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## National income and inequality

Current time:0:00Total duration:8:32

# Is rising inequality necessarily bad?

## Video transcript

- [Instructor] The word
inequality by it's very nature at least sounds, sounds
a little bit unfair. Obviously everyone's not
getting the same thing. They're not getting the same income or they don't have the same wealth. But the question needs to be asked is is this necessarily a bad thing? And even if it is a bad thing, are the ways of fixing it
or trying to address it, could they make matters worse in some ways especially for the people
that you're trying to help. And once again my goal
here is to not tell you one way or the other, but to at least give you a
framework for thinking about this So let's just think about a world where he have kind
of a fixed pie economy and there increasing inequality is clearly not doing good for for the people who have less resources. So let's imagine a fixed pie economy. So let's say this, this this rectangle right over here represents the total national
income in a given period. So year one, this is the
total national income. Total national income. And let's say that in year one, the top 10% of earners, the top 10% of earners make a third of the national income. So they make a third
of the national income. This is the top 10%. Now let me very clear. This area right over here is
not 10% of the whole rectangle. This is 35%, or actually this not I said this is a third,
so this is going to be 33. This is 1/3 of the entire rectangle but it's the income from the top 10%. Income from the top 10%. Now that would mean that the other 90%, other 90% is essentially splitting the remaining 2/3 of
national income between them. So if you go, if you take this reality and if the total pie, so let's do a static pie right over here. So pie stays the same. So pie, now I say pie, I'm talking about the square thing here. I guess it doesn't look
to, to much like a pie so we better call it a pie. So national income,
national income static, so it's not changing right over here. So then you have, let me try to draw a
rectangle of the same size, of the same size. And if you have increasing
inequality in this situation, then you might have the
top 10$ of earners by, let's just say this is year 10, year 10 right over here. Maybe instead of having
1/3 of the national income, maybe they have 50% of
the national income. I'm just picking round
numbers for simplicity. So this right over here is
1/2 of national income now from the top 10%. From the top, from the top 10%. So clearly if this happens, the other 90% are now splitting only 1/2 of the national income. So this is the other,
other 90% right over here. So here it's essentially a zero sum game. If you had a static economy, if it was not growing at all, then of course rising
inequality would mean that these people,
right over the other 90% are going to have lower per capita, I think you could say
income lower per capita GDP, they're going to have a
lower standard of living. So they're not doing
good in this situation. But let's think of the other way of where do you have economic growth. And economic growth that's enough so even if you have some inequality, the growth more than offsets that so that the, the other
90% is still better off. So let's se if we could visualize that. So, so economic growth. Economic, economic growth. Now let's your pie has grown
dramatically over 10 years and I'm just, maybe I'm exaggerating a little bit for the sake of, for
the sake of discussion. Let me draw them like this. So I'm trying about the same height, but now, our whole economy, let's say our whole
economy has, has doubled. Our whole economy has doubled here. And now at this situation, let's say you still have this
wealth and equality growing. So the top 10% in year one
having 1/3 of national income. Let's say that it still grows
to 1/2 of national income in year 10. So 1/2 of national income, so I can draw that a little bit neater. So half of national
income right over there. Half of national income, so 1/2 of national income. So this is still the situation where you've had inequality increase but the half of national income, that's half going to have to be split between the other, other 90% has still grown
fairly dramatically. If we assume that I've
drawn it pretty close to proportional, so let me just copy and paste this. So copy and paste. So this is how much was being split amongst the other 90% in year one. And notice, it's much smaller
than how much is being split by the other 90% and naturally I'll put it right over here to the other 90% in year 10. If we assume that the
population hasn't grown by this amount. It's grown by something smaller than this or maybe the population
has been relatively stable, then your per capita, your per capita GDP,
your per capita income is actually going to improve. So this is a situation here, where even though
inequality has increased, because the pie has gotten bigger, these people are better off. These people are better, are better off. And so that leads to really one of the fundamental questions, especially when you're thinking
about economic systems, is that you have this, you have this market system,
this capitalist system, this market economy, market economy and at least in recent
history it's shown us that hey, this is, this leads to growth, wealth creation. So pie, so economic growth, economic growth but it also leads to inequality. It also leads to inequality. Inequality is an inevitable by-product. Inequality. Now the question you might have to ask is well look, is this necessarily bad? If this economic growth is enough, everyone is better off. It doesn't matter if some
people are even more better off than other people but
everyone is better off and it's important to think about if you try to just focus on inequality, just focus inequality, are you also going to
stop this from happening? Another way of thinking about it. If you're one of the people in this in this situation right over here, you're the other 90%, would you rather stay in this world where you're in a static pie and inequality is not increasing, or would you rather go to
this world right over here. Now once again, the point of my video isn't to say that this world
is necessarily going to happen. There could be a world where
your total economic growth was less than this and the pie got bigger and these people are not as well off. But I, the whole point of this is just to highlight that inequality is not necessarily always going to lead to the people on, I guess who
are getting less of the pie, being worse off if the
pie grows fast enough and the other thing to realize is well, if you sometimes, you
might in an attempt to lessen inequality, you might also stifle economic growth. And that might keep everyone
from being better off in this scenario right over here. So once again, it really
depends on the context, it really depends on the
situation and the variables and then the numbers you're looking at, but I really just wanna emphasize that there's no such thing as hey,
if there's rising inequality it's going to hurt always the other 90%. It will definitely benefit the people who are maybe in the top 10%, but it also, because that's a
by-product of economic growth, it might make these
people better off as well.