Rich Man, Poor Man

     Some people make more money than others. To hear the media tell it, that’s a huge problem and it’s time to do something about it.

     “Rising inequality – the growing gap between the rich and everyone else – is often cited as a primary cause of middle-class angst,” wrote staff writer Lori Montgomery in the February 1 Washington Post.

     On January 30 the president provided ammunition for the rich-poor argument: “The fact is that income inequality is real – it’s been rising for more than 25 years,” Bush said.

      Both ABC and NBC evening newscasts the night before called it pay for failure instead of making it clear that Home Depot had included the compensation package in Nardelli’s initial contract in 2000 and was under obligation to pay it.

     On the Oct. 20, 2006, “Today,” Quintanilla said CEO pay is “369 times the average worker’s salary,” but the February 26 BusinessWeek provided some missing perspective. In fact, CEO pay averages have been declining since 2000, but that went unreported by the NBC correspondent.

     “The counterargument, that the ratio is down from the 514 multiple in 2000, doesn’t get much traction,” wrote BusinessWeek’s Jane Sasseen. 

     “Good Morning America” went ballistic over the Nardelli situation on the January 4 program, turning to a union leader for comment.

“The average CEO in this country makes, makes more before noon on January 1st than a person working minimum wage makes on December 31st, working all year,” said Rich Trumka, secretary-treasurer of the AFL-CIO.

As the Business & Media Institute has noted, news anchors have been quick to condemn salaries in businesses other than their own. Using Trumka’s suggested comparison, CBS anchor Katie Couric’s reported $15 million salary works out to $7,211.54 per hour. A minimum-wage worker would have to work 35 weeks to make what Couric pulls in in one hour.

There’s Enough to Go Around – And If Not, We’ll Make More

     The argument that income inequality is bad is based on an underlying assumption: that if one person has more, another automatically has less. This “zero-sum” approach bases its logic on a pie chart that adds up to 100 percent. If one person has 30 percent of the pie, that leaves 70 percent for all the others to divide among themselves.

     The problem is, that isn’t how a free-market economy works. And the media have left out economists who could explain it on the nightly news.

     “Income and wealth inequality in America is almost entirely the result of an economic system that rewards skill and hard work, and rewards unusually savvy people extraordinarily well,” wrote Diana Furchtgott-Roth, former chief economist for the U.S. Department of Labor, on February 16. “This is not new to the 21^st century; it has always been this way in America. Getting rid of inequality is practically impossible because there will always be low-skill workers entering the labor force.” Furchtgott-Roth is now director of the Hudson Institute’s Center for Employment Policy.

     Economist Tyler Cowen boiled it down in the January 25 New York Times: “the broader philosophical question is why we should worry about inequality – of any kind – much at all.” 

     “Life is not a race against fellow human beings, and we should discourage people from treating it as such,” Cowen wrote. “So why should economists promote this same zero-sum worldview?”

     The problem with the zero-sum outlook is that it ignores the fact that wealth is created and that the overall amount of wealth grows.

     “[D]iscussions of income inequality promote – psychologically if not logically – the mistaken notion that the amount of total income is fixed … income in market economies isn’t a pie that is first produced and then distributed,” wrote Dr. Donald Boudreaux, chairman of the George Mason University department of economics. “Instead, income is earned simultaneously with its production,” added Boudreaux, an adviser to the Business & Media Institute.    

     For the media, economic facts took a back seat to emotional appeals about “inequality.” But as economist and BMI adviser Walter Williams wrote, that misrepresents the issue.

     “In addition to envy, many people erroneously use income inequality as a measure of fairness,” Williams said. “Income is a result. As such, results cannot establish whether there is fairness or justice.”

     “Should people like Messrs. Brin and Page [founders of Google], who have improved our lives, be held up to ridicule and scorn because they have a higher income than most of us? Should Congress use the tax code to confiscate part of their wealth in the name of fairness and income redistribution?” Williams asked rhetorically.    

A Growing Divide?

     While the February 1 Washington Post stated that “Few economists would disagree that income inequality is real and getting worse,” there are economists and data that argue otherwise.

     In fact, economist Alan J. Reynolds just released a book, “Income and Wealth,” on that point in late 2006 before the Post story.

     Between 2001 and 2005 income inequality was virtually unchanged, according to data analyzed by the Census Bureau and released by the Joint Economic Committee of Congress.

     “Congress should consider this fact before acting on the assumption that income inequality is surging,” said Rep. Jim Saxton (R-N.J.)

     Reynolds argued in the Dec. 14, 2006, Wall Street Journal that the widely publicized claim “the top 1% now takes in an astounding 16% of national income, up from 8% in 1980” is simply false. He wrote that the numbers used are “problematic” because they exclude transfer payments made by the government and untaxable income.

     “The emphasis on earnings inequality also ignores the source of most income on the bottom fifth [of earners] – namely, more than $1.5 trillion of government transfer payments such as Social Security, unemployment benefits, the Earned Income Tax Credit, Medicaid and food stamps,” Reynolds wrote in a February 8 column.

     In fact, more than half of that the bottom fifth of households have no earners, the Joint Economic Committee reported.

     “[O]bviously households without earners will lack earnings,” said Rep. Saxton, a member of the committee.

     Another economist, Tyler Cowen, wrote in The New York Times that while he disagreed with Reynolds about the existence of income inequality, he agreed that “matters are not as bad as the critics have suggested.”

Robin-Hood Remedies

     So where does all the talk about paycheck inequity take us? “Well, some higher taxes, well designed, is probably part of the bargain,” said The Washington Post’s Steven Pearlstein in a February 7 online chat.

    If Congress gets involved, the discussion of income inequality may not stop with intangible class envy. And that could have consequences not only for CEOs but for all workers. “The tax code has an important role to play in generating more equality,” Fed chairman Ben Bernanke said on February 14 before the Senate Banking Committee.

     Rep. Barney Frank of the House Financial Services Committee wants to hold hearings in March to examine executive compensation.

     “If Congress or the SEC were to limit the structure of contracts with CEOs, even more companies would go private. It is hard to understand the public interest in discouraging companies from being publicly held,” wrote former FCC commissioner Harold Furchtgott-Roth in the New York Sun on February 20.