Penny for your thoughts?

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“For the first couple of weeks, I want to keep it light so I have plenty of time to spend my Christmas money”. This is what I told myself as I was packing just a few hours before my 7 am flight. And then I worried, “Maybe, I should save it? No, I’ll make a lot more, especially once I graduate”. But will I? Will you? This question is the type of crisis I’ve gone over again and again. The root problem here is future uncertainty, which is aggravated by the constant barrage of income inequality news and statistics. Altogether, it seems that my, and your, hard work for your degree is going to pay you less and less since we started. And worse “the rich will just get richer and the poor poorer”.

It is almost conventional wisdom that the rich had been eating all the economic growth whereas regular people have been left stagnated. This idea has been explored by both sides of the pollical breadth. This then leads to the discussions about income inequality, where people get angry at the rich because they have too much. But is it getting worse or is it moral or even fair?

Is it moral? Inequality is not one of the contributing factors for your well-being, happiness or comfort. It is not in the same category as health, peace or safety. In fact, people blur the two often. What is morally intolerable is not inequality itself, but poverty associated with those sitting at the lower end of the income spectrum. When you think of morality what is more important to you? That everyone has the same or that everyone has at least enough. The key here is that when people are concerned about the morality of inequality, they are really concerned about those that live under an unacceptable living standard, not all those that are above it.

Is inequality fair? It is known that from a young age people show the preference for bonuses to be split between evenly amongst everyone, it seems fair to them. But we also know, it is fair if a bonus gets distribute accordingly to those who work hardest, or the lucky winner of a lottery gets all the money. Therefore, people are shown to be content with these inequality causes if they feel like that the basis in which they are awarded is meritocratic, is fair. Thus, inequality is fairer than income uniformity.

Is it getting worse? World wealth is not a finite resource, and it is growing constantly. Therefore it makes sense that available income to distribute is getting bigger. In other words, the pie is growing and therefore everyone slice is growing. It also makes sense that not everyone’s slice should grow in the same proportion, but should grow according to their merit,  as it is only fair. It is also worth pointing out that because someone slice is getting bigger it doesn’t mean it’s coming from someone else’s plate. In other words, although the richer are getting richer, the poor are also getting richer, just not in the same proportion. And because of this yes inequality is increasing, but not necessarily getting worse. It is purely a product of merit and fairness and better lives for everyone.

All the time, we hear inequality is increasing but economist usually draw our attention two fours ways these statistics may be misleading and cloud the conclusion we draw from them.

1st – There is a difference between relative and absolute prosperity. For example, if the proportion(relative) of earnings of the bottom 5% of the population doesn’t increase this doesn’t mean that what people are earning doesn’t change(absolute) over time. Although this may seem like stagnation, what is relevant is the change of how much people earn now compared to the past. The rich get richer alongside the poor, therefore the bottom 5% can be better off today than ever, even if that’s not apparent.

2nd – Most of the data is anonymous, this is everyone is put into a bucket and it not tracked over time. This can be misleading as the statics fail to include the individual progress of each person. People can move up and down their inequality ranking with time. For example, getting paid more because of the experience that comes with age. In fact, once you track individuals, 50% of Americans will find themselves among the top 10% earners for at least one year in their lives.

3rd – Some statistics can also be misleading by not taking into account social transfers. These are the plethora of government incentives that redistribute the wealth amongst the population. Tiered income taxes, food stamps, and social security are a few examples. These even if they don’t reduce income inequality, they boost the income of the poor, making them better off then sometimes portrayed. In addition, as the rich get richer not only the poor get better off, the social transfer becomes larger providing them with more benefits.

4th – Income is what enables you to consume, that’s is the only reason we care about income. Due to globalization and technology improvements, a pound today, even if adjusted for inflation, enables you to enhance your life far more than it did at any stage in the past. There are things that didn’t exist, vaccines, electricity, refrigeration, and there are tremendous improvements on what exists. For example, wherein the past you had a phone line patched by an operator, now we have unlimited mobile minutes, for a lower price. Thus, even if it seems that people are stagnating at the bottom of the spectrum, they are far better off today than yesterday. In addition, higher ranks’ income is far superior their lives won’t get proportionally better. They can have more refrigerators than you, but that just gives them more chilled produced, they can only eat so many.

To conclude the well-being of the poor is increasing alongside the ones for the rich. If becoming a more unequal society meant we could lift millions off poverty, it is a tradeoff I would take any time. So should you spend that Christmas money? Yes, spend it hard, but then work harder in order to make sure you can move towards the upper spectrum of income, it purely dependents on your merit.

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