The more I learn about wealth and income inequality, the more I realize I didn’t know — and still don’t know — and the more it’s obvious that many other people don’t know. Rampant confusion reigns. In my observation, most laypersons don’t understand the terms, and further don’t understand why we’re talking about them. In the spirit of bettering myself, I’ve studied up a bit on this over the past couple of years.
Following are a few things I’ve learned and/or clarified for myself:
(Please Note: This is a very long entry.)
• ‘Inequality’ Is A Description, Not A Judgment
Many commentators like to categorize economic terms as either “right” or “wrong”, but as far as I can tell, economists don’t apply moral judgments to these terms.
Economists use the term “inequality” much like a mathematician might use it. One figure is not equal to the other; that’s all it means. Four is not equal to five. It doesn’t mean “four should be equal to five”, nor does it mean “four and five should both strive to be four-and-a-half”. The word simply describes the state of two (or more) figures that are not equal.
When applied to wages or wealth, “inequality” merely describes the measurable discrepancy between the lowest wages and the highest wages, or between those having the least wealth and those having the most wealth — and stratifies the population into measurable groups like “the upper centile” (“the top one percent”) or “the bottom half”. That data itself suggests no applause or shame for the people represented in any of these groups.
Over time, trends are measured. For example, wealth inequality increased steadily for thousands of years, culminating just before World War 1, then decreased dramatically in the middle of the 20th Century before beginning to steadily rise again (see image at upper right). All this means is that the richest one percent’s share of wealth used to be a very large share, then the share size dropped, and now it’s growing again.
• Most Of The Numbers Are Estimates
There is no consensus among economists regarding the exact amount of wealth in the world, nor about who owns how much of it — there is agreement on general principles and definitions, but not on precise figures; the information simply isn’t available.
One estimate (.pdf, 2.1MB, from Credit Suisse, 2013) puts the total wealth of the globe at $241 trillion — about $51,600 per adult, but even this highly acclaimed source admits up front: “Although wealth is one of the pillars of the economic system, reliable data on personal wealth ownership is in short supply.”
Data on wages is a little better, since many nations keep tabs on the wages of individuals (for tax purposes) — whereas wealth (capital, assets, savings, property) is largely self-reported, often poorly estimated, and (especially in the case of the extremely wealthy) sometimes obfuscated as much as possible. It also depends on “market value” of assets — especially real estate, but including stocks, shares, etc. — which is often highly subjective.
• Income And Wealth Are Not Synonymous
Once you know this, it seems silly to mention it, yet it’s daily evident that many people don’t grasp the difference. Your “wealth” is the sum total of everything you own, minus your debts. Income can come not only from wages/salaries, but also from profits, interests payments, rents, and other forms of earnings.
In discussion about inequality, it’s important to note which category is under consideration. Fairly often, under stories about wealth inequality, I see comments about income inequality, clearly not even realizing it was a different subject. And vice versa.
• How Much Wealth Exists?
As previously mentioned, Credit Suisse (in 2013) estimated the total global wealth at $241 trillion. In 2015, the same organization estimated (.pdf, 5.3MB) total world wealth at $250.1 trillion. The Money Project puts the total closer to $1 quadrillion — about four times as high.
It appears that different things are being measured here. The Money Project attempted to list “all the money in the world”, including derivative markets, while Credit Suisse listed only “total household wealth”. Not being an economist myself, perhaps I didn’t know the right search terms to use, but I could not find any agreement online about “total global wealth”.
• Just How Unequal Is The Wealth?
The most wealthy individuals in the world, according to Forbes, are worth $50 billion or more. The same list names more than a thousand billionaires. Many, if not most of them, also control even more wealth via their companies. Compare this upper echelon with the “bottom half”, which has a top net worth of $3,210 — and many have a negative net worth: more debts than assets.
That means the richest individuals have 15.5 million times the wealth of someone smack in the middle.
Using Credit Suisse’s 2015 numbers, the average adult in the world has a net worth of $52,400. That means if all the “household wealth” in the world were piled together and then divided equally amongst all the adults in the world, each would get $52,400. Notably, this number is far higher than the median of $3,210. All you math whizzes know that the only way for the average to be that much higher than the median is for the top-end fortunes to be incredibly huge, skewing the average upward.
For a rough estimate of your own net worth, add and subtract the following items:
+ value of home/real property
+ value of vehicles
+ savings/checking accounts
+ retirement accounts
+ any other assets
– mortgage principal
– school loans
– credit card debt
= net worth
My own net worth is somewhere between $30,000 and $40,000, though it’s increasing steadily as my wife and I repay our mortgage and her school loans. Though it’s well below average, it doesn’t mean I’m in the “bottom half”, because I’m well above the median.
To rephrase: half of the people in the world have a net worth of $3,210 or less. That’s about 2.4 billion adults. Collectively, they own less than one percent of all the world’s household wealth.
To qualify for the top 10% globally, your (individual) net worth needs to be $68,800 or higher. Collectively, the top decile (10 percent) owns 87.7% of all the world’s wealth. But most of them seem poor when compared to the top centile.
In the top 1%, every adult’s net worth is at least $759,900 — that’s the poorest one-percenter; the top levels of that group have vastly larger fortunes. The world’s largest private fortunes, according to Forbes are closing in on $100 billion apiece.
Collectively, the one-percenters own half the world’s wealth.
And just eight people at the top of the food chain own as much as the bottom 50% (3.7 billion people), according to a new report, widely reported as I researched this entry. These eight men — including Bill Gates, Mark Zuckerberg, and Warren Buffet — comprise 0.0000001% of the population, yet control about $462 billion in assets, an average of $57.75 billion apiece, while the least-wealthy 3.7 billion people on Earth average $124 in net worth.
As a Vox story helpfully pointed out, “net worth” isn’t a perfect measure of how rich someone is. A dirt farmer in a third-world country, if he has no debt, is technically wealthier than an American university graduate who owns nothing but the clothes on his back and owes $100,000 for tuition. The difference, Vox points out, is the income. That farmer is expected to remain at the same level of wealth for the rest of his life (barring drought, war, etc.), while the university student is expected to earn a fairly decent wage, which will (within a decade or two) result in home ownership, auto ownership, debt repayment, etc.
Net worth also doesn’t necessarily correlate to quality of life. That hypothetical third-world farmer and hypothetical university graduate will have access to greatly varying levels of products, services, healthcare, and government stability.
Still, it is one of several measures that illustrates where the world’s population stands economically. Everything else being equal, someone with the median net worth of $3,210 (richer than half the world’s population) is having a harder time than someone who just edged into the the top one percent with $759,900 in assets.
The wealth is also unequal between nations. Of the world’s wealth, 67% of it is concentrated in North America and Europe — which contain only 18% of the world’s population.
Since so much wealth is concentrated in so few countries, “wealth inequality” means something different within the U.S. than it means globally. While my net worth places me solidly above median (but still below average) for the world, this is not true when compared only to U.S. adults. Here in the U.S., the average net wealth is an astounding $353,000 per adult — again skewed heavily upward due to large fortunes at the top — and the median is $49,800, which means I’m in the bottom half.
The stark differences between the “rest of us” and the richest are more apparent when we divide up the top one percent and look at only the richest 0.1%. In the U.S., that tiny slice comprises 160,000 families, each with a net worth of more than $20 million (source). Those 160,000 families, collectively, own as much wealth as the 144 million families that make up the bottom ninety percent.
• How Large A Group Is The ‘Top One Percent’?
The “Top One Percent” isn’t a a very exclusive group. Worldwide, it includes about 48 million adults — about equal to the combined populations of Texas and Florida — or the combined populations of the 46 largest U.S. cities. In the U.S., the “top one percent” includes 1.6 million families, or 2.4 million adults.
The threshold net worth of $759,900 can be misleading unless we keep in mind that almost all of those 48 million people own more than that. Once your net worth is over a million dollars, you’re counted among the top 0.7%.
A much smaller group is identified by Credit Suisse as “ultra-high net worth individuals (UHNWIs)”. There are more than 120,000 UHNWIs in the world, worth more than $50 million apiece.
Forbes lists more than a thousand billionaires — every one of which has a net worth more than a thousand times higher than someone with a mere million dollars. The top-ranked members of this list have fortunes of $50 billion or higher.
Note: Corporations also own wealth, but they are owned by people. I don’t know how corporate wealth figures into these global wealth reports. But just as a point of comparison, the world’s wealthiest corporation — Apple Inc. — owns about $260 billion in assets (source). 2015’s sales topped $200 billion, with profits at $45 billion.
• Where Does Wealth Come From?
In discussions online, it’s common to see people using the phrase “their hard-earned money” — usually as an emotional ploy to argue for lower tax rates. I wondered whether that money is “earned” or not.
Famed economist Thomas Piketty, in his book Capital In The Twenty-First Century, said “an estimate of 60-70 percent seems fairly realistic”, regarding how much of the largest fortunes were inherited, rather than accumulated.
Of the remaining 30-40 percent, how much is “earned”? It’s difficult to say, but we know that not all of it is. We know that many of the largest fortunes are accumulated via non-wage income (interest, dividends, rents, etc.). “Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size”, says Piketty. “Once a fortune passes a certain threshold… nearly all the income on this capital can be plowed back into investment.”
Piketty gives two poignant examples: entrepreneur Bill Gates and heiress Liliane Bettencourt. One worked (developed and then sold products and services) to amass a fortune, while the other “never worked a day in her life” to get her money. But once the fortunes were established, each grew at astounding rates even without work. Said a different way: Gates worked for some of his money and the rest added itself; Bettencourt worked for none of hers and it grew at the same rate. Again, this says nothing about the moral rightness or wrongness of these fortunes; rather, it demonstrates that “their hard-earned money!” is generally untrue of the largest fortunes.
Middle class and even low-income people can get return on their capital too, but typically their rates are astoundingly low. For example, the average interest rate on a savings account is currently 0.06% in the U.S. — which means that putting $10,000 in savings should earn you about six dollars in interest over the course of a year. Rates are higher on CDs and other forms of savings, but not dramatically so. Also, poor and lower-middle-class families are less likely to use restricted access accounts because they know they might need that money at any time — for a car repair, surprise medical expense, etc.
At 0.06%, you’d need $83 million in the bank in order to produce enough interest to provide even a median salary. Of course, if you have $83 million, you’re probably not using a savings account the way poor and middle class people are.
Currently, it’s a popular idea for upper middle class families to own rental properties; it’s seen as a reliable source of income for very little work. But again, in order to get enough income to live, you’ll need to own a lot of rental properties. Many people who attempt this barely see enough return to pay the mortgage, property taxes, and ongoing repairs. Not to mention that you first need enough income/wealth to own a second property that you can rent.
In other words, in order to make money just by having wealth, you first need a lot of money. So most of us are going to depend on income from wages/salaries.
• Income Inequality
Though income can be derived in all sorts of ways, the vast majority of the working-age adult population gets its income from work, either from wages or salaries.
Contrary to popular belief in the U.S., the “minimum wage” is not necessarily $7.25 per hour. There are quite a few exemptions, including many kinds of farm labor, disabled workers, very small companies, teenage trainees, and tipped employees. Globally, many nations don’t even have a minimum wage law (even including a few wealthy western nations like Finland and Iceland); the rest vary widely in purpose, application, and minimum pay. For example, Haiti’s minimum wage law comes to about 31 cents per hour — about four percent of the U.S. minimum wage, while the cost of living in Haiti is about 46% of the U.S. cost of living.
Even assuming a $7.25/hour wage and a 40-hour work week, a wage employee will earn $290 per week, or $15,080 per year. So a household with two minimum wage workers would bring in $30,160 per year (before taxes). Typically, minimum wage workers do not receive other forms of “compensation” such as healthcare, retirement benefits, maternity/paternity leave, stock options, etc.
On the other end, the highest salaries in the world change from year to year as various CEOs play musical chairs among the top corporations. One list has the 10 highest-paid people in the world each receiving more than $50 million per year. That list is topped by Apple’s Tim Cook, who was paid a single-year compensation of $377,996,537 in 2011. A different list has some of the same people at the top, but lists the biggest annual salary as $143,077,442 (J. Michael Pearson of Valeant Pharmaceutical). Regardless, all sources agree there are hundreds of people today being paid $10 million or more per year (salary plus other compensation, not including other forms of income like dividends, interest, etc.)
Piketty employs the term “supermanager” to describe the people earning ultra-high salaries, and points out that it’s a relatively new phenomenon. Others have noted this as well — in the 1950s, for example, CEOs in the U.S. saw compensation packages roughly 20 times higher than rank-and-file workers (source). By 2000, that ratio had ballooned to 200-to-1. At some specific companies, the difference is more stark. For example, JC Penney’s Ron Johnson was paid more than $53 million in 2011, about 1,800 times more than an hourly employee at a JC Penney store.
In attempting to explain this explosion of income at upper levels (while median salaries have stagnated), Piketty wonders whether it “can be explained as a form of ‘meritocratic extremism’, by which I mean the apparent need of modern societies, and especially U.S. society, to designate certain individuals as ‘winners’ and to reward them all the more generously if they seem to have been selected on the basis of their intrinsic merits rather than birth or background.”
For reference, the worldwide median income is $2,920. By country, it ranges from $19,308 in Norway to $118 in Liberia (and $15,480 in the U.S., in sixth place).
Many sources like to use household income (rather than individual income) as a benchmark. In that case, the U.S. median household income is currently $56,516, still down from its peak of $57,909 in 1999, and still lower than 2007’s $57,423 (source).
To be considered in the “top 1%”, your household income needs to be $383,000 or higher. (And the numbers curve up sharply to get to the 0.1%.)
By all accounts income inequality is increasing, more so in the U.S. than in most other nations. This means the highest incomes are getting larger, while the lowest incomes stay the same (and most in the middle have stagnated too).
• When Does Moral Judgment Enter The Picture?
If these are all just numbers to economists and statisticians, then when do we get to the moral judgments? That comes when we start talking about policy — government actions that can and often do directly affect wealth and income. Usually, we’re talking about taxes and minimum wage laws — though occasionally we’re talking about worker protections such as healthcare, maternity/paternity leave, overtime regulations, etc. Suddenly all the numbers take on “good” or “bad” qualities.
The questions you ask — and the way you derive your answers — about these numbers determines where you fall on the political spectrum.
An advocate of free market capitalism sees nothing wrong with the current system, except perhaps the existence of minimum wage laws and government-mandated worker protections — seen as harmful government meddling in a system that will eventually correct itself and arrive at the optimum level of pay and protection for everyone. Unsurprisingly, people who hold these views tend to spend their money and votes on Republican and Libertarian candidates (here, I’m referring to U.S. politics; in other countries, parties and positions vary quite widely).
One of my first questions, as I began to learn about the stark discrepancies in wealth and income, was: “Is there any legitimate justification for this inequality?” In other words, what are the reasons for it, and are those reasons acceptable to me, morally?
• How Is Income/Wealth Inequality Justified?
Some will say the inequality doesn’t require a justification; it just is. Others typically offer the following justifications: (1) It provides incentive, (2) It reflects amount of work/productivity, (3) Financial outcomes are the result of personal choices. I have given serious consideration to all three during the past few years, and find them all lacking.
• Income Inequality Provides Incentive
Early, I learned that many economists justify extreme income inequality “on the grounds that it is required to give people a strong incentive to be productive” (quote source). In fact, this is what I was taught as a child: the more work you do, the more you’ll be paid. This logic says: there would be no incentive for any worker to try harder. No one would want the tough jobs, the dangerous jobs, the long-hours jobs, the jobs that require greater education and skill, or the jobs with the most stress and responsibility — if all salaries were equal. Each person would gravitate toward a job that resembled his or her hobby — what he/she enjoys doing.
For me, this is a perfect justification for some inequality of income. Higher pay should be associated with more difficult jobs or jobs that require more training and education. (Spending $100,000 on a degree damn well better be worth it.) Higher pay should be associated with higher productivity and greater efficiency. And to some degree, higher pay should be associated with length of employment — to encourage loyalty.
Concrete examples: If a first-day grocery bagger at Safeway earned as much as a 20-year veteran of a sewage treatment plant, no one would be working at sewage treatment plants. It stands to reason. Medical doctors should be paid more than janitors, due to the level of education and expertise required. A clothes-sewer in a garment factory should be paid more than another sewer in the same factory, if he produces more clothes. I don’t think anyone disagrees with the “incentive” justification in instances like these.
But there are issues with this justification. First, and perhaps most importantly, the argument only applies to income from wages and salaries, and does not apply to income from inheritance and capital — the primary source of income for the wealthiest households. Every single one of us, given the opportunity, would prefer to inherit a multi-million-dollar fortune and simply earn the dividends, rents, and interest for the rest of our lives. Secondly, once we begin talking about multi-million-dollar salaries versus minimum wage jobs, it ceases to make sense. By the flawed logic of this justification, everyone could earn $20 million per year if only they worked hard enough, studied hard enough, etc. We know that’s not the case.
• Income Inequality Reflects Work/Productivity
A second but similar justification offered is “high-income families have higher earnings than low-income families is that they largely work more” — from a university professor of economics (source). This claim is backed by statistics showing that the top quintile (20%) of income averaged 2.1 workers per household, while the bottom quintile had only 0.48 workers per family (one person working less than half-time). “So it should not be too surprising that wealthy families have more income, since they have four workers for every worker in the lowest-income group”, the explanation goes.
This justification would of course be ironclad and unassailable, if the top quintile’s income was approximately four times that of the bottom quintile’s income. But it’s not four times greater, is it? And, while anecdotes can’t override quality data, anecdotes can easily show this justification to be absurd. One can easily find low-income households where two or more adults are engaged in full-time work (often well beyond 40 hours per week) yet barely make enough to live, while there are well established examples of high-income persons who do very little that could be called “work”.
It’s not difficult to find examples of CEOs who are paid $10,000 or more per hour. Yet I’ve worked 80 (and more) hours in a week and earned closer to $10 an hour. The work/productivity argument says that CEO’s work was a thousand times more valuable than mine.
Besides, direct observation shows that pay is often not equivalent to productivity. Every one of us who’s had a job has personally witnessed this in action. We’ve seen the slacker earn the same pay as everyone else, while the hardest-working employees get no special bonuses (and sometimes burn out). We’ve seen workers get raises simply for sticking around, despite not being any more valuable to the company than a less senior employee.
It also often works out that the largest salaries are given to those who are the most well-connected, who were born into the correct circles of influence, regardless of ability, experience, training, or productivity. As economist Paul Krugman points out in The New York Times: “In practice, however, the children of the wealthy benefit from opportunities and connections unavailable to children of the middle and working classes.”
• Personal Choices
A third justification I’ve seen, often intertwined with the other two, is the idea that all financial outcomes are the results of personal choices (example). Richer people simply make better choices, this logic says. Yet most wealth comes from inheritance, and wealthy people have more access to better schools, better jobs, and influential people.
To me, the “personal choices” claim is better at explaining slight variations between people within certain economic classes. Two middle class women, working in a similar field, will see different outcomes based on many personal choices: when to have children, how many children to have, whether to drink or use drugs excessively, whether to gamble, etc. Or take two men, both from poor families and with little education; the one who makes better choices will have a better chance at surviving or even moving into the middle class. But if you compare one of those women, or one of those men, to a person born into the top centile, their personal choices are rarely going to matter.
• Is There A Valid Justification?
If pay inequality can’t be justified as an incentive, as a reflection of how much you work or how productive you are, or as a result of personal choices, then what is the real explanation? Why is there so much of a gap between top pay and bottom pay?
First, let me reiterate that each of the above provides some explanation for some inequalities, especially within specific economic classes, within specific companies, and even between types of jobs. But none of them explain the extreme income inequality that pervades the entire economy, nor do they explain the extreme inequality of wealth.
I haven’t found a valid justification — certainly not a morally conscionable justification. But there are explanations — which, I think, are more complex and nuanced than any trite phrase such as “they just worked harder”. There are multiple factors, going back to before recorded history.
I’ve written a separate entry that I hope explains these factors — the concepts of ownership, inheritance, money, and interest. Once these four concepts were established in human society, then greed was able to operate without constraint, and it became possible for individuals to gather far more wealth than they or their descendants could ever need, use that wealth to gain more, and then keep the collection intact by passing it to heirs.
Other factors and concepts influenced the way people viewed these social constructs and how influential they could be. Those factors include religion, law, education, and others. The ideas of property, inheritance, money, and interest eventually became accepted custom and were eventually enshrined into law, sometimes backed by the dominant religion.
• The Luck Of The Rich
It turns out that the best way to get rich is to be born rich.
“In the U.S., about 50 percent of variation of wealth and about 35 percent to 43 percent of variation in income of children can be explained by the relative wealth and income of their parents” — from Bloomberg. The wealthier your birth, the greater your likelihood of a top-tier education (without cumbersome loans), the more likely you are to marry another rich person, and the more likely you are to be hired by a wealthy friend of the family. While about 40% of men have at some point worked for the same company as their fathers, “the proportion rises to 70 percent among the top 1 percent in income distribution” (again, from Bloomberg).
There are other reliable predictors of future wealth, but none of them as reliable as being born wealthy — and many of those are dependent upon existing wealth levels.
The “birth lottery” also applies to the poor (source), and for basically the same reasons. People born into poverty typically don’t have access to the best public schools, and have far less access to college educations — much less the ability to pay for it. They’re far less likely than middle class or wealthy persons to have wealthy friends or family friends who can hire them.
All of this is sheer luck — no one can choose which income bracket they’re born into.
It’s also sheer happenstance that a person is born a specific color, or in a specific country — other factors that affect wealth and income.
A person born in the U.S. is far more likely to end up rich (or even “middle class”, by U.S. standards) than a person born in, say, Liberia or Haiti — even if all other factors (education, skin color, etc.) are equal. Among people born in the U.S., a white person is more likely to end up wealthy than a person of color — even if all other factors are equal.
So, one can all but ensure wealth and/or high income by being born into a wealthy white family in the U.S., and all but ensure poverty by being born into a poor family in a third-world nation.
Obviously there are anecdotal exceptions; they often become famous due to how unusual they are. Often, the intent of telling a rags-to-riches story is to encourage others: “If it can happen to her, it could happen to anyone.” But usually ignored is that it can’t happen for everyone.
And even in those exceptional stories, luck often plays a huge factor.
• How Luck Runs Things
Luck — or chance — isn’t only evident in the determinations of which family or country you’re born into. Even wealthy — and especially middle class — families can fall into poverty due to factors beyond their control. Surprise market shifts sometimes make wealth disappear. Seemingly dependable jobs suddenly disappear — when a company fails, or is purchased, or moves jobs elsewhere. For everyone outside the wealthiest slice, a surprise medical emergency or natural disaster can lead to bankruptcy. It makes no difference what your personal choices were, or how hard you worked, or how loyal you were, or how educated you were, or how productive you might be.
Even the most popular advice for growing wealthy depends largely on factors outside your control. If you search out how-to guides for gaining or increasing wealth, you’ll repeatedly see this advice: own your own company. This is how Bill Gates, Steve Jobs, and Mark Zuckerberg rose from obscurity (though none of them grew up poor) to move among the world’s wealthiest. The reasoning goes like this: if you’re working for someone else, there is a cap to your salary possibilities, but if you work for yourself, there is no such cap. You’ve put yourself in the driver’s seat.
What these “helpful” lists always fail to point out is that for every Gates, Jobs, and Zuckerberg, there were a thousand other people who did the same thing and failed — or hung in there but continue to struggle. For every nationwide restaurant chain, there are a thousand family-owned restaurants that never pulled enough profit to expand. For every national retail giant like Walmart, there were a thousand mom-and-pop general stores that had to shut down. For every drugstore company like Walgreens or CVS, there used to be a thousand local drugstores that were bought out or went belly-up. For every Midas or Firestone, there were a thousand mechanics who couldn’t stay in business, despite doing everything right.
One example: In 1997, someone thought the time was right for online social networking, and launched SixDegrees.com, “the first recognizable social network site” (source). It “failed to become a sustainable business” and closed in 2000. MySpace didn’t come along until 2003, and Facebook (in its original, local configuration) wasn’t until 2004. The idea of SixDegrees.com was right; the implementation was right; only the timing was slightly off, something that couldn’t have been predicted beforehand. (Note: the site is still up, but is under different management, and almost no one’s heard of it.)
You can develop an innovative product, hire the right people, and get a groundswell of public interest, but then no one buys your product or service on opening day. You can open a business in the right location and work hard, but just end up doing that for the rest of your working life.
The fact that a handful of entrepreneurs were immensely successful is not evidence that being an entrepreneur will lead to success; it is only evidence that a handful of entrepreneurs are able to find success.
Further, there are unseen factors at play outside the realm of economics or business. Health is a big one, including mental health. You can do everything “right” in the business world, but still get struck down by disease, accident, or mental illness. Another is war, which has been known in history to wipe out even the fortunes of the wealthiest (though it sometimes makes money for others), but is much more reliable in wiping out the small sums owned by the poor and lower middle class (not to mention outright killing people).
All of these are factors outside a person’s control, and the prevalence of all of them rip holes in the mantras of “you’ll be okay if you just work hard”.
• Is Extreme Inequality Fair?
This is a moral question, that once asked, can lead to a progressive point of view.
As I mentioned earlier, I think some inequality is fair. Someone who works 40 hours a week ought to be paid more than someone who works 20 hours a week (everything else being equal). A job that requires years of training and an expensive education ought to pay more than a job anyone can do. I don’t think anyone disagrees with this.
But is it fair that two people, each with an identical work ethic and personal choices, can end up on opposite ends of the economic spectrum based purely on circumstances of their birth? One studies, works hard, and then goes to elite universities and takes over a giant corporation or hedge fund because he was born into wealth. The other studies, works hard, and ends up at a part-time blue collar job (or less) because he was born into poverty and can’t afford tuition and will never meet the “right” people in order to get a cushy job?
I assume almost no one thinks this is fair.
Is it fair that one child is born with almost nothing while another is born with everything? Is it fair that no amount of working, struggling, or personal responsibility can ever close that gap?
One side responds with the platitude: “Life isn’t fair.” This is code for “get over it” and “accept your lot in life”. The other side says perhaps we can fix it, maybe there are legislative steps to even the playing field, and there is a different way of looking at economics.
• Being Unfair Isn’t The Worst Part
Piketty said it this way:
It is a very real fear that not only can the extremely wealthy influence policy-makers to protect their interests, but that the very wealthy can become the policy-makers, as we saw in the 2016 U.S. Presidential elections. Not only did a billionaire win our presidency for the first time, but he began immediately nominating to important cabinet positions other people of very powerful wealth — our new Secretary of State is Rex Tillerson, basically an oil baron, with a personal fortune of about $250 million. Secretary of Education Betsy DeVos was born into a billionaire family and then married a billionaire heir to the Amway fortune. Secretary of the Treasury Steve Mnuchin‘s personal fortune is about half a billion dollars. And so on.
It’s beginning to look a little like the 230-year experiment in democracy was just a flash in the pan when compared to the long-term history of human societies. Wealthy elites apparently won’t stand for it.
• We Know How To Close The Gap
Notably, extreme wealth and income inequality lessened dramatically during the the 20th Century (mostly in Western first-world countries), before the gap began to grow again. According to Piketty, this is the only time it’s ever happened — at least that we can be sure of.
It is not difficult to identify the factors that narrowed the gap and the factors that began to expand it again. In fact, noted economists have already identified these factors; it’s just that many people aren’t listening.
What were those factors?
One huge factor that Piketty identified is fairly obvious: two world wars. Staggering amounts of wealth were simply destroyed during those wars. That factor alone lessened wealth inequality; wealthy families lost more than poor families because they had more to lose. Additionally, there were market disruptions and losses of foreign assets. Some wealthy folks chose to sell off capital rather than decrease their standard of living. Let’s assume that none of us want to go that route again, and note the other factors that narrowed the gap.
Over the same time period — approximately — as the two World Wars, nations began to implement or increase new kinds of taxes on wealth and income, introduce rent control, low cost housing, strong financial regulations, minimum wage laws, and more.
1. Taxes: taxes on dividends and profits became firmly established, income taxes became highly progressive, estate taxes were introduced and/or increased.
2. Rent control: due to runaway inflation during the war years, governments (both locally and nationally) introduced rent control laws. These in turn lowered real estate values (or kept them from rising further), which hurt the wealthy more than the poor.
3. Low-cost housing: as millions of soldiers returned home from war to start new families, mass-produced houses popped up across the countryside, keeping housing costs low and allowing an entire new class to become property owners.
4. Financial regulations: in the wake of the Great Depression, many nations enacted strong financial regulations to prevent another economic collapse. These had the side-effect of capping profits of banks and brokerage firms.
5. Minimum wage laws: such laws had popped up in a few places before the two World Wars, but truly came of age during and after the Great Depression. They continued to be strengthened for several years afterward. This provided a boost to the salaries of the lowest-paid workers, thus automatically reducing income inequality.
• So Why Didn’t It Last?
The reduction in wealth and income inequality didn’t end naturally.
All the protections and economic forces that caused the dip in the graph were intentionally undone, especially in the U.S. The highly-progressive tax rates of the 1950s have all but disappeared. Some corporations or industries wrote their own loopholes in to law and thus avoided paying taxes altogether. Some businesses are now outright subsidized by the government. Conservatives fought estate taxes. Wealthy landlords fought off rent control policies, often by simply taking a loss and building elsewhere. It became easier to obtain larger mortgages, so home prices increased. Financial regulations that worked for decades were struck out by libertarian-leaning politicians under the influence of wealthy Wall Street bankers.
And so we see a “U”-shaped curve in any chart displaying wealth inequality. Things became more equal for a while, but then began to return to a historical norm.
The point of mentioning this is that we know exactly how to close the gap — at least somewhat — because we’ve done it before, and we can do it without bombing capital into oblivion.
• Additional Solutions
Other solutions besides the above have been proposed, including Guaranteed Basic Income (GBI), a moneyless society, and a global progressive tax on wealth (favored by Piketty), not to mention old-fashioned socialism. Each idea has its desirable facets, but each seems to have quirks too (not to mention some of them being impossible from a practical standpoint).
Some have proposed the fringe view that there should be a “maximum wage” law. I would be willing to entertain such an idea, if only for discussion’s sake, since such a law would (ostensibly) lessen income inequality. However, even proponents must admit it would apply only to wages/salaries and not to other forms of compensation or other forms of income (interest, dividends, rents, etc.) Many of the obscenely high incomes in the world don’t come from paychecks. And of course, it would not affect stored wealth at all.
In case it wasn’t clear from my introduction, it bears repeating that I’m not an economist — and in fact most of what I wrote here has only been evident to me for a couple of years. I suspect that this information will be startling to some and shrug-worthy for others.
Many people, even among progressives, have cynically given up hope that economic inequality can be solved in their lifetimes. “Business interests are just too powerful.” “Too many voters are uninformed” (or misinformed). I haven’t given up hope yet, but I do not remain incredibly optimistic.
I take the view that Thomas Paine expressed in “Rights Of Man” (1792), when he said “an overgrown estate… is a luxury at all times, and, as such, is the proper object of taxation.” He noted that if a certain sum is “sufficient for the support of a family”, then any amount beyond that is a “luxury”, and once you get to triple or more of the necessary amount, “we shall at last arrive at a sum that may not improperly be called a prohibitable luxury… There ought to be a limit to property or the accumulation of it by bequest.”
He was speaking of wealth — the massive estates of the landed aristocracy — but the same principle can apply to income as well. When we speak of ever-large incomes, we eventually climb past a point were any further amount is not only unnecessary, but obscene. This is why progressive taxation makes sense — the more you own, or the more you earn, the less that an increased tax rate can be considered injurious.
I further take the view that it is morally wrong to live in mansions while a single person remains involuntarily homeless. It is wrong to power through $1,000 lunches while a single person goes hungry. It is wrong to hold a $20 million birthday party while a single child lives in squalor.
Once enough people — voters — are convinced of this, then perhaps things can change.