nav-left cat-right

Thoughts on Income Inequality

In an article so blind to the obvious that it might as well be willful, The Wall Street Journal opined, “Americans Are Richer Than Ever, But They Don’t Feel That Way: U.S. household net worth is expected to hit another record, but that won’t mean much to most people”. And not once does the article mention income inequality. Boiling the problem down to the simplest example, let me point out that, between us, Bill Gates and I average about $43 billion. And yet somehow, I’m not feeling richer. The US has a distribution problem, not a wealth problem. There is more wealth, in absolute dollars, than ever before. Heck, the Fed doubled the money supply in the recover from 2008, so there is literally twice as much money as before. But it has not been spread very evenly. Those who have ended up with a much greater proportion than before the crisis. And the other 98 percent have, well, about the same, in absolute terms, as before. Think about that. The amount of money (dollars, specifically) doubled from 2008 to 2016, and all of the increase went to the top 1%. And most of that went to the top 1% of the top 1%. That fact alone may do more than a little to explain the mood in the country.

Meanwhile, I find it curious how any criticism of wealth inequality is instantly met by personal attacks, as if only people who are jealous (and lazy) would be disturbed by the present trends. We are all living in a system that has deliberately chosen all of the things that produced the present situation, through laws and regulations. We don’t live in a “natural” economic system, because arguably no such thing exists. All economic systems are choices, and all produce winners and losers (by degrees). And anyone who is among the “winners” will spend a lot of time arguing why the system is totally fair and any changes, no matter how small, would be immoral.

When I pointed out in the comments the logical flaw in the headline (with the comment: Between us, Bill Gates and I average about $43 billion. And yet somehow, I’m not feeling richer) a few helpful souls replied with things like, “Nothing’s stopping you from making your desired fortune except for you” and “how about we just tell Bill Gates to give you a billion. He won’t miss it. After all he has forty two more right. [sic]” completely missing the point of averaging my net worth and $86 billion and getting $43 billion. Another commentator helpfully suggested,

“Bill gates wasn’t born rich. He went out and made a product that changed the world. Try doing that and see if that average doesn’t come up a bit in your favor. The “hand out” mentality is the reason we have the issues we do in this country. Everyone wants a free ride on someone else’s back.”

Which conveniently ignores the fact that Bill Gates actually was born rich, even if he skillfully played his advantages to a fantastic career. These poorly thought out ad hominin responses illustrates a tendency that Russell Brand pointed out a few years ago: any discussion of income inequality as a structural problem will inevitably be refuted by attempts to make income inequality the personal problem of the person pointing it out. If you are poor, it is jealousy. It you are rich, well, it must be sensitivity, or naivety, some form of ignorance.

Another common response is some variation of the “straw man argument” that obviously people are not born with equal talents, so any attempts to engineer equality of outcomes is doomed. But of course no one ever suggested that everyone had to be equal – in wealth or in talent. But I would suggest that we have an economic system in place that actively upwardly redistributes income, and that this represents a political choice. If we want to address this, we don’t need to change human nature or abolish private property. We only need to tweak the rules. The same rules that are currently upwardly redistributing. For example, we could review the carried interest loophole. Or reconsider whether our tax system is sufficiently progressive. Review the perverse incentives that make corporate inversions a logical choice for megacorp executives. Or the loopholes that allow an entity to book all its sales in one jurisdiction, but book all its profits in a different, lower-tax jurisdiction. Or the Double Irish with at Dutch Sandwich. Or the fact that over 100 major US corporations paid no tax in one of the past 8 years, and 18 paid no taxes at all in the last 8 years. In fact, some paid less than no tax, and actually got taxpayer money (despite showing strong profits to Wall Street). And the list of systemic problems goes on. All of these represent rules that create winners and losers. The winners can try to justify their success with reference to their personal intelligence, work ethic, and moral qualities. They can smile and say that anyone could do what they did if they only worked hard enough. But that is disingenuous, even if they they have themselves completely fooled. They are simply gaming a system. Look at the system. Ask who it is serving. Ask why.

Others try to box the discussion into a false binary state. If you want to address “income inequality” either we have total equality, or any degree of inequality is all the same. And since we can’t have perfect equality, then what we have today is really no different than any other level of inequality we might have. That is a fine trick to divert attention from the real problem, which is the degree of inequality. I take it as a given that there will always be inequality. It seems to be so obvious as to be beyond any sort of real discussion. But that the degree of inequality we get as a society is actually a choice is something that a lot of people want to ignore. As if the present system is some sort of “natural” state. It is not. It is a set of choices.

Yet another angle to avoid hard questions about inequality is along the lines of, “Why do you have an opinion on the wealth of another person? Handle your business and keep your opinions to yourself about everyone else’s.” (actual comment on a thread about inequality). As with so many other suggestions, it helps to ask, who benefits? Who benefits if we ignore the systemic causes of inequality?

But we can’t ignore our economic system. Democracy requires us to be interested in the dynamics of our entire society. Too many people think that it is only about them. And too many people fail to see how their success (or failure) is tied up with the structures that the (democratic) society they live in has chosen, through the political process, to allow. Society causes money to be redistributed, through regulations, tax policy, and enforcement priorities. Our society has many massive means of upward redistribution constantly working, as well as a few minor methods of downward redistribution. Many people talk a lot about one, but not about the other. Unless you look at the whole, you don’t have the necessary context.

And speaking of context, consider productivity and productivity gains. In economics, productivity gains are the only source of wealth increase of a society as a whole. A society that stops becoming more productive is a society that produces no new wealth, and is left moving around the wealth that already exists. So has the US stopped becoming more productive? Not at all. We continue to be the wonder of the world. In fact, the average American today is more than twice as productive as in 1970. So the average worker today produces twice as much value as in 1970, and generates twice as much income… for somebody. But for who? Because the average American worker earns just as much money (adjusted for inflation) as in 1970.

The key takeaway from this graph is that if median household income had kept up with average productivity gains, we would all be earning a lot more. Median household income today in the US is a bit over $51,000. If wages had kept up with productivity, that is, if we had the same distribution of income as a country as we had in 1970, then the median household income in the US today would be around $127,000. So if your household is making less that $127,00 and at least one member works a job that is at least moderately skilled, the question is not, “Why am I so lazy?” but, “Where did the rest of my $127,000 go?”

Under any system there will be some who are richer. Some people have the talent and drive to succeed in any setup. And the system they operate in will determine whether they take advantage of slave labor, or child labor, to what degree they can externalize environmental costs. Or whether they can make huge speculative financial bets with other people’s money and take a large percentage of the upside, but be indemnified from any downside (basically, a no-lose situation). These things are all choices. And I’m advocating we reconsider some of them. Because the degree of inequality we have is starting to get unhealthy. We are trending towards one of those trap situations where the long-term self-interest of the ultrawealthy is in conflict with their short-term self-interest. And if too many of them go short-term, we will all be worse off in the long term. At least, that is my prediction.

Leave a Reply

Your email address will not be published. Required fields are marked *