J7 – Income Inequality [To be marked]

19 01 2011

Income inequality is one of the most pressing issues of our time. According to a Globe and Mail article, Toronto, a city once prized for being a middle-class even city, is becoming more and more of income polarized both numerically and geographically. So, should the government actively be trying to reduce income inequality?

Well, first we should realize that income inequality is not altogether a bad thing. In fact, it is a healthy part of a capitalist society. Being able to increase income is a great incentive to increase productivity and innovation, both for individuals and corporations. Higher income brackets thus turn into goals and lower ones become threats, always there to prod you forward. No matter what anyone says or thinks, someone is going to have more than someone else. Since resources are scarce, those who call for income equality are fighting a loosing battle in our greedy world. Everyone has a different idea of what is completely “equal”, “fair”, or “equitable” and complete equality is close to impossible in these conditions.

But should we just leave it at that and completely ignore the problem of income inequality (polarization)? No! Even though we cannot and should not create full equality, we should still try and close the gap between the high and the low, something which is far less controversial than complete equality. But why?

The first reason is one from morality – it is simply wrong for people to let their fellow brothers and sisters waste away while they enjoy their jacuzzis.  This is akin to leaving someone who tripped on the floor.  In fact, many people who are stuck in poverty are not neccessarily there because of themselves – they are stuck in the cycle of poverty. They need help getting out and we should be there to help them. If we don’t they will be both a burden to themselves and to us – they will need protection by families, friends, and relatives not to mention the fact that there is a chance of increased crime rate for them.

The second reason relates to our current economic “growth”. Not only does the GDP not document spending distribution leading to improper views about our society, but the poor are generally not included in economic “growth” rallies. Should they not feel the growth too? It is also not surpirsing then that, by not increasing in income, even in the best of times,  many low-income areas have limited business ventures/start-ups regardless of “economic conditions”. Let’s look at a projection of Toronto in only 15 years from The Globe and Mail:

Because these red areas have not seen the light of day, businesses will be loosing out on investment opportunities that could see them grow many fold. This can’t happen without letting these people get some income. Businesses cannot set up shop, hire more workers, and sell items, all activities which increase total GDP (C up, then I up, then C up, etc = multiplier effect!!).

In the hands of a few, large sums of money is useless. One can even call it “too much money”. There is only a certain amount of goods and  services that a rich individual can consume. Beyond that, their money is invested. But why not invest in the community? If that money was spread out, it can increase spending (and therefore GDP) even more because more people will spend more on bare minimums.

So how would this work? Well, I would say that those with super-high and high incomes transfer a percent or two (increasing progressively) of their incomes to those of lower income brackets. Though this is a small fraction from those of high incomes, it would be a large fraction when compared to the income it is being transfered too. I would suggest that$150,000 is considered “high class” but I could be wrong.

So, in conclusion, it is clear that, though it may cost more in the short run, the government should work actively to reduce income inequality. We could simply choose to be efficient and take the cheapest route – letting everyone whither away. But no. We are humans and we must try to be as fair as we subjectively can. Fairness requires a lot of sacrifice on our part, but after many years, with more people spending, we will see the positive effects it has on the growth of our economy.

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8 responses

19 01 2011
Abdiwahab ISP « The Blog for WLMac Economics

[…] « J7 – Income Inequality [To be marked] […]

19 01 2011
hankyulthespiderdude

Abdiwahab, I absolutely agree with this post. Of course, we want to bridge the gap in income inequalities, because of the efficiency of the money in people’s hands. When a few people have money, they aren’t going to be spent very effectively, since people can only consume so much. I like how you found the projection for the red, blue and grey zones in Toronto in 2025. What I like even more is your point on where the money is being invested. If it is given out to the community, the GDP grows through the multiplier effect. But if no one has the money, then there is no spending, and no growth, and employees laid back. While you have argued all these, you did not omit the fact that everyone’s idea of equity is different, and income inequality should not change to COMPLETE income equality for the differences in jobs, hours, etc. Very well done.

19 01 2011
Alexandra Huang

I agree with the point that inequality is not a really bad thing which can be incentive to innovate people to work harder. And I believe that our government should intervene in this polarization phenomenon.

One thing I have learnt from this journal is that to help poor people would also improve our economy since in the image you showed that poor people are much more than rich people. And by using the multiplier effect, to guarantee poor people with quite enough money would create extra economy benefits.

Cool.

19 01 2011
Han Kyul Lee – ISP Journals/Comments « The Blog for WLMac Economics

[…] Comment 10: J7 – Income Inequality […]

19 01 2011
api1993

Hi Abdiwahab. Execellent job. I liked how your considered the GDP and considered the multiplier. The diagram was a nice visual. I just have one concern. This portion, ‘always there to prod you forward’ , I don’t understand this portion. I don’t know if its just me or an actual mistake. Well, Overall, good job.

19 01 2011
jeremyip

Abdi, I enjoyed reading your post very much. I also wrote on this topic and came to the same conclusion as you. The government needs to find a way to reduce income inequality and I believe that taxing the very rich is a good way to go. I also liked how you included the image of Toronto, it fit your point very well and helped boost your argument.

20 01 2011
jonnyme

I agree that morality should be kept into account when discussing income inequality. However, considering that we are in a free market economy, the incentive to succeed, innovate, and produce quality relies on the promise of money and other compensation. People expect high returns for their hard work, and arguably, it is the biggest reason why America and other free market economies have done so well.

If we take out income inequality, the whole free market system could be affected. Although making incomes equal is the right thing to do, I think that we should take the possible consequences to the market in account as well.

What are some suggestions you have to make sure that the incentive that characterizes a free market stays reasonably intact?

20 01 2011
Jonathan’s ISP « The Blog for WLMac Economics

[…] 1. Income Inequality […]

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