On The Inequality Of Wealth

I’m so excited to write this post, mainly because I know the amount of vitriol I’m going to get for it.  Among other topics, the inequality of wealth ranks right up at the top in the inability of people to read the words written on the page instead of giving the writer’s words their own spin.  Such is life, people never change, but I can ask that you make the attempt to at least pretend to give it a read without injecting your own views, at least until the end, let’s take it one step at a time I guess.

Here are the facts, income inequality in the United States has been increasing since the 1970′s according to the IRS.  As of 2007 the United States had one of the highest levels of income inequality among developed nations.  Between the 1940′s and 1970′s income inequality actually decreased.  Between 1979 and 2005, the mean after-tax income for the top 1% increased by 176%, compared to an increase of 69% for the top quintile overall, 20% for the fourth quintile, 21% for the middle quintile, 17% for the second quintile and 6% for the bottom quintile. For the same time span the aggregate share of after-tax income held by the top percentile increased from 7.5% to 14%.

Now, I can throw all the statistics at you that you’ll ever want to know, but statistics are statistics and they can be bent every which way.  If you want just about all of them, just go to this Wikipedia page, it’s surprisingly awesome on the subject.

My point here is not to make a statistical argument, anyone can do that in either direction, arguing different correlations and causations.  I just wanted to briefly show you that income inequality is indeed rising.

What I would like to talk about here, is whether or not this is a problem, should be counteracted, or even can be counteracted.

First off, when someone hears that income inequality is increasing, I don’t believe they quite understand that the who pie has been increasing rapidly as well.  Those in the lower percentiles of income are earning more, that’s a fact.  So don’t tell me that those in the higher percentiles are earning more at the expense of those at the lower end, it’s just plain wrong.  And don’t compare the United States to a banana republic, at least not in this sense (inflation and currency debasement soon possibly).  Banana republics don’t see the pie grow, they just see the slice of the pie for those at the lower end get smaller while those at the top steal larger portions.  So if you’re an economic pundit, stop making these ridiculous connections between the United States and Argentina in the 1940′s (I’m looking at you Mr. Kristof).  Banana republics also often aren’t republics at all, they are just dictatorships shrouded in the veil of “republic” as some stupid gimmick, who knows why those leaders even care.  We’re comparing apples to oranges here.

So why have incomes been rising more for the top earners here than for the bottom earners.  Well, I chalk it up to technological, social, and industrial progress.  Yes, before you throw a brick at your computer screen just read.  Think about the ability for a kid in his garage to go from nothing to owning a billion dollar company now compared to the pre technology revolution era (1970′s).  I don’t have to name them, but just think about Michael Dell, or Bill Gates, Steve Jobs, on and on.  These billion dollar companies were created rapidly.  How long did it take for Groupon to become a billion dollar company, a few years?  Wealth is created in this country now at an amazing pace because of the ability for new enterprises to spring up quickly and grow to an enormous size.  Globalization has a lot to do with it as well.  Companies can now reach markets the world over because of the speed of information and advancements in logistics.  Your customers are no longer relegated to a defined geographical area, your customers are the whole world.  Again, the pace with which anyone can grow a business from nothing to monstrous has been increasing rapidly since the 70′s.

On the other side, that same advancement in technology has decreased the need for the unskilled population of the workforce.  Automation has taken jobs away from this group, and has put a cap on what they are worth to the company.  Every day companies do the cost benefit analysis of replacing people with software, you can see which is winning.  This is not driving down wages across the board, they are still rising for the middle class, but they aren’t rising much, and you can see what it has done to the unemployment numbers.  Why would this lower and middle class workforce keep up with the upper percentiles of earners when their skills can be replaced by software?  They are not contributing more to the earnings of companies than they did previously.

So is the increased inequality the result of the upper percentiles benefiting at the expense of the lower percentiles through some malicious manner, or are individuals growing extremely wealthy at a higher clip these days because of structural changes to the economy?  I would argue the latter.  That being said, I think it’s pretty obvious that these advancements in technology are causing the middle class to shrink significantly and have contributed greatly to the rise in unemployment.

The pie is growing a lot bigger, but only the very upper percentiles are getting a meaningful amount more to eat.  The next question becomes, can and should this be changed?  Let’s start with can it.  I don’t believe so, simple.  If you want to go back to a world where software doesn’t exist and the kid in his garage can’t start a billion dollar company in 2 years, be my guest to think that way, but it ain’t happening.  We could become Europe, where there are very strict rules on hiring and firing, wage controls, on and on.  I don’t think that jives with the American spirit of ingenuity, flexibility, and entrepreneurship.  I’m not going to make the argument that Groupon being a 5 billion dollar company which is creating a massive amount of wealth for its share holders is creating a lot of jobs, how could I.  These tech companies take very little in the way of personnel, a few thousand people, at most.  Compare that to a manufacturing company that’s worth the same amount, I think you get the drift.  The point here is that for those with great ideas, a great education, and the will, there has never been a time or place in the history of the world when a single person can amass this kind of wealth, quickly.  That’s an amazing thing, and amazing opportunity.

Of course it all goes back to education, as just about everything does, the world over.  It is the single defining characteristic that makes the most impact on the ability of a healthy individual to increase their earnings.  I think the “should we work to change this” question is the wrong question.  Taxing those upper percentiles more is not going to change this equation.  I’m not necessarily against that, maybe it’s the right thing to do, maybe it’s not, but it doesn’t answer the question of income inequality, it just puts more money in the hands of the government, again, not for or against that either, it’s a separate issue.

I don’t think the income inequality issue is a moral one.  In fact, I think the more inequality we have the more progress we’ve made in enabling a no one to become a billionaire.  This country is all about giving everyone opportunity, not giving everyone an equal piece for nothing.  If you want a piece for nothing, go live in Europe.  It’s extremely hard to watch a large portion of our population lag behind the top earners, there is a lot of fear out there and for a good reason.  Our economy is one again undergoing a structural change, and at this point I don’t see what drives wages for the unskilled middle class.  That doesn’t mean the system is broken, the system is what it is.  As I said, the key to everything is education, if we want to give everyone an equal opportunity to be that no one who becomes the billionaire, we need to give everyone a better education so that they can create the next company that sells products to the world.

Or we can hope for artificial intelligence robots to do all the work for us soon and everyone can live off the state.

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