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Income inequality affects us all

| Monday, February 1, 2016

Whether income inequality is the biggest issue of our time or not is dependent on one’s personal opinion. Reasonably, there are many other issues affecting our generation such as racial polarization, immigration and terrorism that could be considered bigger issues of our time. However, to go as far as to say it is not a problem, as Mimi Teixeira said in her column Jan. 27, is ignorant.

Teixeira’s piece, “Is Income Inequality That Bad?”, brings up the challenging question of what level of income inequality is acceptable. I agree with Teixeira that alarmists fail to determine what exactly is an acceptable level. However, that question is difficult because income inequality can be viewed from a normative or positive perspective. In economics, a normative statement is one that is subjective and value-based, while a positive statement is one that is objective and based on facts. From a normative perspective, the numbers are arbitrary. Looking at the economic data from a positive perspective, the conclusions are clearer.

From a positive perspective, there are some answers as to what is not an acceptable level of inequality, and there are nonpartisan, economic implications of today’s level of income inequality. Income equality hampers economic growth as described by recent International Monetary Fund (IMF) studies. A paper published June 2015 from staff writers of the IMF has analysis that suggests income inequality can impact growth. GDP growth actually declines when there is an increase in the share of the top 20 percent. On the other hand, when the income share of the bottom 20 percent increases, there is higher GDP growth. The authors of the paper use the Gini coefficient, which is measured from 0 (full equality) to 1 (full inequality). For the United States, the Gini coefficient is 0.401 after taxes and transfers and is the highest U.S. Gini coefficient since the 1980s.

The Cato Institute claims the real value of low and middle-income workers’ compensation is increasing, but the National Academy of Social Sciences has determined that “employer costs have been steadily increasing with the economic recovery, although are still near historic lows. Benefits per $100 of covered wages have been fairly constant since 2006 and at lower levels than at any time since 1980-81.” Those fairly constant benefits in workers’ compensation pair nicely with mediocre gains in wage growth. In contrast, the compensation of CEOs and high-level executives has skyrocketed. The growth in CEO compensation has to come from somewhere. If wage growth is mediocre and benefits in workers’ compensation have stayed fairly constant, then those high-level executive salaries are coming from what would have been the increased wages of the laborers.

The belief that rising income inequality is bad for the economy is not some liberal-spun fairytale. The lower and middle class are not riding on the coattails of successful entrepreneurs such as Bill Gates and Jeff Bezos. Do innovators and successful businessmen in America deserve to earn more than average workers? Absolutely. Do they deserve to earn as much as they have been recently earning? Absolutely not.

Republicans encourage growth, and they believe in cutting both income and corporate taxes regardless of whether it increases income inequality. The analysis from the IMF reveals that significant income inequality causes GDP growth to decline, thus cutting taxes would be counterintuitive to economic growth if it does nothing to address income inequality. To say you do not care about income inequality but that opportunity inequality and a lack of social mobility are significant is contradictory. Income inequality is bad, and it is appropriate for everyone, regardless of political affiliation, to be shocked.

The views expressed in this column are those of the author and not necessarily those of The Observer.

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About Eduardo Mancilla

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  • WAP1102

    RE: Income Inequality Affects Us All (for the better –WAP)

    By Eduardo Mancilla | Monday, February 1, 2016

    Dear Eduardo,

    The prosperity of any nation and its people is the result of its collective productivity, ingenuity, private economic investment, and the growth of its GDP – less the cost of government and nonproductive entitlements – as measured in non-inflated (constant) dollars. History has clearly demonstrated that a competitive, free-enterprise, free-market, work-ethic, entrepreneurial, profit/surplus-motivated, constitutional, sky’s-the-limit economy – is the best way of producing prosperity for the greatest number. Everything is better today as a result of the USA’s competitive free-market economy – as businesses strive to meet the needs, wants and expectations of its people. – WAP

    What is the result of believing the lie that economic equality (of results) is more important than economic (GDP) growth . . . property ownership . . . or getting a just reward for one’s labor and investments? It is entrapment in poverty.

    The public need to see examples of others who have gone from poverty to wealth. It is very destructive for a society to continually vilify “the rich,” to portray them as evil, and to promote envy and hatred toward them. The idea that wealth comes from the exploitation of others rather than from creating new value is a Marxist idea, not a Christian viewpoint. Such class-warfare rhetoric tends to discourage poor people from trying to succeed in business and become wealthy through hard work and perseverance – for who wants to be hated by everyone else? If a society focuses on envy or hatred of the rich, it significantly hinders its economic productivity and GDP growth.

    Every time a nation moves from poverty toward increasing prosperity, some people will do better economically than others. People have different gifts and skills, different levels of ambition, different work habits, and different levels of intelligence in various areas. Many people will become moderately prosperous because they do quite a good job of providing useful products and services of value for the economy. . . . In fact, in free-market societies, most people who become moderately wealthy have quite “ordinary” occupations.

    Of course there will be a very few people who become spectacularly successful. Often they are people who invent new products or new ways of mass producing products. They are people like Henry Ford, Cornelius Vanderbilt, Andrew Carnegie, Steve jobs, Bill Gates, Jeff Bezos, etc. who invest time and wealth in the economy. There are also incredibly talented athletes, entertainers, entrepreneurs and investors who earn and successfully invest in the free-market economy. (The preceding paraphrased from “The Poverty of Nations,” pages 303 – 304.)

    In God we must trust . . . but we must always do our part – to secure and promote the truth and a better way – to protect our freedom and interests – and to defend our competitive, free-market system and the Judeo-Christian American-Way.

    WILLIAM A. PAUWELS, SR.
    Leadership in Strategic Planning & Private Equity Investing
    President & COO, ’82-’00, Thomson Group of Industrial Companies
    Univ. of Notre Dame, BSEE – ’60; Loctite/Dartmouth Executive Program
    Jackson Drop Forge; Dow Corning; Loctite; Thomson Group
    E-mail: wap1102@ix.netcom.com

    2/2/16

  • Eduardo A. Mancilla

    My response to Mr. Pauwels:

    Dear Mr. Pauwels,

    I appreciate your response and am grateful to know that Notre Dame alumni care and are taking a part in the conversations that we are having here at our university.

    I do agree that the prosperity of any nation is the result of collective productivity, private economic investment, and the growth of real GDP. I think you may have misunderstood my article because I never stated that the equality of results is more important than GDP growth. If we look at neoclassical economic theory, the goal of an economy is to be efficient and achieve sustainable growth. Classical economic theory, the theory of competitive free-market economy, dictates that a nation need not to institute any policies because the market will correct itself. Unfortunately, recent history has demonstrated this to be an unreasonable approach to current economic situations. A free market implies that each agent has the same amount of information but that is not the case. There are market imperfections and there are situations where one agent has more information that others. When this occurs, those assumptions of a free market are invalid and it is clear that the USA does not have a free-market economy.

    On the topic of wealth coming from the exploitation of others, you are correct about it being a Marxist idea. However, you are incorrect in saying that this disgust of exploitation of others is not a Christian viewpoint. We do not have to go far to see that Pope Francis criticized the economy of exclusion. If you do not believe that we live in an economy of exclusion then obviously you will not care about Pope Francis’ criticisms on the economy. As for your idea of class-warfare rhetoric discouraging the poor, I do not agree and I do not think your belief has any basis in facts. Moreover, I have yet to learn in any of the economic courses I have taken here at Notre Dame about envy or hatred of the rich affecting economic productivity and GDP growth.

    I never mentioned hatred or envy of the rich in my article. I did mention that the compensation of CEO’s, specifically in America, are too high. I agree that some people will do better economically and, with capitalism, that will always be factual. Income inequality is a fact of capitalism, but in neoclassical economic theory, the amount of income inequality does affect GDP growth. As of now, there is no answer to how we can truly optimize income inequality, but the USA does have an amount of income inequality that is inefficient. Let me reiterate on the equality of results. Such an idea is unfeasible and preposterous with capitalism. However, for the economy to work efficiently, we cannot have so many individuals who do not have enough money to spend or who are not in the job market while there are a handful of individuals who have the majority of income and wealth of this nation.

    Thank you for your response and I look forward to how the USA will address the problem of income inequality.

    All the best,

    Eduardo A. Mancilla

  • MC

    For an economics major, you pretty heavily miss the counterfactual error you made in the piece. How do we know there would be as much growth at all if we somehow reallocated increased CEO pay to lower wage workers? Aren’t people only paid what the market will bear for their labor? The growth in CEOs pay has to come from somewhere, and it does–the increased value that they add to the market.