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Ralph Reiland

The injustice of the inequality fixers

| Sunday, Feb. 9, 2014, 9:00 p.m.

Here's an actual business case about one person's entrepreneurship, which provides some insight and economic reality to the growing debate about income inequality.

At the extreme end of the political spectrum, some argue that almost any level of economic inequality is automatically bad, a moral flaw and societal injustice that should be corrected by politicians through public policies that redistribute wealth and income.

Here, for example, is an analysis by Paul Buchheit, self-described as a college teacher and founder of UsAgainstGreed.org, as recently published at alternet.org: “Inequality is a cancer on society, here in the U.S. and across the globe. It keeps growing. But humanity seems helpless against it, as if it's an alien force that no one understands, even as the life is being gradually drained from its victims.”

That's some heavy negativity. Imagine having Buchheit for an 8 a.m. class: “Good morning fellow victims, helpless prey. The alien vampires are bigger this morning than ever and we're totally powerless as earthlings to stop them.”

It sounds like the script from “Invasion of the Body Snatchers.”

Other critics of inequality, perhaps less anti-capitalist and more lighthearted, argue that it is the extreme levels of inequality that are inherently bad.

Others contend that it's inescapably a sign of economic unfairness if the degree of inequality is growing.

All those assumptions are wrong.

In fact, they set the political stage for the enactment of policies that create obstacles to upward mobility for the poor and middle classes — the opposite of what's desired by those who seek more upward mobility for the bottom and middle-income groups.

Here's a business illustration that shows the aforementioned assumptions to be intrinsically flawed: It starts with a woman, an entrepreneur, who is not making a lot of money, $20,000 in a good year, and a few dozen women who are primarily homemakers with no outside incomes.

The woman came up with a good product idea, and after years of work on design, production and marketing, she now earns over 10 times more annually than when she started.

Also making more money is her sales team, mainly women who went from zero income to earning — even with part-time employment — tens of thousands of dollars annually.

Putting specific numbers to it, let's say the business owner's income increased from $20,000 to $200,000 and a part-time sales consultant's annual income went from zero to $30,000.

Income inequality became greater in this case, with the earnings gap between the two women jumping from $20,000 in the first stage to $170,000 in the second phase.

In short, their incomes are more unequal in stage two but they're better off than they were in the beginning — more unequal but both richer.

And even more potholes will get fixed, as incomes and taxes rise.

The key question: Would the women now making $30,000 a year, up from zero, be better off if we discouraged the entrepreneurship of the other woman, stifled her ambition and investments of time and money by way of higher taxation, more regulations, more mandates and higher levels of social disapproval?

Ralph R. Reiland is an associate professor of economics at Robert Morris University (rrreiland @aol.com).

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