THE BLOG
11/14/2014 01:44 pm ET Updated Jan 14, 2015

It's Not All Relative When It Comes to Income Inequality

Coauthored with Rachel Reese (MA student and research assistant at George Mason University, rreese3@gmu.edu).

How do we determine the welfare of poor Americans, and how should we seek to improve it? The left continues to flaunt inequality as the greatest indicator of material well-being, while the right views mobility as the end-all be-all measure of potential for the poorest Americans. So who's correct, which policy prescriptions should we be listening to? The answer is neither: both popular measures fail to grasp the underlying issue at stake -- the actual welfare of those trapped in poverty.

Inequality vs. Mobility

Inequality has been touted as an indicator of social injustice, and many on the left suggest that higher rates of inequality demonstrate low standards of living for the poor. But this measure is not a valid measure of the well-being of those in poverty. The total amount of wealth is not fixed, so greater levels of inequality do not necessarily indicate that those at the bottom have less than they did before. The US is considered much more unequal than Iraq, for instance, but most people would agree that the livelihood of poor Americans is probably better than that in Iraq. Additionally, as inequality has increased over the decades, real income for the median family has actually risen.

Proponents of focusing on social mobility argue that inequality statistics fail to address the opportunities available to those Americans in the bottom quintile of the income distribution. If mobility is high, it is argued, then the "American Dream" is achievable. Why worry about the income gap between the richest and poorest if those at the lower end have ample opportunity to reach the top? This is relative social mobility -- how well a person is doing relative to others in the income distribution. Some recent research suggests that the US lags behind other developing countries on this front -- parental income is a large determinant of children's success.

While both measures may be important for various reasons, they fail to consider the absolute standard of living within the various quintiles of the income distribution. The bottom quintile of Americans will include the same number of people over time (assuming no population growth), regardless of the relative mobility or inequality in society. So even if everyone in the bottom quintile leaves this portion of the distribution over their lives, doing so means that the same number of people (but not the same people) shifts into this category.

The important question, therefore, should not be how to get more people from the bottom quintile to leave it, or how to ensure this quintile is relatively more equal compared to the top, but how to improve the standard of living for those people who find themselves there. This is absolute mobility -- how well a person in one part of the distribution fares over time. This type of mobility measurement is the most meaningful representation of improving standards of living of Americans in all distributions. And on that front, we fare quite well -- a recent study shows that 67 percent of Americans become richer than their parents.

How to Improve Standards of Living?

The political arguments to help the impoverished remain focused on inequality and relative social mobility because they are the most politically feasible to tackle. Income inequality, it is argued, can be resolved by greater taxation of the rich and redistribution to the poor. Social mobility, conversely, can be enhanced by reforming the educational system and by making college more affordable.

However, none of these efforts improves the welfare of people who are left at the bottom over time. The only force that can genuinely and enduringly enrich the lives of the poor is economic growth.

Ironically, and disastrously, in attempting to better the lives of the very poorest in this country, these policies may actually hinder the economic growth that is essential for absolute mobility. Alleviating income inequality with increased taxes on the rich has been found to hurt growth. This redistributive bandage may help the poor temporarily, but at the expense of long-term improvements in standard of living for everyone.

Alternatively, rather than making college more affordable, federal subsidies and other policies have actually dramatically increased tuition and student debt is at an all-time high. Mass indebtedness of young people also harms long-term economic growth. All of these policies may therefore be impediments to improvements in the well-being of our very poorest.

Ultimately, none of these policies work to promote absolute mobility of the lowest income bracket, and may actually cause overall economic growth to stagnate.

But if these policies don't work, what does?

This question is much more politically problematic to address. Unfortunately, economic growth does not occur through the public sector: solutions to problems of low absolute mobility must come from private innovation. Politicians and public policy can help by encouraging entrepreneurship and resisting the urge to adopt short-sighted, destructive policies.