Income inequality: Look first for the causes (and then solve them!)
Why does wealth rise faster for the wealthy than the not wealthy?
Reinvestment and compounding reason
Taking risk reason
Global competition; the reality
Unfair disparity or economic reality?
Being responsive to the effects of income inequality, with no moral outrage
The rich get richer and the poor get poorer because of natural causes, not evil.
When we get into the conversation of "it's not fair" or "they're not fair", we get into a "make wrong" mode of thinking, based on complaining (which is victim thinking) and on false beliefs. The percentage of the wealthy "doing wrong" is very, very low.
The only solution lies not in blaming, but in answering the question: How can we improve the lot of the poor and the lower middle class?
To solve this we need to apply Ethics, Personal Responsibility, and Rational Thinking.
Read those to see if you wish to support those being used first and foremost for creating a better world.
So, let's do some "critical thinking" and see what we come up with, instead of just jumping to conclusions and/or warring about it...
INCOME INEQUALITY: LOOK FIRST FOR THE CAUSES - AND THEN SOLVE THEM! (hint: the cause is not evil or even unfairness on anyone's part)
The "top", the rich get richer because:
Investments compound (bigger start means a bigger dollar gain)
Get higher return rates often, so their assets grow more quickly
Business and tech knowledge have much more upside potential, even explosive
The more educated command higher job pay, higher pay goes to "knowledge workers"
Global competition causes wages not to increase (because others are cheaper, the jobs
go overseas and they are becoming more technologically savvy by copying ours)
The influx of low education people into the US
Poverty perpetuates itself with low education and lower "values"/character, on average
The world market is bigger so anyone serving the bigger markets can have huge income increases (they are providing more total value because they have more customers!)
"REINVESTMENT AND COMPOUNDING" REASON
Wealth increases for the wealthy because they compound their wealth by investing it, which ultimately benefits all the people with more jobs and companies that work. That part is good, I think, by any standards.
If someone starts with little, then their wealth will compound but not as quickly with those with a higher amount of assets at the start:
Starting Compounding Ending assets Difference
Assets Rate of growth (20 years) From low base
Low base $1,000 6% $3,200 0
High base $1,000,000 6% $3,200,000 $3,196,800
The rich get richer because of reality and there is no justification for making them evil or bad.
THE "TAKING RISK" REASON
Taking risk overall, if done intelligently, has a greater return in increase in wealth on average. However, risk means that one can also lose money.
The advantage of people accumulating wealth is that they can afford to take risks without being wiped out if things don't work. We need to have people who have accumulated wealth, so that there are more companies created and more jobs created.
And, as above in the compounding discussion, those people's wealth will increase even faster, on average, because of the higher average return on higher risk.
In short, their wealth will grow even faster - while also benefitting the rest of society.
GLOBAL COMPETITION: THE REALITY
Americans no longer compete only with their fellow citizens for jobs; they also are challenged by workers in India, China, Europe, and the rest of the world.
Further, as the U.S. economy becomes more complex and innovative, workers will have to be more knowledgeable and flexible to succeed – which means they will need additional education and/or job training throughout their careers. Life-long learning will be a necessary part of career development.
UNFAIR DISPARITY OR ECONOMIC REALITY?
Many comparisons are made between the average increase in wealth and income between the middle class and the rich. They are made from a perspective of it being unfair.
Let's look deeper at the causes to see what is actually going on, instead of basing conclusions on generalities and/or lack of reasoning and analysis.
In order to see what is going on we have to look, with openness, at often opposing arguments, but ones which have sound reasoning.
Surely, it is not reasonable to say that the accumulation of wealth, by itself, makes others poorer. There is no fixed pie to split up. It is a growing pie, due to the accumulation of wealth to invest in productive organizations, which provides jobs and more effective use of skills relative to income.
We can fix the blame, but it is probably better to take the responsibility for figuring out how to increase our own wages and financial well-being rather than taking away from someone else.
We are more able to shift jobs overseas, especially as other countries have been developing their skills so that they can do those jobs but at much lower prices.
If the same amount of product can be obtained cheaper elsewhere, that dramatically increases the supply of potential workers (more foreign workers are added to what is available) and reduces demand for workers here at higher prices. Technology and industrialization have spread to other countries so we now have much greater competition. The West used to be the only ones with a great economic advantage, from our having industrialization when they didn't and from the formation of large pools of capital from which to create large efficient organizations that are effective.
We no longer have that "monopoly" in productivity.
Effectively, our high wages have priced ourselves out of the labor markets. That's why the relative wages have not been going up - in fact we're kind of lucky they haven't gone down significantly. Competition keeps the wages down, not evil business people.
And this will continue for years, until the disparities between our wages here and the costs overseas is dissipated. This means that each citizen has to tighten his/her/their belts to live more frugally within these new limitations or ...
The alternative is to increase our ability to do things where we can produce greater value per hour, which is mostly in more of us becoming knowledge workers. As "laborers" we have too much competion and are very unlikely to have adequate wages. Sure, we can "force" employers to pay us more, but when the price is higher than the profit produced the workers will no longer have a job.
Companies are just doing what capitalistic behaviors would suggest they do.
We do, in fact, have to tighten our belts and reduce our consumption - but we have plenty of room to do that, as Americans are buying for more than they need to for an adequate life. The era of excessive consumption is over!
BUT NOT SO MUCH FOR CORPORATIONS IN A GLOBAL ECONOMY
Corporations can make profits either here in the US or elsewhere in the world, so they are not stuck with the same downward pressure in this regard. (There are other downward pressures. See Economic Forces.) This will help cause a greater disparity between the average American wage earner and those who compound their wealth (which are the rich more than anyone else).
More competitiveness of other countries, with lower prices - draws away growth to other countries but also puts downward pressure on our wages - big factor!
Manufacturing jobs have dropped dramatically since 2000 by about 1/3!
Dramatic outsourcing of jobs to cheaper countries
Overall comparable wages are declining because of this
Declining health of the US citizen due to poor health habits
Declining education level
Declining work ethic
Declining average Age of average worker
Change in ethnic mix toward lower income races
Change in the mix of jobs
Offshoring companies "are paying Chinese wages and selling at U.S. prices," said Alan Tonelson, of the U.S. Business and Industrial Council, a trade group for small business. "They're not creating better living standards for America."
Also, the question must be asked about how it is that wages did not rise proportionately with productivity increases. What dynamic is going on? Supply demand?
And why the discrepancy between the high income earners and the average?
The decline in real wages for these groups of workers was the result of a variety of factors. As shown in an earlier analysis, nominal wage growth slowed over the past few years as the slack in the job market ultimately slowed the momentum coming out of the full-employment job market of the latter 1990s. Inflation was also a factor last year, as energy costs drove prices higher (on average for the year, inflation was up 2.7% in 2004 and 3.4% in 2005). Thus, nominal wages needed to grow that much faster to beat price growth.
Other factors contributing to the decline in real wages are those that reduce the bargaining leverage of many in the workforce, including: the erosion of union power, the fall in the real value of the minimum wage, the growing imbalance in international trade, and the offshoring of white-collar jobs. As long as these forces are in play, the headwinds pushing against real wage gains for many in the workforce will remain strong.
"Wealth is not a fixed quantity and one person's success does not come at the expense of others ... Economists have understood [that] for over two centuries, but moralists have not caught up."
Once you get rid of the idea of averages and look at small business incomes, excluding those of professional services organizations such as lawyers and cpas, the net income is abominable. See the IRS summary of sole proprietorships in 2008 in How Much Money Do Small Business Owners Make?
"If we want the whole world to be rich, we need to start loving wealth. In the difference between poverty and plenty, the problem is the poverty and not the difference. Wealth is good. ... wealth is not a world-wide round-robin of purse snatching, and ... the thing that makes you rich doesn't make me poor. ... Without Productivity, there wouldn't be any economics, or any economic thinking, good or bad, or any pizza, or anything else. We would sit around and stare at rocks, and maybe later have some for dinner. ... Wealth is based on productivity, and productivity is expandable. In fact, productivity is fabulously expandable."-- P.J. O'Rourke in Eat the Rich
"of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production." --Robert Lucas
"But the free market is not primarily a device to procure growth. It is a device to secure the most efficient use of resources."
-Henry C. Wallich 1
Shiller says “we do want some inequality,” since leveling would kill effort, leaving everyone worse off. But I don’t think we really want “some inequality.” We want a system in which everyone is doing as well as possible, and inequality is going to be a side-effect of that.
it is claimed that wealthier Americans "command" an "unfair share" of our "national wealth." Such language implies that American wealth is a communal pie that belongs equally to all of us.
The vast wealth that exists in America has been created--through the productive activities and voluntary arrangements of individuals. And individuals do not necessarily create the same amount of wealth. Compare the value brought into existence by the entrepreneur whose productivity software is eagerly bought by millions--and the checkout clerk at a store that sells it. Such vast differences in productivity--which can be caused by vast differences in ability, work ethic, interests, skills, and choices--are the root of vast differences in income.
Because all wealth is created, it rightly belongs to those who earn it (or their chosen beneficiaries)--and no one can rightly claim to deserve wealth earned by others. If someone wants to make more money, he is free to enter a new field, gain new knowledge, start a business, or do anything else to enable himself to create more value.
It is often implied that the rich get richer at the expense of everyone else--that if some get big slices of pie, the rest get only crumbs. But the exact opposite is true. Since wealth (including pie) is created, there is no limit to how much can exist--and the wealth of others cannot inhibit us from creating and enjoying our own. Further, the wealth creation of the richest Americans makes us far more productive and well-off.
Government policies based on the same egalitarian mentality that denounces "income inequality." In the name of giving citizens "equal access" to education and medicine, the government has virtually taken over these fields, placing crippling controls on both producers and consumers. In the name of equalizing income, it enforces minimum-wage and anti-firing laws that make it difficult for eager newcomers to enter the job market. In the name of saving us from the alleged evils of rich, Big Business, it enforces endless regulations that apply to every business, decreasing the productivity of all and making it hard for new business ventures to succeed.
WHY ARE THE POOR GETTING POORER?
First of all, they have to, if they're spending more than they are making, as any assets they have will be dissipated.
But most people are referring to the fact that more people as a % of population in America are poor. And they are saying that wages are falling behind inflation.
PURE MATHEMATICS - WHY THE RICH HAVE TO GET RICHER
If person A starts with a salary of $50,000 and pays taxes of $10,000, he'll end up with $40,000 net. If salaries grow at 10% over the next 10 years, he'll end up at $44,000 net, with no savings.
If person B starts with a salary of $80,000, and he pays on his extra $30,000 30% tax
(instead of the 20% above on the first $50,000 of income), he'll pay taxes of $10,000 on the first $50,000 and $9,000 on the next $30,000, giving him a net of $21,000 a year to invest at 5%, so after 10 years he'll have a salary of $88,000, but assets of $230,000.
A ends up with 0 wealth. B ends up with $230,000. Is this unfair?
Does it suggest that there is a reason that the rich get richer and it is not because they screwed somebody else out of something?
WHY DOES WEALTH RISE FASTER FOR THE WEALTHY THAN THE NOT WEALTHY? WHOSE FAULT IS IT?
In investments, on average, you'll do better over the long term if you take more risk.
If a person (A) has a good salary and saves $10,000 a year for 20 years at 5% return net of taxes, he'll have $330,000.
If another person (B) starts with $100,000 and invests that at 10% but has the same salary and savings per year, that person will end up with the $330,000 plus $673,000 from the money he started with, for a total of $1,003,000.
A started with $10,000. B started with 10 times that. His buddy ended up with an extra $320,000 and he ended up with an extra $903,000, three times as much of a gain.
Should the disparity be taken away from B and given to A?
THE OTHER SIDE: RISK
As shown in smallbiztrends, the survival rate of business start-ups is relatively low.
After a year, more than 25% fail, with rates going up until there is just a 50% survival rate af 5 years. (It will vary up to almost 60% in some industries.)
But well-reasoned risk returns more on the average.
Also, the small business person (not the professionals or the exceptions) averages a rather poor income, often finding that he/she would have done better with a regular job.
Poverty in the United States is cyclical in nature with roughly 13 to 17% of Americans living below the federal poverty line at any given point in time, and roughly 40% falling below the poverty line at some point within a 10-year time span.
Poverty is greater in some races, just a fact. Hispanic and African American.
BEING RESPONSIVE TO THE EFFECTS OF INCOME INEQUALITY
It seems that it would make sense to be responsive to the effects of income inequality, but with no moral outrage. (Note that moral outrage is a sign of "not-rational" thinking. See Rational Thinking.)
In Ethics, we are trying to do the greatest good for all concerned (without harming the individual). And, for now, let's assume that our stakeholders are US citizens (although expanding it to "the world" could be advocated, though we would run across practical limitations).
Since ethics almost always includes not forcing others to do what we want, our solutions need to be based on giving people choices.
A choice in this case might be to leave the country if we do not believe it is good for us anymore. However, if we, for instance, take money away from business creators and managers we may suffer the consequences of lower growth and a smaller pie to split. We must be aware of the tradeoffs so that we do not suffer unintended consequences, with such awareness being a requirement for Rational Thinking.
Another consequence if we use increases in taxes is to drive business to other countries which is happening right now in a very large way.
So, having said that, I think one source of solving this is to assure that there are sufficient revenues derived from those who can afford them so that adequate education and accessing of opportunities is provided so that people can be personally responsible and capable of creating value for which they are paid adequately.
Since people do not necessarily individually understand this adequately, it is up to the governing entity to educate them.
What must absolutely be done and what I think will produce benefits coming back to all concerned, in the form of greater prosperity and a bigger pie is:
Teach strong values and the benefits of education, to at least the degree of giving people the level of confidence in the value of education that they do not drop out of high school.
Teach adequate skills to have people create adequate value to be employed at a reasonable wage or to create a means of earning money.
Teach emotional intelligence.
Teach character and personal responsibility.
The expenditures must especially go toward solving the poverty perpetuation that occurs in depressed areas where so many do not value education enough nor have hope for the future that they drop out of high school and have poor values and ethics.
From the Institute for Research On Poverty: Most notably, blacks and Hispanics have poverty rates that greatly exceed the average. The rates were 30% through the 1980's and mid-1990s, falling to about 22% in 2000 and then back up toabout 29% by 2009.
Unemployment rates tend to be higher in those groups also.
Historically the average poverty rate has varied fdrom 11.5%, but mostly been in the 12% to 15% range, now being at 14.3% in 2009.
To analyze: The paper reports that the gap between the top wage earners and other workers is growing. It cites research from economists Emmanuel Saez and Thomas Piketty that showed that in 2004, the top 1 percent of earners --a group that includes many chief executives --received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago.
In addition, corporate profits are growing more quickly than wages and salaries. Employee pay now makes up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, according to the paper, while corporate profits have climbed to their highest share since the 1960s