Is ‘income equality’ realistic – should leader and laborer earn the same?

Robin Hood Memorial in Nottingham near the castle / Olaf1541 for Wiki Creative Commons
Robin Hood Memorial in Nottingham near the castle / Olaf1541 for Wiki Creative Commons

WASHINGTON, January 16, 2014 — Focusing on helping the lowest 15 percent of income earners while damaging the rest of us, President Obama’s quest for income equality is  the “defining challenge of our time.”

Income inequality has grown worse under this administration and it seems that for 2014, Obama will continue that same agenda this year. So what is likely to happen?If the Obama agenda were to make economic growth its primary objective, the income inequality problem would fade away. The administration takes a different view and will continue to push “income redistribution” programs. These take income away from people who have earned it and give it to people who have not earned it. This distorted Robin Hood approach is characteristic of the three primary components of the Obama economic plan for this year.

Obamacare is the clearest and most redistributive transfer program in Obama’s plan. Over the next few months we will hear stories about millions of people benefiting from Obamacare. The problem is that for each person who benefits, ten will pay more for their care. Because Americans are very compassionate, they approved of this, at least until they found out what it really was.

The administration is pushing an increase in unemployment benefits. Many of the unemployed have been receiving benefits for more than one year. At one time some recipients could receive up to 99 weeks of benefits.

This is very costly to the taxpayers who fund it, and it is costly to workers whose skills may be lost by the long term inactivity which is encouraged by the long term benefits. If we extend the benefits to the 1.3 million people who qualify, the rest of us will eventually have to pay for it. Because Americans are compassionate, they will likely favor this, even if it comes with a cost to themselves.

The next big push will be for the immensely popular increase in the minimum wage. Most studies show the vast majority of Americans favor at least some increase, mostly for compassionate reasons. The problem is that any further increase in the minimum wage may positively redistribute income in the short term but will worsen income inequality and cause higher rates of unemployment, in the long term. Why?

Look at the Walmart example. For the past three years Walmart profit margins have been about 3.5 percent. That means from every dollar in sales, Walmart keeps about 3 ½ cents. Based on their large volume, that profit margin provides a sufficient return to the stockholders so that Walmart can raise the capital they need to grow.

If the minimum wage is raised, Walmart’s costs increase. In order to maintain the 3.5 percent profit margin, they will be forced to raise their prices. The result is, in the short term, a few million minimum wage workers see an increase in income while the hundreds of millions of Americans who shop at Walmart pay higher prices.

In the long term, Walmart’s high labor cost encourages the use of capital goods to replace the expensive labor, resulting in fewer jobs. This is what happened to toll takers on major highways whose relatively high wages lead to their jobs being replaced by automation. The net long term effect of raising the minimum wage is an increase in unemployment among the lowest income earners. This worsens income inequality.

The president’s appeals will be very convincing. He will say that we have a duty to take care of all Americans. He will ask, Who could oppose giving affordable health care to every American?  Who could oppose the payment of a fair wage for a fair day’s work? Who could oppose giving unemployment benefits to those people who, through no fault of their own, can’t find a decent job?

Americans are very compassionate. In principle, we do not oppose any of those things. What we do oppose is investing in our education or training, working hard and gaining some success, only to have it taken from us by a government that is more concerned with helping the poor than it is with improving the lives of the vast majority. We recognize that we share a social responsibility. But the president’s agenda of robbing from the masses to give to the poor is counter-productive. At least Robin Hood took from the corrupt and returned it to those who earned it. Obama has it backwards.

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