The “problem” of income inequality is at the top of agenda in many places, most notably in President Obama’s plan for the remainder of his term, and in the conversations of the world’s political and business leaders, such as at the World Economic Forum's recent Annual Meeting in Davos. I am going to argue that income inequality, or a widening income gap between the wealthy and the poor, is not the problem—poverty is. Millions of people in the poor regions of the world in Asia, Africa and South-America live on a less than $2 per day.
But the solution to eradicating poverty is not “redistributing” wealth from the rich to the poor in an effort to narrow the income gap. The solution is to create more wealth. Slicing the pie in more equal pieces will not work; making a bigger pie will. The historical evidence backs up my claim. Government efforts to make incomes more equal through “redistribution”—such as minimum wage laws or progressive income taxation—have never worked to end poverty. They merely slice the same pie differently as opposed to making the pie bigger.
The only consequences of government income-equalizing measures have been increasing unemployment among youth and other unskilled workers and the departure of wealth creators and high income earners for other, lower-tax jurisdictions. Consider countries with minimum wage laws like Greece and Spain, where the unemployment rate for those under 25 is more than 50%, and the proposal by French President Francois Hollande to increase income taxes for millionaires. Why would an employer hire a young, inexperienced, or unskilled worker if he has to pay him the same wage as someone more qualified? And why would a millionaire stay and pay higher taxes rather than move somewhere else with more freedom where he can invest his money in further wealth creation?
If President Obama and government leaders elsewhere truly wanted to end poverty and provide opportunities for upward mobility to those earning low incomes, they would reduce and eventually end government interference in the economy. That would mean, for example, no minimum wage laws or other wage controls, no anti-trust laws, no employment laws dictating who to hire, and no income taxes, progressive or other. The first requirement of increasing wealth creation is freedom. It is freedom that encourages entrepreneurship and the creation of businesses, the engines of economic growth. The ability to pursue a line of business of your choice, to invest your money how you want, to hire whom you want, and to decide how to use the money you make, is a huge incentive for wealth creation. Look at Hong Kong, the most economically free—and the wealthiest—jurisdiction in the world, as an example.
If governments withdrew themselves from trying to direct the economy and stuck to their only legitimate—and crucially important–role of protecting individual rights of their citizens, poverty in the world would be nearly eradicated. I say “nearly” because people have free will, and not everybody makes on effort to rise out of poverty. (And those who are truly unable to help themselves when opportunity arises, such as the chronically ill and the handicapped, would depend on either private insurance or on private charity. The latter would flourish when wealth creation increases and government involvement in the economy and citizens’ welfare is non-existent or minimal, as in the 19th century America).
Although poverty would be almost eliminated if the economy was free and government protected individual rights, income inequality wouldn’t be. Neither should it be—because income inequality is moral, by the standard of human well-being and flourishing.
Income inequality has the same cause as the impossibility of eradicating all poverty: people’s free will. Some people choose to work harder, develop their talents, and apply themselves more than others do. These are the producers and wealth creators like Steve Jobs and anyone else with productive ability. Governments should not penalize them by income-equalizing measures but encourage them by leaving them free to produce, trade, and create wealth. Such wealth creation would not make the rich richer and the poor poorer, as those on the Left claim. It would make both the rich and the poor richer, through more businesses and opportunities in general, higher demand and higher wages for labor, cheaper goods and services, and a higher standard of living for all.
Governments everywhere should not aim to reduce the income gap but to eradicate poverty—by extracting themselves from the economy and protecting the individual rights of their citizens. More freedom, wealth, and well-being would be our reward.