Rich-poor divide shows poverty is relative

Posted: Jun 18, 2003 12:00 AM

If Bill Gates and I started our own country in which we were the only residents -call it Gatesbergia -it would be wracked by the worst income inequality in the world. The "haves" of the society would make hundreds of thousands of times more money than the "have nots." The disparities of wealth in our nation would be worse than those in Brazil, Nigeria or even -gasp -the United States. And, if Warren Buffet, the Sultan of Brunei and Rupert Murdoch immigrated to Gatesbergia, the problem would be even worse, for the gap would get wider and I would be "left behind."

Now, even though the rich-poor disparity of Gatesbergia would be "bad," I would not be in bad shape. In fact, I could live quite well in Gatesbergia, even though what I make every year is less than a rounding error on Bill Gates' tax return.

Indeed, I could prosper. After all, Bill Gates and the sultan would surely pay me very well to clean their houses, cook their food and tie their shoes. Soon I could become a millionaire, even as the low taxes and pro-business policies of Gatesbergia sent the billionaires even further and faster into the income stratosphere. So, in effect, even as the rich-poor gap got wider, I'd get richer.

I offer this illustration because we're poised to enter another round of hand-wringing over income inequality in America. The editorials and op-eds on the subject are multiplying and intensifying.

The Lilliputian army of politicians running for the Democratic presidential nomination, terrified that the economy might actually rebound before Election Day and hence sweep President Bush to reelection, are laying the ground work to rail against income inequality. The New York Times, The Washington Post and other leading papers have recently run several articles and op-eds bemoaning the rich-poor divide.

Now, the first thing to keep fresh in your mind is that high income inequality is not the same thing as high poverty. As the Gatesbergia example illustrates, you can have outrageous gaps between the rich and poor and the "poor" will still be OK.

For example, according to Robert Rector, an economist with the Heritage Foundation who uses the government's numbers, the typical person in the poorest fifth of U.S. households today spends as much as the person of average wealth in the early 1970s (adjusted for inflation).

The typical "poor" American, according to census data, has a car, air conditioning, a refrigerator, a stove, a VCR and a color TV. It should go without saying -but usually doesn't -that in, say, 1960, someone who had a color TV, a refrigerator, air conditioning and a car would not be considered poor.

More telling: Child hunger has largely been wiped out as a major social problem in America. While deplorable instances of hungry children still occur (usually attributable to bad parenting), the real nutritional problem we face today is fat kids.

Not only is poverty relative, it has less to do with money than most people think. Technological innovation makes life less expensive. Fifty years ago, a refrigerator was a big investment, even for the middle class. But it was worth it because it made it possible to buy food in bulk.

Today, refrigerators may not be supercheap, but they're affordable. And the cheapest fridge today is far more advanced than a fridge from two decades ago. Ten years ago, a cell phone was a luxury. Today, they're ubiquitous -even in the poorest neighborhoods.

Here's how relative our understanding of poverty is: The average poor person in America is richer than many entire villages in Africa or Asia, where they still have no phones, refrigerators, and very little food.

Many on the left -particularly those still in a Marxist haze -reject the idea that poverty should be viewed in absolute terms. But when you think about it, they have to. If we all agreed that many of the poorest people in America live with the material prosperity -cars, phones, air conditioning, the caloric intake of a Roman emperor -we associated with millionaires just a few generations ago, most of the liberal agenda would have to go out the window.

Of course, this is all easy for me to say. I don't live in poverty, relative or absolute. And many millions of people are struggling to make ends meet, put food on the table and educate their kids. But that's not because of income inequality. If Bill Gates doubled his income tomorrow, poor people would still have a hard time. Income inequality doesn't make people poor, it just strikes some people as unfair.

But some economists believe that if Bill Gates and those like him got a lot richer, there'd be fewer poor people. In a new book put out by the American Enterprise Institute, Inequality and Tax Policy, contributor Robert Barro of Harvard notes that in wealthy countries, there's a strong link between rising income inequality and rising economic growth.

That's the way you'd think it would work, in Gatesbergia and in America.