Archive for February 25th, 2011

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Income Inequality: the Imaginary Powderkeg

February 25, 2011

Mother Jones recently published a set of infographics on income equality in America, which is understandably kicking up some dust around various corners of the internet. The numbers are shocking: the top .01% make an average of $27 million per household. The bottom 90%? Only $31,000.

Looking at this chart, it’s easy to believe that some sort of unfairness exists. That somehow the richest 10% (who control over 70% of the wealth in this country) are undeserving of their income. The knee-jerk response is to start thinking of the nation’s wealth as zero-sum, and for every dollar going into Bill Gates’ pocket, a corresponding dollar is being taken away from the lower 90%.

Obviously, nobody believes this is done directly. But many do believe that this is being done indirectly through layoffs, wage suppression or actions along those lines.

But it’s an illusion.

It’s an illusion created by those who believe there is some sort of caste system, aided by political action, that serves to make the poor poorer and the rich richer.

But don’t fall for it. There’s nothing there.

The supposed “problem” of income disparity only exists if you believe it exists. I’m not saying that these charts aren’t accurate or that there is not a large gap between the top 10% and the bottom 90% of earners. I’m saying that this gap is only a problem if you choose to believe it’s a problem.

The thought process as to why you should believe it’s a problem is false. The theory is that the more the top 10% makes, the less you make. Unless the CEO of Goldman Sachs is siphoning money out of your bank account, this simply isn’t true.

“But I don’t work for Goldman Sachs, I work for X company.” Exactly. And every chart like this is intended to make you feel as though the CEO of X company is getting richer by suppressing your wages. People look at infographics such as these, compare that with their paycheck and subjectively apply it to their situation, forgetting that there are several people in the top 10% who don’t (directly or indirectly) have any effect on their paycheck.

Ask yourself this question: what do the super-rich have that I don’t? Multiple houses, luxury vehicles, housekeepers, etc. are not the sort of thing any reasonable person expects out of life. Even in the lower income levels, we still have access to services and consumer goods that used to be the domain of only the rich: decent medical care, a house, multiple vehicles, high-end electronics, computers, appliances, schools, and so on. These all used to be available only to the very well-off. In the past, only the rich could afford qualified doctors and education for their children. Computers used to cost thousands of dollars. The same with high-end electronics. Washers and dryers were luxury items.

As life has gone in the US, the cost of these goods has fallen dramatically. Everyone has a free option for their children’s education. Life expectancy has gone up. As the wages spread further and further apart, life has not gotten collectively worse for everyone outside of the top 10%. Life continues to get better for a majority of the other 90%. There are some outliers in the lowest percentiles but generally speaking, life is better for a majority of Americans despite this perceived inequality.

In fact, as wage disparity has increased, happiness levels in America have risen as well. Income disparity increased over 50% between 1972-2004 and yet a GSS (General Social Service) poll shows happiness levels increasing from 30 to 31 percent.

“If the egalitarians are right, then average happiness levels should be falling. But they aren’t. The GSS shows that in 1972, 30 percent of the population said that they were “very happy” with their lives; in 1982, 31 percent; in 1993, 32 percent; in 2004, 31 percent. In other words, no significant change in reported happiness occurred—even as income inequality increased by nearly half. Happiness levels have certainly shown some fluctuations over the last three decades, but income inequality explains none of them.”

There are a lot of reasons for people to be unhappy now. We’re in the middle of a recession. The housing market has collapsed, dragging down net worth for the bottom 90%. A jobless recovery is slowing progressing. People need a villain to take the blame and the top 10% is better than nothing. The perception that America is run by robber barons is taking hold again.

A lot of this perception stems from the financial industry’s top level compensation. There’s a huge disconnect between what CEOs in this field make and the perceived value of their actions. Resentment has built from the bank bailouts and other special treatment these institutions have received over the years, which when coupled with the current recession tends to bring most people to the conclusion that these same CEOs are extremely overpaid. I’d agree with this conclusion. They are overpaid. But then again, so is most of their rank-and-file. It’s a feeling that those who push imaginary money around shouldn’t be compensated this well, especially when their money-pushing results in hardship for the bottom 90%.

But this isn’t totally the fault of the financial institutions. If you want to blame somebody, blame the government. And keep blaming them because they’re never going to fix it. Goldman Sachs, in particular, is a revolving door that circulates its executives in and out of government positions and vice versa. Even if the government decided to step in and raise taxes appreciably on big business and the incomes of the top 10%, it would have no effect on the bottom 90%.

The ugly truth is that if you tax something more, you get less of it. Just ask New York City, whose latest tax increase (to $6.86 a pack!) resulted in an influx of tax-free bootleg cigarettes and the relocation of tax money to neighboring states with lower prices. Sales dropped 27% between July and November, far exceeding the 8-10% the politicians predicted.

A higher income tax would simply mean that more of the top 10% would relocate to countries with lower tax rates. The same goes for the businesses. They would incorporate in tax havens and dodge the bullet that way. The bottom 90% would pay more for goods and services as any applied tax meant to “punish” the high end would simply be passed along to the low end. It’s always this way and those who yearn for the golden era of 90% marginal tax rates on millionaires are kidding themselves if they think a tax hike will actually result in some sort of windfall for the bottom 90%.

Contrary to the images painted by those with class warfare on their minds, a majority of the rich did not simply “luck” into this money or exploit the hell out of others to get it. Many of them were innovators (Bill Gates, Lawrence Ellison, Sergey Brin) who developed new products and services. Others were savvy investors (Warren Buffet, Carl Icahn, Sheldon Adelson). With the exception of the Wal-Mart inheritance and the Mars family, no one on the Top 20 list of richest Americans simply had money given to them.

It’s at this point that merit comes into play. Do people who hate the income gap really want all people to be rewarded equally? Do they want the top end skewed down or do they want the bottom end to rise? Should this be handled via “redistribution” (in other words, taxes – an impossibility but we’ll let it slide for rhetorical reasons) or wage caps? Do they really want a world where hard work and foresight is punished?

Take Mother Jones, for example. Their ad income is most likely several times that of smaller online commentary sites. Should they be forced to toss their “excess” in a pool for the smaller sites to benefit from and close the “gap” that way? I would imagine they’d disagree with this, stating that they’ve built up their brand and hired talented writers and thus, deserve this additional income.

Is that any different than deciding that Bill Gates should be forced via taxation or salary cap to cough up his “excess” income so that those in the bottom 90% can have more? And how exactly does anyone expect this to happen?

All the ideas I’ve read revolve around raising the tax rate on the top 10%. This is the ever-popular “soaking the rich” tax plan. It plays well with voters but will never be instituted, thanks to the fact that many of our nation’s representatives are wholly beholden to the ultra-rich, if not actually part of the ultra-rich themselves. (Interesting note: Democrats are more prone to painting the Republican party as champions of the ultra-rich, but 7 out 0f 10 of the richest representatives listed below are, in fact, Democrats. And not just any Democrats, but Democrats who crossed party lines to vote FOR Bush’s tax cuts on higher incomes.)

Beyond the fact that there is nobody in Washington willing to do this, a further issue is the fact that the government is quite possibly the worst Robin Hood analogue imaginable. They cannot, despite constant assurances otherwise, redistribute wealth. They cannot take Bill Gates’ money and spread it among a random sampling of the bottom 90%. They can’t even do it indirectly through taxes, as much of that money is already promised to a variety of earmarks, subsidies and entitlements already.

Not only that, but a higher taxation rate wouldn’t close the gap. Gross income is still gross income, no matter what the tax rate. Someone making $20 million will still make $20 million, even if 60% of it is siphoned off in taxes. And the person making $30,000 will still be making $30,000, even if $12 million just rolled into the IRS offices.

They also have no business setting wages. Despite governmental creep into the private sector, there is no way these self-interested players should be allowed to cap wages or set minimums. They already have screwed up with the minimum wage and granting them the power to cap maximums is asking for a quasi-socialist system where even fewer people have a chance to get rich but many, many more will have the chance to be poor.

Beyond that, no one seems to have any idea how to close the income gap. If this were a real problem, rather than just a shoddy platform plank, ideas would flow freely. As it is, it’s just a political haymaker and another reason to get pointlessly angry.

My suggestion? Let it go. It won’t change. It can’t change. And anyone who thinks it can be changed wants to enlist the worse people possible to handle/redistribute other people’s money: the government. That’s not a solution. That’s a farce.

-CLT

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