Inside a recent analysis of Jill Abramson’s firing from the New York Times, Jacob Bacharach reveals a serious misunderstanding of how economies work. There are certainly lots of good reasons to care about income inequality. However, failing to understand the utility of high incomes leads to uninformed, knee-jerk “eat the rich” policies. In practice, these laws and regulations have the unintended consequences of actually hurting the poor more than income inequality ever could, by stalling economic growth.
The piece is interesting in full, but one false assertion may help elucidate the source of much left-wing handwringing over income inequality.
Here’s the portion:
A few brief thoughts on the New York Times-Sulzberger-Abramson affair.
It’s awfully difficult to feel badly for income discrepancies where people are making hundreds upon hundreds of thousands of dollars. Beyond a certain income level, which I would set at significantly less than $100,000 per year, it’s all just surplus value; its only purpose—if that word applies—is luxury purchasing for purposes of status signaling. This is not to say that women executives should be paid less than their immediate male counterparts; rather, no one should be paid so much money to be a general manager.
Mr. Bacharach here may be right that it’s harder to feel bad for Ms. Abramson than it is to feel bad for Lupita the housecleaner. But that’s really neither here nor there regarding his next claim, which is that the only purpose of salaries over $100,00 per year is “luxury purchasing for purposes of status signaling.” And that this proves his claim after that, which is that “no one should be paid so much money to be a general manager.”
The claim that high incomes are only good for luxury purchasing completely ignores some fundamental truths about economic growth. Namely, believing it requires being wrong about what high incomes are used for.
If we want a living wage for Lupita, we need to be down with economic growth. That means higher wages and lower costs of living for everyone, at all income levels. And how do we get economic growth? Wikipedia says that “the primary driving force of economic growth is the growth of productivity, which is the ratio of economic output to inputs (capital, labor, energy, materials and business services (KLEMS).”
In English, that means innovation. Innovation is getting more from what you already have. Economies grow when entrepreneurs discover how to get more work done in fewer hours and how to get better products made with fewer materials. Innovation saves time, money, and energy, resulting in a better standard of living across all incomes.
What most people, especially those who aren’t rich, often don’t think about is how innovation itself costs money. There are two primary sources for innovation: startups and capital investment. Startups need capital to enter the marketplace with their innovative technologies. Think Shark Tank. Entrepreneurs need money to build, advertise and deliver their disruptive ideas. Capital investment is how we describe the process establish businesses go through to introduce their innovations to the market. For instance, every time Intel comes up with a faster, cheaper processor, they have to spend money buying or adapting machines to build it.
Here’s where the rich come in, if we don’t eat them first. After a certain threshold, the vast majority of earnings end up in savings and investments. In short, the rich save more than the poor. As a percentage of income, the poor spend way more on “luxury purchasing for purposes of status signaling” than the rich. While this has been demonstrated empirically, it also just makes sense. The poor must spend nearly all they take in just to survive. The rich, on the other hand, can and do save and invest their “surplus” income. That’s part of why they’re rich.
It’s those savings and investments which make up the bulk of the money for startups and capital investment. The rich aren’t just buying bigger and bigger yachts, they’re lending money to Mark Zuckerberg to build Facebook.
Whether or not to care about income inequality is ultimately a value judgment. However, we should all want higher standards of living for the poor. Easily falsified claims about how the rich use their incomes don’t just fail to further the conversation on how to get there. They also, I suspect, form the backbone of calls for heavily punitive taxation schemes. These schemes may be justified on the basis of eliminating income inequality. But they come at the cost of economic growth. The truth is that incomes high enough to produce surplus income are necessary for economic growth. And so, if we truly care about improving the lot of the poor, and not just punishing the rich, we must accept them.
This post originally appeared at LibertyChat.com.