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Income Inequality

Stelios Lazakis

Income inequality – what is it really? And is it a problem?

Well, it depends on whom you ask.

Representing the “Yes, it’s a problem” camp is Christine Lagarde, a French politician who serves as the managing director of the International Monetary Fund. The IMF is a global lending organization (formed by 188 countries) that is best known for stepping in when troubled nations are having difficulty paying their bills. They offer loans for troubled economies, but also usually require strict budget cuts.

The IMF warns that “wide income inequality can slow economic growth” and suggests several ways to reduce it, including raising property taxes, taxing the rich more and raising the eligibility age for governmental retirement programs.

The idea behind such sentiment is that if the middle class is economically stagnant, consumer spending and overall growth will be depressed.

On the other hand, representing the “No, it’s not a problem” camp is small business owner Carol Roth. “Inequality,” she says, “isn't the problem — the problem is the level of people in and near poverty (as well as the struggles of those in the middle class of late). The fact that some people have significantly more wealth makes this no more of a problem than if those people were less wealthy.”

New York Times columnist David Brooks argues that “…there is a growing class of people stuck on the margins, generation after generation. This is caused by high dropout rates, the disappearance of low-skill jobs, breakdown in family structures and so on. If you have a primitive zero-sum mentality, then you assume growing affluence for the rich must somehow be causing the immobility of the poor…”

He continues, “Low income is the outcome of these interrelated problems, but it is not the problem. To say it is the problem is to confuse the cause and effect. To say it is the problem is to give yourself a pass from exploring the complex and morally fraught social and cultural roots of the problem. It is to give yourself permission to ignore the parts that are uncomfortable to talk about but that are really the inescapable core of the thing.”

It is an inescapable fact that there are some really wealthy people in this nation and others that live in poverty. Some see that gap as the cause of the problem. Others see it as the result of the problem.

Obviously, both sides see a different problem.

It’s interesting to remember what Mark Ridley writes in his book The Rational Optimist, “Today, of Americans officially designated as 'poor,' 99 percent have electricity, running water, flush toilets, and a refrigerator; 95 percent have a television, 88 percent a telephone, 71 percent a car and 70 percent air conditioning. Cornelius Vanderbilt (the wealthiest man of the 19th century) had none of these."

The truth is that most of us will spend some time being poor and some time being affluent during our working lifetimes. In fact, half of all Americans between the ages of 25 and 60 will spend a year in poverty or near poverty.

On the other hand, 73% of us will spend a year in the top 20 percent of all income earners.

Income inequality is fluid, not fixed.

Count me in the camp that sees income inequality as a result, not a cause.

As much as possible, we need to focus on equality of opportunity, and let the results take care of themselves.

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.
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