Income inequality is an acceptable and unavoidable component of a productive capitalist economy. Therefore, the government should not intervene by attempting to control income inequality. Many of the social externalities that have been linked to income inequality, such as poor health care, lack of opportunity and higher crime, are in actuality repercussions of poverty and not directly linked to income inequality itself. The government's role should therefore be to focus its resources on helping the impoverished. In the long run, helping the truly poor is a much more beneficial goal than narrowing inequalities.
Past attempts by the government to halt the explosion of income inequality have included a more progressive tax system, increased earned income tax credits and other policies that attempt to redistribute wealth from the rich to the poor. In reality, these measures are more harmful than beneficial, because they drain the economy's strength, in turn making everyone worse off. For example, "raising marginal tax rates ... usually hits many people who regard themselves as middle class and does nothing to reduce the vast fortune of [the highest-income] families" ("Would You" 3). "If the rich get poorer [due] to high[er] taxation, some people may feel pleased [in the short term,] but few are better off. [However,] if the poor [become] richer, the whole country ... benefit[s] ("Does Inequality" 2).
In our society, "where advancement is based on merit and seemingly open to everyone, regardless of class, race, creed or sex, unequal outcomes [should] not be a cause for concern" ("Does Inequality" 2). However, when opportunities are not equal, the government's role is to do what it can to make them so, by improving social programs and especially public education. As more jobs over the past decade have required higher-skilled workers, wages for workers with higher levels of education have increased faster than those positions for people with minimal education. The main focus of the government, therefore, should be to first and foremost improve public education and make it equally available for all. This needs to be supported extremely vigorously in the poorest areas. One specific example is the Head Start program. Numerous studies have woven the economic and social benefits of these early-childhood programs for disadvantaged children. For example, "Head Start children are significantly more likely to complete high school and attend college than their siblings who did not attend Head Start," as well as "significantly less likely" to commit crimes later in life ("Research Bites" 1). Additionally, the government should also focus on providing remedial training and schooling for adults, as well as programs to help the poor get into any type of work through which they can support themselves.
Once the government succeeds in providing everyone with the same opportunities, income inequality in fact provides those in poverty an incentive to work hard, achieve higher levels of education and eventually advance to higher-paying positions. "America is a remarkably mobile society. ... [T]his year's Economic Report of the President points out [that] 50-80% of the [people] in America's bottom quintile [move] themselves into a higher quintile after 10 years" (quoted in "Would You" 2). Additionally, most Americans are optimistic about their chances of future advancement. An opinion poll reveals that "19% of American taxpayers believed themselves to be in the top 1% of earners, [and another] 20% [expected to be] there within their lifetimes."
Without income inequality, there would not be as much incentive for those in poverty to take advantage of this mobility. Statistics that are initially shocking can actually be inspiring. For example, the average CEO is paid over 400 times as much as the average worker ("Would You" 1). Without these top earners to aspire to, the productivity of the American economy would collapse. If every person made the same amount of money, employees would find no reason to work hard, because there would be no goal to reach for in terms of future earnings incentive.
Another reason that the government should not interfere with issues of income inequality is that the financial situation of most Americans has improved over the last few decades, despite the misleading statistics. While the income gap has widened, poverty rates have dramatically decreased. "The proportion of Americans in poverty now stands at 12 percent" as opposed to 22 percent in the 1950s. And while "real wages appear [to be] stagnant, poor people can [today] buy far more with them [due to] technology and globalisation, [putting more one-time] luxuries ... [in the hands] of poorer Americans" ("Would You" 2). And while compared to other rich countries America is certainly the most unequal, the poorest Americans are still "better-off than those in Britain and Australia" in terms of purchasing power. Lastly, "the relative inequality in America [is due largely] from the people at the top doing unusually well. [For example,] the top 10% of Americans are nearly twice as [wealthy] as the top 10%" of households in the Nordic countries ("Would You" 2).
Income inequality is a necessary component of a productive capitalist economy. The income gap provides incentives for people to work hard and attain higher levels of education, therefore powering the potential output of the American economy. Many of the problems that have been blamed on income inequality are in actuality problems stemming from poverty. Therefore, the government's role should be to address the issue of poverty, rather than income inequality, by providing equal opportunities for education and advancement to all Americans, instead of penalizing the financially successful.
Brenner, Lynn. "What People Earn: How Did You Do?" Parade. 14 March 2004:4-10.
"Does Inequality Matter?"The Economist. 14 July 2001.
Galbraith, John K. The Good Society: The Humane Agenda. Boston: Houghton Mifflin, 1996.
Goldstein, Carl. "The Gap." MPR News. Minnesota Public Radio. April 2000.
Mokhiber, Russell and Robert Weissman. "The Age of Inequality." (18 Nov. 2003).
Multinational Monitor. Interview with Jared Bernstein. Multinational Monitor. Online. May 2003.
"Research Bites—Head Start Research." 2003.
"Would You Like Your Class War Shaken Or Stirred, Sir?"
The Economist. 4 July 2003.
This spring the Minneapolis Fed held its 16th Annual Student Essay Contest, which is open to high school juniors and seniors in the Ninth Federal Reserve District. Nearly 250 essays were received from 39 high schools, representing all six district states. Submissions were divided into two categories: standard and advanced economics classes. The essay above was selected as the overall winner.
See other winning essays.
Fifteen finalists in each division received a $100 U.S. savings bond. In addition, first- and second-place winners from each division were selected; the two second-place winners each received an additional $200 savings bond, and the two first-place winners an additional $400 savings bond. A paid summer internship at the Minneapolis Fed was awarded to the overall winner.
What role, if any, should the government play in addressing income inequality?
One often hears the phrase "The rich get richer and the poor get poorer," and the media print headlines like the following:
- CEO paid 450 times average worker in firm
- Combined income of richest 400 Americans exceeds collective income of 12 million poorest
- Since 1960 American population increased by 100 million; number in poverty decreased by 7 million
It seems almost contradictory that significant inequality figures stand next to decreasing poverty rates. Yet this contrast exemplifies the complexity of the issue.
Students were asked to review background literature from the Minneapolis Fed and other sources, to consider the economics of income inequality and to determine what policy, if any, the government should adopt.
See other Essay Contest topics.