Hopefully this post will add to the light shed on the poor job[i] the government does in measuring the standard of living of the poor and middle-income people that was discussed in my posts “’You will always have the poor among you. . . .’” and “Income Inequality Is More Than It’s Cracked Up to Be.”
The meaningful standards of living of America’s poor and middle-income people[ii] (e.g., the extent to which they consume more than the minimum to survive for a reasonable life span — probably more than twice[iii] the average life span of all humans who had ever lived before 1900) has advanced more rapidly than those of the rich. The big reasons for this are:
1) Once a person reaches about $60,000 per year of income (and the consumption that goes along with that level of income), additional income and consumption do not make a person significantly happier.[iv] To understand a major reason why this is, ask yourself who got more enjoyment from the following purchases: 1) Bill Koch when he bought a $100,000 bottle of wine, or you when you bought your last phone for less than $1,000? Let’s say a guy is looking to buy a new yacht, but he cannot afford to pay $25 million for the nicest yacht in the club, though he can afford to buy the twentieth-nicest yacht for $4 million or the sixteenth-nicest yacht for $8 million. Although he may choose to buy the $8 million yacht, it is not possible for him to enjoy that yacht twice as much as he would have enjoyed the $4 million one. He could justify choosing the $8 million yacht not because the experience would be twice as nice, but because he is so wealthy that $4 million will not be a big deal given how much money he will have left over after the $8 million expense. And, of course, “money can’t buy me love.”
A middle-income person’s smartphone is no less capable than the wealthiest person’s. Both can afford cars to get from point A to point B in comfort. The people in the back of the plane get there only a few seconds after first-class passengers. The movies, TV, books, plays, and Internet consumed by the rich are the same as those consumed by middle-income people (and for the most part, the poor). When rich people pay five times as much for a 50-yard-line football ticket, they generally do not get five times as much enjoyment as a person seated in the end zone (and many people would prefer to watch the game on TV anyway).
If in a hurry to do something of medium importance, a rich person likely would not walk two blocks out of her way to pick up a free $1,000. A poor person would likely drop just about anything to get the free $1,000 two blocks away. In short, an extra $1,000 dollars is worth much less to a rich person than to a poor person.
(Before you jump to the conclusion that this makes a case for government taking relatively worthless dollars from the rich and giving them to the poor in order to increase the nation’s aggregate of happiness, please see my blog post, “Wealth Creation. No Happiness, Why Bother?”)
2) Having a great amount of wealth can ameliorate, but cannot eliminate, the tragedies of life. The rich, the poor, and everyone in between will get sick and will die. The same is true of their friends and families. The slings and arrows of outrageous fortune come on top of the stresses, slanders, confrontations, 70‒100-hour work weeks (assuming they can “turn it off” when they are not actively engaged in work), demands, and expectations of business executives. Many cannot walk down the street without being harassed or without bodyguards. (I’m not expressing sympathy for high-income people here. I’m simply pointing out that disproportionately high incomes come with disproportionately high costs, which offset some of what might appear to be a standard of living differential between middle-income people and the rich.)
3) Innovators are only able to capture a small fraction of the value they bestow on society.[v] This means that the vast majority of the value created by innovators spreads out to the benefit of everyone else in the world.
Yet the hubbub over income inequality seems to intensify daily.
Income inequality is necessary to progress and does much good.[vi] It also causes harm, especially to the envious among us. In particular, the higher the nearby mountaintop, the lower many people in the bottom of its valley feel themselves to be. It is sad that “the system” makes so many people so unhappy and disgruntled.
History is replete with examples of governments filling valleys by grading off the tops of mountains. Venezuela is just the most recent example of how much happiness that approach brings. The only historical examples in which such systems were sustainable with a reasonable amount of happiness (I am discounting the happiness of the masses in USSR who were relatively happy with their meager existences because they were unaware that their meager supplies came mostly from slave labor[vii] — had they known I do not believe they would have been so sanguine) are those that were propped up by the wealth and innovation of other countries, e.g., Europe at large, but especially Greece.[viii]
As many harms as income inequality entails, the existence of income inequality leads to greater human flourishing than the absence of income inequality, and, hopefully, now you see that the income inequality gap in America is smaller than you may have thought.
[i] In the future, I will likely write a post on why and how producing misleading assessments of the standard of living of poor and middle-income people is in the best interest of politicians and bureaucrats who want to constantly expand government activities at the expense of the public — which is essentially all of them.