“This growing inequality isn’t just morally wrong; it’s bad economics. When middle-class families have less to spend, businesses have fewer customers. When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy. When the rungs on the ladder of opportunity grow farther apart, it undermines the very essence of this country,” Obama said during his speech on the economy. So what does this even mean? Are Obama Economics real?
First of all, he presumes that economic inequality exists. Second, this statement presumes that economic inequality is morally wrong. Third, he presumes that economic inequality is bad economics. Without becoming side tracked with the rest of the winded speech, with the faulty, nonsensical metaphors such as bridged receiving Medicare, income inequality will be the subject of this article.
Let us witness the first point, one often argued by the observation that the gap between household incomes in the top 20% (1%, .01%) and bottom 20% has been growing. On the surface, this seems to indicate that economic income inequality has been growing, right? Well, the size of households is changing. Here is an example. One house has four earners and the other has one. Every single person receives the same income say, $10 dollars per hour. The gap between the single household and the four person household is $30 per hour. Now let us give every single person a $5 raise. The gap is now $45. So when everyone is doing better, the economy is growing across the board, the household income gap is growing. If anyone is using household income in their statistics, they are trying to sell you something.
Secondly, we must look at how people at different income levels are receive their wages. People at higher income levels receive the majority of their income in the form of direct funds (capital gains, etc.). People in the middle and the bottom receive a larger portion of their income through benefits. A business owner who files under the individual income tax may provide his employees health insurance, but his health insurance coverage comes out of pocket. So let’s say the economy is doing well, people are making more money, but the cost of healthcare is going up. The lower level employee receives their raise in the form of continuing health care coverage. The employer receives his raise in the form of real income, and then spends it on healthcare. Again, the statistics will show a rising income gap where none exists.
Additionally, people constantly move between the different income brackets. A person working on commission might have a bang year, placing them in a higher income bracket, then use that to fund their bust years in a lower bracket. The top 1% of earners in the U.S. earns just under $400,000 per year. Anyone who owns house in a middle class neighborhood can easily make this in a year by simply selling their house. If you sell a $400,000 house you own, and then buy a $350,000 because you just got laid off, congratulations, you are in the top 1%. That doesn’t exactly jive with the lap of opulence typically attributed to the top 1%. Additionally, people generally earn more as they get older. Comparing a 55 year old person at the peak of their earnings and 30 years of experience to a 22 year old with an entry-level job is meaningless.
Moving on to Obama’s second point, is economic inequality morally wrong? Frankly, there is no widespread moral theory of philosophy which can contend that by definition, inequality in material goods is morally wrong. You don’t even have to examine the nuance of utilitarianism, Kant’s categorical imperative, or virtue based ethics. Let’s say that two people work making widgets. One person works five hours a day and makes five widgets. The other person works six hours a day and makes six widgets. As money is a measure of value, and the second person is providing more value, they should be compensated with more money. It is as simple as that. To have a system where they both received the same value back not only removes the incentive to provide value, it is morally wrong.
Finally, we move on to the discussion of good economics. Assuming the measure of good economics is increased production (GDP) the evidence overwhelming suggests that free market capitalism is the best economic system. In the words of Milton Friedman, “The only way in which you can redistribute effectively the wealth is to destroy the incentives to have wealth.” This can be seen in the widget example above. Obama’s “middle out” approach to the economy, an economy based on consumerism and a loose Keynesian idea of “stimulus”, supposes that the ultimate driver of production is people spending money instead of trying to amass more, whether it is for themselves or their family. This theory thinks it would be as good for the economy for a person to buy a BMW as it would for them to buy a machine which makes the BMW (assuming the two cost the same). Friedman again points out, “the harm in that is that where do you get the factories, where do you get the machines, where do you get the capital investment, where do you get the incentive to improve technology if what you are doing is to establish a society in which the incentive is for people who if they by accident accumulate some wealth to waste it in frivolous entertainment.” This also applies to forcible government attempts to move said wealth to lower level consumers who will, in turn, “waste it in frivolous entertainment.”
So, in summation, Obama’s assertions about income inequality are baseless, unsubstantiated, and indefensible. He does not even attempt to defend them. Nowhere in the speech does he land upon specifics. He simply sets up straw man arguments which on the surface seem to indicate his point. One should not be fooled by logical fallacies.
Podcast – Obama Economics – The Adam Goldfein Show – Hour 1
Podcast – Obama Economics – The Adam Goldfein Show – Hour 2
The Wall Street Journal, Obama’s Remarks on Middle-Class Prosperity: http://blogs.wsj.com/washwire/2013/07/24/transcript-obamas-remarks-on-middle-class-prosperity/
Forbes, In Much-Hyped Speech on the Economy, Obama Offers up More of the same: http://www.forbes.com/sites/dougschoen/2013/07/24/more-of-the-same/
The National Review Online, The Income-Inequality Myth: http://www.nationalreview.com/articles/287643/income-inequality-myth-michael-tanner
The Wall Street Journal, The Politics of Contempt: http://online.wsj.com/article/SB10001424127887324564704578625973354325756.html?mod=trending_now_5
Thomas Sowell, The Top 1%: http://www.youtube.com/watch?v=Qi8clPrg7kc
Thomas Sowell vs. Occupy Wall Street/Obama: http://www.youtube.com/watch?v=H8f59IuijFo
Thomas Sowell, Is “Income Stagnation” an Economic Myth? http://www.youtube.com/watch?v=WrtoSx-NbLQ
Milton Friedman, Redistribution of Wealth: https://www.youtube.com/watch?v=MRpEV2tmYz4