it will lead to an ever widening gap between rich and poor and full circle to the growing resentment. The solution to this is a humble reevaluation of their situations. The resentful poor man should not view his wealthy counterpart with ill intent. Just as he should not hate someone of a different skin color or sexual organ. He should see their quality of life difference not as a hindrance to himself, but as an inspiration to seek his own comparative advantage. It is simply a state of mind.