Income Inequality and Structural Impoverishment

             There has been a lot of talk about income inequality lately in the news media and among politicians of both liberal and radical rightist persuasions. The liberals have pointed to the fact that most of the income gains of recent decades have gone to the rich and the very rich while most people’s wages have stagnated. The result of this process has been increasing inequality of incomes in this country, and the liberals have defined that inequality as a problem.

The radical rightists have responded that the market rewards each of us according to the value of his/her contribution, and therefore, if some people are rewarded more than others, it must be because the former have made much greater contributions.  In addition, the radical rightists have said that the government should not interfere in this process because the market is an efficient allocator of resources. Any interference with the market will result in a less efficient allocation and therefore, will lead to less rather than more economic prosperity.

I suggest that both sides are shooting at the wrong target. The problem is not inequality but impoverishment for the vast mass of the people. Impoverishment is a problem both for humanitarian reasons and for coldly practical ones.  The humanitarian reasons are easy to see, but the coldly practical ones are not so obvious. So, let us review some of them.

Our economy is heavily dependent on consumer spending, but as people become poorer, they have less money to spend.  There is a debate over the size of our economy’s dependence on consumer spending . Some people say that 70% of our economy depends on consumer spending, while others say that the number should be 40%. I am happy to go with the lower number. It is plenty large enough to support my point, which is that the impoverishment of the population is a drag on our economy.  But isn’t this drag counteracted by the fact that the rich have more money to spend? Yes, but not very much. Poor people spend nearly all of their incomes, while rich people are able to save a large part of theirs. So, the impoverishment of a large number of people will lead to lower consumer spending. For a while, spending may be sustained by the indiscriminate use of consumer credit, but obviously, that cannot be sustained indefinitely.

As people become poorer, they not only spend less, they also pay less in taxes, but at the same time, they need more government services like Medicaid or food stamps. It has been widely reported, for example, that many of Walmart’s employees receive food stamps and Medicaid to supplement their wages, but their minimum wage jobs do not allow them to pay much in taxes. Thus, the impoverishment of the people decreases tax collections and increases government expenditures. In short, the impoverishment of the people increases both federal and state deficits, and the only way around that would be to increase the tax burden on the rest of us.

Poverty is highly correlated with crime. This is not surprising. People who can make comfortable livings without breaking the law are likely to do so. (There are plenty of rich people who commit crimes, but a higher percentage of poor people do so.) So, as our people become more impoverished, crime rates are likely to be higher than they would be otherwise. This relationship is not simple, and it may be obscured by other factors like the aging of the population (Most crimes are committed by young people), but crime is expensive for our country, and impoverishment is likely to increase crime.

 We can see, therefore, that impoverishment is a problem in a way that income inequality is not, and if impoverishment is the problem, we should ask what its causes are.  Sometimes, a person may be poor for purely personal reasons. He/she lacks education or has a bad attitude. He/she has trouble getting along with people or is lazy. People who are poor for such reasons need to solve their problem on a personal level. We can help them by providing training opportunities or counseling, but ultimately, only they can pull themselves out of poverty.

On the other hand, some people are poor because of structural changes in our economy.  For example, during the crisis of 2008, millions of people were suddenly impoverished.  Their characters didn’t change, but the structure of our economy did. Opportunities for work that had existed disappeared. Similarly, the trend toward outsourcing many jobs to other countries caused factories and offices to close in this country.  The people who were laid off were the victims of a structural change over which they had no control.

When people are impoverished because of structural changes, the problem can only be solved at a structural level. Of course, an individual here or there may resolve his/her individual problem by getting new training or moving to a new place, but such actions cannot create new opportunities for millions of unemployed people or for people working for a minimum wage with a declining value.  Let us call impoverishment that is caused by structural changes “structural impoverishment,” and let us recognize that it is a policy problem, not an individual problem.

I suggest that structural impoverishment rather than income inequality is our real problem.  If people can make huge profits and become very rich, that is great, but if they do it in ways that increase structural impoverishment, it becomes a problem because it creates costs that the rest of us have to bear.  If some people become very rich but our economy stagnates because people’s buying power has gone down, that is a problem because it hurts all of us. If some people become very rich by creating tax burdens for the rest of us, that is a problem. If some people become very rich by increasing the crime rate, that is a problem.  If we want to solve these problems, we have to focus on structural impoverishment and support policies that counteract the structural forces that have caused it. So, let’s stop talking about income inequality and start talking about structural impoverishment.