Let's not focus on income inequality, let's focus on fighting poverty

2016-07-22 11:16

One of the many things that seems to trouble most people around the world today is income inequality. Organisations like Oxfam have been very vocal against income inequality. Pope Francis, Barack Obama, and many others on the left have spoken loudly against this phenomenon.

People like Thomas Piketty, the famous French economist, have become global rock stars on the crusade against income inequality. Piketty, who delivered the 13th Annual Nelson Mandela Lecture at the University of Johannesburg in October last year, is the author of the best-selling, anti-income-inequality book, titled Capital In The 21st Century.

But here’s what saddens me: too often, when it comes to income inequality, people like Pope Francis, Thomas Piketty, and President Obama tend to be driven by emotions, instead of logic and objective interpretation of factual data.

They claim income inequality is one of the causes of social upheavals we hear about and see every day – a wrong and misleading assertion.

The crusade against income inequality resonates with many, especially here in South Africa – a country with one of the highest income inequalities in the world.

Currently, South Africa’s Gini coefficient, which measures income distribution (with 0 representing perfect equality and 1 representing perfect inequality), stands at 0.65; in contrast to America’s 0.45, China’s 0.47 and Brazil’s 0.53.

People all over the world are bothered by these statistics, and as a result, call for the reformation of the free-enterprise system. They are disgruntled by the so-called greedy CEOs and the top one percent who, in their view, take all the income gains at the expense of the middle class and the poor.

In the United States, the notion that the middle class is declining has gained traction. Those parroting this false rhetoric, including President Obama, refer to declining household incomes and wages as indicators that the capitalist system has benefited only a few: the top one percent.

But these people should do themselves a favor – they must stop for a few minutes and think.

In his well-written and intelligent piece titled The myth of wage stagnation, published by CNBC in 2014, Daniel J. Smith, an assistant professor of economics at the Johnson Center at Troy University, argues the claim that incomes are stagnant is “wrought with holes and erroneous interpretation of the data available”.

Looking at just average hourly wages in the United States, adjusted for inflation using the Consumer Price Index (CPI), it is shown that earnings increased only 5.58% since 1964. But this statistic and others like it are misleading because they do not factor in the new forms of growing employee compensation, and they overstate the erosion of purchasing power. “Once these contributions are taken into account, a much more clear — and positive — picture of the average incomes surfaces,” he writes.

When you look at total compensation – which is your salary, plus benefits such as healthcare, paid vacation time, hour flexibility, improved work environments and even daycare, you come to a conclusion that actually, earnings have increased by more than 45% since 1964 in the United States, not by 5.58%.

But to people like Piketty, Pope Francis, Obama, and their followers, this sensible interpretation of statistics doesn’t mean anything. Logic and common sense doesn’t mean much to them.

It’s not only Daniel J. Smith who has written about this ignorance of people like Thomas Piketty. Dr. Thomas Sowell, the legendary American economist, and Senior Fellow at the Hoover Institution, has written extensively about income inequality.

In his column, That top one percent, Sowell contends that the top 1% is an income bracket – it’s not people. Americans in the top 1% in a given year are not there permanently. In other words, I may be in the top 1% this year, but it’s quite likely I won’t be in the top 1% next year. People’s incomes fluctuate over time, and given the globalized, volatile world we live in today, too often.

Yet these top 1% people are written and spoken about as if they are an enduring class. How irrational.

Also, people like Obama and Piketty ignore the fact that age is a factor on income inequality. It takes years to acquire the skills and knowledge needed to have a high-paying job. People older than sixty years will have higher incomes than those in their twenties – because they have worked longer, have experience, and have accumulated a lot of money during their working years. Is the relationship between age and income that difficult to understand?

Here in South Africa, like in the United States, the obsession over income inequality persists. People don’t even give themselves time to think; they hear rhetoric and they run with it.

It will take a long time for South Africans to reduce income inequality, because, twenty-one years after the end of apartheid, millions of people remain unskilled with minimal education. And all these points I have discussed above on income are relevant to South Africa.

The great news is this: in a new democratic South Africa, significant economic strides have been made. As Leon Louw of the Free Market Foundation South Africa explains in one of his writings, the once ostracized and repressed Black communities have made remarkable economic progress.

To speed up this progress, South Africa, and the world, should fix their education, open up and deregulate markets to create employment opportunities, and privatise government-owned enterprises. People will need skills, jobs, and experience to climb the income ladder, regardless of their race. Those who argue we should take a portion of A’s income and give it to B are totally wrong. That is not the solution – that approach will violate human rights and people’s liberties.

Even though poverty has declined significantly over the past twenty-five years, millions around the world remain jobless and live in poverty. We need to focus more on fighting poverty, and stop the obsession over income inequality.

This article was first published at Rational Standard.

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