Examine inequality’s causes before prescribing solutions

By Nick Gillespie
December 19, 2012

Fear and loathing of income inequality is both totally understandable and ultimately misplaced.

It’s understandable because everywhere around us it seems as if top income earners ‑ those latter-day kulaks vilified as the “1 Percent” by the Occupy crowd and populist politicians ‑ are gaining while the rest of us seem barely able to hang on to a lower-middle-class standard of living.

It’s misplaced because it glosses over strong evidence that the ability to rise above your starting place ‑ the American Dream, by most accounts ‑ is better than it was 40 years ago.

There is no doubt that the spread between top earners and those below them has grown over time. The share of income earned by the top 1 percent in the United States has doubled since the early 1970s. The top 20 percent’s share  has risen, too, though the increase is much smaller and has leveled off since the 1990s.

Yet it is far from clear that inequality is a bad thing when it’s the result of market forces. Think about it: Do Bill Gates’ billions take bread from your mouth, or have Microsoft products allowed you to put bread in your wallet by making you more productive and the goods and services you buy cheaper?

As important, it’s not clear how to “compress” incomes even if we want to. The same trend toward greater inequality is happening in most advanced economies, across different tax and regulatory systems. Despite spending $1 trillion a year on the poor, federal and state governments report increases in poverty and need. The Congressional Budget Office estimates that President Barack Obama’s proposed tax increases on individuals making over $200,000 and joint filers making over $250,000 would raise just $42 billion in 2013 and $39 billion in 2014. That’s not enough either to strip the wealthy of their booty or lift the poor up ‑ especially given the bad track record that government programs have in boosting the prospects of the least skilled among us.

Which isn’t to say that government policies don’t redistribute income and opportunity. They do in all sorts of ways, but typically in ways that work against leveling opportunity.

For instance, in terms of total compensation (salary plus benefits), federal workers earn 16 percent more on average than private-sector workers with the same experience, education, and responsibilities. They are paid out of your current and future taxes, not corporate profits. In what some have seen as an echo of the setting for The Hunger Games, the growing power of the federal government to dispense favors and direct whole industries has transformed the Washington, D.C., metro area into the nation’s wealthiest, boasting 10 of the top 20 counties for median household income.

Then there is generational inequality, which is also goosed by government policy. The Pew Research Center finds that in 1984, households headed by someone 65 years or older possessed on average10 times the wealth of a household led by someone under 35. By 2010 that gap had widened to 22 times. Part of that disparity is the result of payroll taxes that take about 12.4 percent (half from the worker, half from the employer) of every dollar of earned income up to $110,000 to pay for Social Security (for the past two years, the worker’s share of Social Security taxes has been reduced by 2 percentage points, a break that will expire at year’s end). Another 2.9 percent of all wages ‑ again split between employee and employer ‑ goes to Medicare.

Payroll taxes take a relatively bigger bite out of the paychecks of younger and poorer Americans even as old-age benefits are disbursed generally without regard to need. To add insult to the situation, Social Security will be paying out fewer dollars than new and future retirees will have put into the system. So at the very time when younger Americans have lost ground to their elders, they are compelled to pay into a fund that will shortchange them when they become eligible for it. Given the already unsustainable benefits levels of both Social Security and Medicare ‑ their major trust funds will be exhausted by 2033 and 2024, respectively ‑ it’s likely that those of us retiring in 20 or more years time will face even more sharply curtailed payouts. Would that we could use some of the 15 percent of our income that goes to payroll taxes to build for our futures.

However, all is not darkness, even in the Great Recession. A June study from Pew’s Economic Mobility Project finds that 84 percent of Americans have “higher family incomes than their parents did.” Among people raised in the bottom income quintile, the figure was 93 percent.

These findings are widely accepted. Brookings Institution scholar Scott Winship, who worked on the Pew study, has documented that even as the rungs on the income ladder have spread out, mobility has not diminished since the early 1970s. In fact, he argues that over the past four decades, “upward mobility from poverty to the middle class rose from 51 percent to 57 percent.” As he told me in an interview earlier this year, “You can be concerned that there’s not enough mobility or enough opportunity, but you don’t have to also believe that things are getting worse.”

That is good news, even as Winship and others grant that there is no simple, obvious way to increase mobility, especially for the poorest Americans.

But rather than looking at ways to slice money off the top of the income distribution and funnel it into government programs with spotty records of success, we should address the ways in which government is already stacking the deck against the younger and poorer among us.

 

14 comments

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There is no easy, quick “fix” to programs that assumed an ever-increasing population now that population growth of those not in the “underground economy” is simply not happening. Yes, everyone needs to put on their “thinking caps” to get beyond that problem. We need economic theories that make economies stable with economic progress in a time that fewer and fewer people are needed to do “what must be done” (presuming war isn’t one of them).

But even more, it is societal “values” in the black, hispanic and white “subcultures” that stack the deck against those very same individuals. America doesn’t need more and more of the uneducated, unskilled, unwilling, and unmotivated standing on our street corners and in lines for unemployment benefits for years.

But “we, the people” may them by the head to create more and more of themselves to suck forever at the public teat. No one has the courage to explain to them early on that there is no place in our society for them unless they prepare themselves for one. The character Gomer Pyle may not have been the brightest light in the harbor, but his comment “Surprise, surprise!” seems somehow appropriate here.

Posted by OneOfTheSheep | Report as abusive

“upward mobility from poverty to the middle class rose from 51 percent to 57 percent.”

What does the writer think “middle class” means today? Is he measuring it as income only?

With an income of $10,000 per year I’ve got a lavish income by the standards of about 75 years go.

The Bill Gates example is an exceptional case. So many other high earners may just be riding on his coattails and didn’t invent or boost the productive capacity of this country anymore than overdressed women invented the sewing machine.

This country has been living with a “winner takes all” mentality and that attitude leaves, actually requires, a lot of losers with next to nothing.

The “entitlements” are there to make sure the lunge for the top doesn’t make too much embarrassing wreckage in its wake or the game would be shut down by social upheaval. The “winners” are part of the social experiment too, actually.

The social organism that is a country – and now the world – has to make sure the head doesn’t become detached from it’s body or both parts die. Both Franklin Roosevelt and Chairman Mao knew that intuitively.

I would imagine every head is a “communist” when faced with the prospect of parting with its body by the knife of a guillotine. Heads do like to socialize with their bodies, as a rule. But this country has always had a tendency to let the heads live in worlds of their won.

The biggest threat from income inequality isn’t here, actually, as much as it comes from the 3 to 4 billion people in developing countries who are growing healthier and stronger bodies and may not actually need our well coiffed head at all.

Posted by paintcan | Report as abusive

Completely agree with the last paragraph. Today, there are not enough jobs for the already 7 billion on Planet Earth. The numbers will be even more daunting in another decade, when even fewer American males will finish high school or go to college, regardless of financial circumstance.

Posted by timebandit | Report as abusive

@timenandit- Which last paragraph: Mr. Gillespie’s, OOTs’ or mine?

I’m going to assume mine is the last paragraph!

It seems to me the worst future for the US is computer generated jobs. We have bodies to be used. They are so exquisitely suitable for manual employment. The computer is doing to the population, especially men, (I think), what photography did to painters in the first half of the 19th century. It is making a physical body, and even a normal human mind, obsolete. Unaided human minds can do staggeringly complex tasks but they can never work as quickly as a computer. But I may be wrong about the issue of speed? Listening to a musician and I seriously question computational speed of computers versus well trained minds and hands.

There is more to life than writing code and using Microsoft spread sheets or cut and paste pre-packaged programs to produce Facebook type virtual businesses. Or there used to be until even manual work became “artisanal”.

BTW – I just got a call form a young metrosexual sounding guy that asked me if I wanted to go back to school. I had made online inquiries over two years ago but was hearing quotes for at-home online tuition costs of between $25 and $40,000 for one year master’s program in computer aided design. Calls I get since then never get as far as quoting me a tuition fee and they give up on me.

That kid was a hybrid life-form as far as I could tell. He said he’ll try again when “things improve”. I interrupted him several times to ask if he was a machine and I don’t think his programming was quite able to “compute” the question. “Things” will never improve so much that $25,000 to $40,000 per year for a dubious course looks like a sensible tuition for using no other physical facilities than my chair at home, my own computer and cheap internet connection and classes with disembodied proctors or professors that might fail me for any flimsy excuse only to take the tuition and run with it to their nearest bank while they sneer “sucker” online in an email.

Posted by paintcan | Report as abusive

….quotes from between $25,000 to $40,000…

BTW college degrees seem to make one more specialized and inflexible for potential hiring than not having them.

Mr Gillespie is also asking for trouble by talking privatized social security. If that had been the case pre-crash, a great many retirees, or even those far from it, would be starting from scratch again and screaming for the government to bail them out. They would also be asking for the defenestration of Wall Street investment bankers and they wouldn’t have been as polite or dispassionate as the OWS protesters.

Posted by paintcan | Report as abusive

You can’t tell me that 400 individuals controlling 50% of the nation’s wealth doesn’t put a damper on the other 99.999% gaining wealth!

Inequality is NOT due to market forces; the wealthy have very much stacked the deck in their favor by having the banks deregulated and controlling the healthcare industry, just for starters. They buy the law that suits them.

The focus of wealth around D.C. is not a new phenomenon.

If the top earners were taxed properly, then the bottom earners would be taxed less.

The corrupt and inequitable system of government and commerce we have had for some time has been revealed by the tide of falling income. But the thing that really precipitated this fall is efficiency. If you can make a product in China with slave labor, or in Detroit with robots, the income gained by the production process goes to fewer and fewer people. And fewer and fewer people have the wherewithall to buy the products, a fact overlooked by Gillespie and other comfortably off apologists for the status quo.

Posted by franabulax | Report as abusive

The real problem are people like the person “franabulax” above. While probably well meaning, their abject ignorance on economics deeply rooted within the ‘low information’ segment of the population, and it seems the proportion of that population is increasing.

The simple fact of the matter is once a person make $1 million, they’re set for life with interest income in excess of $25,000 per year. No one should begrudge someone striving to earn that level of wealth. We all should strive for that.

And the fact of the matter is, there’s not cabal of wealthy people attempting to deny you the ability to earn that level of wealth, because it’s not a zero-sum game. All it takes is a single idea, and a poor person could attain that level of wealth.

The true problem isn’t that there are wealthy people, and that some how life is better for them… The true problem is that as a culture we’ve been taught to believe we’re victims of something, instead of taught we are the masters of our own destiny.

Posted by kehvan | Report as abusive

Does ANYONE proofread at Reuters? Or should I say Reuter’s?

Posted by Porkov | Report as abusive

Yeah, people like Franabulax take the easy way out: blame some Evil Other that is the cause of all your problems, so you don’t have to look in the mirror. It’s funny that liberals claim to be ‘reality based’, yet spin their own tinfoil conspiracy webs.
See also: Jews, the Koch Brothers, “banksters”, Big Oil, etc.

Posted by segesta | Report as abusive

“…payroll taxes that take about 12.4 percent (half from the worker, half from the employer)”

This is a pure fiction and the author should be ashamed for repeating it.

Wages are negotiated based upon the bottom line it costs a company to keep that employee around, not some imaginary number that exists only in the dreams of tax auditors.

All the money that is used to keep that employee on the payroll comes from the same pot. Money that I have to pay to the government is money that I’m not paying to the employee. Depending upon how you look at it, either I’m paying all the tax, or that employee is paying all the tax.

This canard about who pays what when all the money comes from the same place has been perpetrated on the public now for decades and I’m sick and tired of hearing it.

The average person should be smart enough to see through this.

Posted by LeeReynolds | Report as abusive

The idea is that people should rise to their level of competance. That does not happen. You can be a minion if you want. I say most CEOs are stupid twits worried about the next three months and what that means to their wealth increase. Shallow, selfish and stupid. But you all like a master to look down on you, and you smile like a good little serf. “Oh thank you, king of all for seeing my loyalty and adoration of you” you say in some other equally pathetic way.

Posted by brotherkenny4 | Report as abusive

kehvan, I do not see myself as victim, I am wealthy and my children are wealthy because of their own industriousness. Nor am I ignorant or stupid on the basis of the fact that we disagree. Nor do I have to descend to the level of insult to make my point. But I see a vast working underclass in the US deprived af the ability to climb the ladder unless they are exceptional, like myself, while the resources of half the nation are hoarded by a few. Time was, simply working a job guaranteed security and the acquisition of wealth. That time has passed and there’s a reason, which you have not addressed by merely flinging insults. So. What’s the reason as you see it?

Posted by franabulax | Report as abusive

It seems to me that the biggest problem with Social Security is that it does not earn much interest – I believe only about 2%. Were SS dollars to be invested in a “fiscally conservative” portfolio, it would be easy to double that amount and likely solve its solvency problems.

Posted by Bucklee | Report as abusive

Bucklee – Social Security isn’t seen as an investment fund because higher returns imply higher risks to the fund. DUH.

@kehvan – “The true problem is that as a culture we’ve been taught to believe we’re victims of something, instead of taught we are the masters of our own destiny.”

If that were truly the case there wouldn’t be so many people spending so much money to shape laws in favor of their own interests and “destiny”. You sound like the “low information” segment of society too. People who were systematically discriminated against (e.g blacks in the south pre civil rights era) were never “masters of their own destiny”. And more than ever, one seems to have to have money to continue to make any. It’s becoming a country of investors rather than working employees.

For one thing, one needs a car, more often than not, just to get to employment prospects. I recall years ago that I never had one when I graduated from college. And the one I got when my grandfather died lasted about a month before the radiator died from driving about 120 miles round trip to a low paying entry level job. I had to quit and try to find something closer to home. I didn’t yet have a credit card.

That statement about being one’s own master only really made sense when most people worked the land and they needed productive land or their work could be wasted anyway. Somehow – submitting one’s resume with hundreds of others is not the stuff of “self mastery”. Nothing about the employment or educational opportunities I’ve seen in my life ever suggested I was ever really the master of my own destiny. It said very much the opposite and that it didn’t matter what I may have learned or could accomplish. If I wanted a job with someone else I had better be prepared to regard them as my “master” and they would decide what my value was or to demonstrate if I was able to do anything beyond my narrow job description. It is always in their interest never to value you too highly and makes other employees nervous if you try to cut across job descriptions.

BTW-OOTS – do you ever spend your retired weekends preaching to the street corner unemployed about the necessities of having a proper work ethic, in person? How about hiring a few of them as well?

Posted by paintcan | Report as abusive