Tag Archives: income inequality

Changes for an equal opportunity retirement

retirement

Over the past few decades, how Americans prepare for retirement has changed, shifting the responsibility for things like portfolio choices and risk management to workers.  In response to these changes, the American retirement system should be modernized with means testing for social security benefits and mandatory saving for workers above a threshold.  While ultimately the responsibility will always rest the individual, these changes would ensure availability and access to a minimum of retirement planning for all.

A logical way to begin this modernization of the American system is to implement some sort of means testing in for social security benefits.  The top 10 countries already do some sort of income/wealth based benchmarks for benefits.  By phasing out the benefits with income, the top earners would be forced to save more.  This is especially attractive option given the expected short falls of social security, though there are political considerations due to what would essentially be a transfer of wealth.

Adjusting people’s social security payments won’t be enough by itself to make up for the deficit.  The most direct way to increase saving for retirement is to make people save more.  The United States should update the current system with the addition of mandatory saving for all workers above some poverty threshold. The groundwork for such a program has already been laid.  In January, shortly after the state of the Union address, President Obama announced the MyRA.  The account can be opened with a minimum of $25, and is effectively an IRA that is invested only in treasuries. The account allows for the accumulation of $15,000 over 30 years until it is rolled into a Roth IRA.  The Marketwatch article mentions that a key difference between workers with savings and those without is access to such an account.  This account is a sort of IRA on training wheels, allowing savers time to learn and gain experience building wealth for the future.

There are some drawbacks to a mandatory savings program however.  As seen in Australia, who use a similar program has resulted in lower wages.  The United States certainly doesn’t need lower wages, but this can be avoided by not implementing Australia’s mandate that employers contribute at least 3% of pay to the plan.  Instead the a portion of the amount of social security that is phased out due to means testing can just be discounted back to its present value and then saved.  In this way, the United States can ensure American’s that make enough money to be saving are saving something for their futures, with out effecting wages.

Americans are not prepared for retirement.  Roughly a third don’t even have $1000 saved, and the majority have less then $25,000.  It should come as no surprise that when world rankings of retirement preparedness were released in February 2014, the United States ranked 19th.  Part of the problem is that people don’t understand the complex plans and decisions that need to be made.  However the United States can reverse this trend by implementing policies that have already been proven to work in other countries.

 

What about the Middle-Class?

Americans’ wealth reached its highest level ever last year. This growth can be attributed to rising stock values and rising values of homes. The net worth of U.S. households and nonprofit organizations rose 14% last year- the highest on record. Even adjusted for inflation, U.S. household net worth has hit a new record.

Since the housing crash and recession, Americans have made huge progress. However, even though the rebound has been powerful, it has favored the affluent and left behind many middle and lower-income Americans. Proof of this discrepancy is that there have been big gains in wealth but no big jumps in consumer spending to back it up. The increase in stock prices has disproportionately benefitted the affluent, who more than likely own shares. More evidence of the discrepancy in wealth can be seen through holdings of stocks and bonds as a share of overall net worth. This figure (holdings of stocks and bonds as a share of overall net worth) is at 35%, the highest level since the bubble bursted in 2000. This shows that as wealth has increased, it has gone to the affluent.

There are certain groups that the housing market has benefitted and other groups that it has hurt. In terms of the affluent that it has benefitted, much of the wealth is going to older Americans. Based on demographics, baby boomers are less likely to spend and more likely to save. Also, the proportion of baby boomers in comparison to the rest of the population is another reason for the discrepancy. In contrast, these wealth gains have caused younger families (led by someone under 40) to lag behind. This group has only recovered about a third of the wealth it lost during the recession- according to the St. Louis Fed in a recent study. However, the average wealth of middle-aged and older families has almost recovered to pre-crisis levels.

According to the Fed, one reason the economic recovery has been so weak is due to the fact that many Americans have been digging themselves out of mountains of debt. Fed data shows that total US household debt has fallen to 109% of disposable income from 135%. More manageable debt could mean that households might start borrowing and spending soon, especially now being a time where we’ve seen a slow job market and weak income growth.

Although some consumers are willing to borrow and banks are willing to lend, I believe that there are alternate approaches to arrive at a solution. We’ve seen that housing policy hurts the middle class. When lots of money is moved into housing, money moves away from other important sectors like health and education. Given that the stock market is at an all time high and interest rates are at all time lows, this is a time when the government can afford to reduce commitments to the housing market- therefore sending a message to the middle class that they can afford to treat their homes as less of an investment. With a change in focus shifted toward sectors like education, the economy will become closer aligned with goals that will provide the middle class with better wages and jobs in the long-run.

(Revised) Is Inequality Really a Problem?

Many report shows how bad the income inequality in the U.S. is in many occasion.  One report tells us that the ownership of wealth among households in the U.S.  tends to be more concentrated since the 1980s. Top 10 percent of households controlled 73.1 percent of the total wealth in 2007 compared to  68.2 percent of the total wealth in 1983. On the other hand, bottom 60 percent of households only controlled 4.2 percent of the total wealth in 2007, reduced from controlling 6.1 percent in 1983. Another report like one in Wall Street Journal says that the gini coefficient of the U.S. is behind many other developed world such as Sweden, Germany, and UK.

One thing that I have found interesting here is that the poor seems to accept this situation or as in the language of Matt Miller in his Washington Post’s opinion, ”If things are as awful as we think they are, why hasn’t there been a broader revolt?”

He outlined the answer from Will Wilkinson’s essay for Cato Institute in 2009:

“Wilkinson argued that technology’s impact on quality and prices complicates the way people perceive these matters and how we should judge them. That’s because the surging income gap often masks a narrowing difference in the actual consumption experiences of the rich and the rest of us. “At the turn of the 20th century, only the mega-rich had refrigerators or cars,” he wrote. “But refrigerators are now all but universal in the United States, even as refrigerator inequality continues to grow.””

He pointed it out more clearly by saying,

“The difference between the rich man’s $11,000 Sub-Zero “monument to food preservation” and the poor man’s $550 fridge from Ikea is smaller than the difference between being able to enjoy fresh meat and milk and having none. “The Ikea model will keep your beer just as cold as the Sub-Zero model,” he wrote dryly.”

It does seem to me that this argument is plausible. Although the absolute income inequality has steadily increased from time to time, the real standard of living does not move a lot. The comfort that the rich perceived from driving a luxury car is not far away from what the poor perceived from driving an affordable used car. Both can live in the house each with heater, can eat meat and drink milks without burden, even if the poor getting it through the WIC (the special supplemental nutrition program for women, infants, and children). Thus, how much they each spend to fulfill their need is not too relevant given that the poor can still afford relatively the same things as the rich can do in spite of the difference in the quality. Therefore, keep the poor to be able to afford their need is a key for the income inequality not to be a problem.

In the developed world, where the society values individual accomplishment more than that in the developing world, inequality is far from causing a problem. The poor understand that the have deserve what they own because they achieve that through hard work and fair competition. On the other hand, in the developing world, inequality is becoming more and more concern since it could easily cause instability. Corruption, collusion, nepotism, and all form of lack of fair competition lead to lack of trustworthy among society. Often, the poor think that they are there simply because they do not have the same opportunity as the rich or that the rich has achieved it unfairly. Therefore, equality in the developing world is more complicated and need more concern compare to that in the developed world.

 

 

Proposed US VAT tax has potential to hurt more then help

800px-Gini_since_WWII

New research from the University of Michigan Law School conclude that to address the growing income inequality in the United States, the federal government should institute a Value added (VAT) tax.  It is argued that such a tax would decrease income inequality by providing more funding for social safety nets like food stamps and social security and Medicare.  These programs are vital to a healthy American economy, however current economic realities would make this policy a disaster. By instituting what is effectively a national sales tax, the only thing the government would decrease would be demand and employment.

A national sales tax is not an affective means to reduce income inequality and will only cause massive damage to the economy.  By adding on yet another tax, many things in the economy become more expensive.  This decreases demand, which is precisely what the United States needs to be increasing right now.  Decreased demand and increased costs also cause unemployment, when a decent job is the only real way out of poverty.  If you want to fix income inequality in current economic conditions, raising taxes isn’t the answer.  Consider this article in Forbes.  The article itself keeps the situation too simplistic to give it a proper treatment, but their second point does provide some insightful information (and a subscription req. link).  According to their research, “In 2006, a whopping 81.4 percent of families in the top income quintile had two or more people working, and only 2.2 percent had no one working. By contrast, only 12.6 percent of families in the bottom quintile had two or more people working; 39.2 percent had no one working.”  While they write this off as obvious, it speaks to the heart of the problem.  If mobility is the same as ever (an assumption that will be addressed shortly), but inequality is growing, and the top 20% work over 3 times as many paid hours then the bottom 20%, what the country needs is jobs.

There is also a more subtle reason to believe this policy will fail.  This is because the problem it tries to solve is not a national problem.  Research shows that social mobility, and even income inequality are explained better by geography then time.  To quote the researchers, “The U.S. is better described as a collection of societies, …some of which are ‘lands of opportunity’ with high rates of mobility across generations, and others in which few children escape poverty.” A policy that effectively closes the gab in San Francisco most likely is not what is needed in New York, or Alabama for that matter.  While income inequality has increased, whether the situation as a whole has gotten worse is unclear, as the researchers note “A useful visual analogy is to envision the income distribution as a ladder, with each percentile representing a different rung. The rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed (rank-based mobility has remained stable).”  So while yes, people do make more money, it’s just as ever to do it.  This casts some doubt on the importance of the relatively small increase in inequality.  What is clear however is that a national program that is trying to address local problems isn’t going to do anything but waste resources.

Instituting a VAT tax in the US doesn’t make sense.  It is not the correct time or the correct place for such a tax, and the federal government may not even be the entity capable of fixing the problem.  Funding social safety nets is an important priority, but we shouldn’t risk so much to do so.  As the United States recovers and adds jobs, social mobility will shrink the income inequality, and more people will be paying taxes to fund these programs.  In order to decrease income inequality, the government should be worry less about its own income, and more about the missing income of millions of Americans.

 

 

“Picking on” Greg Mankiw

Gregory Mankiw had a new post titled Yes, the Wealthy Can Be Deserving on NYT two days ago, I have to say that the title is quit catching because usually we think that rich people earn too much is resulted from inequality, which we should fight against with.

Mankiw argued that film stars like Robert Downey earned tons of money by playing a role in the famous films, and we are not appalled by their tremendous income because we think they “deserve” that. Just as the example given in his post, Robert Downey earned $50 million while the movie The Avengers made a revenue of $1.5 billion, so it seems to be fair enough.

However, Mankiw made two mistakes in his argument here: first, some people don’t care about Downey’s income doesn’t mean the income distribution is reasonable, maybe the people who responded to him are irrelevant in this situation. Say if you are also a film actor in that film and you played better than Mr. Stark but got way lower income, than you may care about the inequality. Second, the movie’s box office receipts were not the reason for paying so much to one single actor. The payments to players were decided even before the public show of the movie, you can’t predict the revenue of the film while you still have to pay a lot to film stars like Robert Downey. We knew a lots examples of movies played by famous film stars but received bad market responses, also movies played by nobody but brought huge profits.

The true reason why employing famous film stars cost you much is because you can’t find them everywhere. Mankiw said that “When people can see with their own eyes that a talented person made a great fortune fair and square, they tend not to resent it.” It is true in some case but not for here, even if you are as talented as Robert Downey, you may not be able to make money like he did because there is only one Robert Downey, the payment for him is not a reward for hard works, but more like a reflection of scarcity.

Mankiw is also wrong about CEOs’ pay. At first, he indicate that critics are wrong about the idea that CEOs’ are paid more than they really worth. He pointed that “the most natural explanation of high C.E.O. pay is that the value of a good C.E.O. is extraordinarily high”, and here is what he said:

A typical chief executive is overseeing billions of dollars of shareholder wealth as well as thousands of employees. The value of making the right decisions is tremendous. Just consider the role of Steve Jobs in the rise of Apple and its path-breaking products.

But actually Steve Jobs is not by his side. We all know that Jobs’ popular story of “1-dollar salary”. If his logic is correct, than Jobs is not as worthy as a hot dog. If the price paid by the board to those CEO is totally precise, than Jobs is the worthless CEO in this planet, even though he made billions of dollars to his shareholders.

Actually these “critics” are right, no matter how bad the CEO performed, he/she can always earn excessive income, and there are few cases where CEO didn’t get what they asked, that’s doesn’t mean the income for them is fair enough. Sometimes you paid high enough to your CEO even they perform very bad, in 2013, Steve Ballmer only get 79% of his target bonus but it is still too “generous” according to his performances. Actually, according to the diminishing marginal returns, higher income cannot act as an effective incentive for those CEOs to perform better.

In the end of his argument, Mankiw contributed the inequality problems to the imperfect tax system. But the true problem here is not about tax rate. Think if you are the CEO, will you ask for a stable income after tax or pretax? No doubt you will ask for the same amount of pay after tax, so even if we increase the tax rate for the rich CEOs, they will find a way to escape the “harm”. If the tax rate raises, that means CEOs will ask for higher pre-tax income, what that means? It means other employees will get less! It is typically the problem of income distribution, but Mankiw said “The solution here, however, is not to focus on the income distribution…”

I think our tax system is good enough, what’s more significant now is to put more money on solving unemployment and inequality, which means we must increase the efficiency of redistribution. And of course, it’s better to solve the income distribution inequality at first.

Using Skilled-Trade and Manufacturing to Rebuild the Middle Class

In the United States, manufacturing is finally rebounding.  After taking a huge hit at the onset of the Great Recession, manufacturing grew at 4% in 2011, more than 2% points higher than the aggregate US economy.  Moving in parallel with manufacturing, the demand for skilled-trade workers (ie: electricians, machinists, welders, etc.) has undergone a similar change.  After falling 13% from 2007 to 2009, skilled-trade demand grew 6.2% per year from 2010 to 2012.

Amazingly, despite this rapid growth in employment, the economy would like to hire even more skilled-trade workers.  Indeed, in 2012, the Wall Street Journal reported 600,000 unfilled skilled-trade jobs nationwide at a time when the US unemployment rate sat above 9%.  It therefore seems logical that skilled-trade jobs could help this country fix its unemployment problem.  Unfortunately, though, this shortage of skilled-trade workers doesn’t seem to be a relevant issue for US policymakers.  Instead of addressing it, the skilled-trade shortage is expected to increase, and the United States is likely to miss out on an opportunity to increase income mobility and strengthen the middle class.

According to ManpowerGroup, a firm specializing in workplace and business solutions, the shortage of skilled-trade workers is expected to increase given the age distribution of America’s current skilled-trade employees.  In 2012, 53% of skilled trade workers were over the age of 45, and 18.6% were between the ages of 55 and 64.  In contrast, the same statistics for the aggregate US labor force are only 44% and 15.5% respectively.  Furthermore, only 1.9% of skilled-trade workers are over the age of 65 (4.8% for the aggregate labor force), indicating that skilled-trade workers choose to retire earlier.  When assessed together, these statistics suggest that the quantity of eligible skilled-trade workers is likely to decrease even more in the next couple of decades as current skilled-trade workers choose to retire.  Doing so will likely exacerbate the labor shortage that US manufacturing is already experiencing.

To me, this shortage represents a tremendous opportunity for the United States to strengthen the middle class and increase income mobility.  In, “Inequality is Not the Problem We Should Be Worrying About, ” I have previously discussed my belief that income mobility, not income inequality, should be the primary focus of US economic policy.  In my mind, it is important to make higher wages accessible to more Americans, thereby strengthening the middle class and bolstering aggregate demand.  I have also previously suggested in “Employment is on the Rise, but is it the Employment We Want” that higher education might not be the solution to income immobility, as there seems to be a surplus of college-educated Americans forced to work low-wage service jobs when they cannot find high-wage employment.  An increase in skilled-trade training seems to be the perfect solution to both of these issues: by helping to promote skilled-trade education, I believe policymakers can help many Americans earning low wages enter the growing manufacturing industry, thereby increasing their wages and entering the middle class.

Depending on your idea of skilled-trade jobs, this proposal may come across as elitist.  Thanks to the impression skilled-trades developed in the 1980’s, many people consider skilled-trade jobs to be for the uneducated.  But according to the WSJ, this impression is not true.  While in the 1980’s, skilled-trade jobs were “80% brawn and 20% brains,” today these same jobs are “10% brawn and 90% brains.”  Skilled-trade jobs require “skill,” and accordingly skilled-trade employees are typically required to undergo rigorous technical training at 2-year vocational or technical schools.  In this way, skilled-trade jobs should not be viewed as simple; working as a skilled-trader requires significant training and brainpower and adds significant value to the US economy.

Skilled-trade employment seems to be an excellent way for the United States to address income immobility.  Given the huge emphasis this country places on a 4-year education, we are likely to experience an even larger shortage in skilled-trade jobs in the near future.  This shortage represents an opportunity for many Americans to escape the lower class and enter the middle class.  Through 2-year vocational training (which is typically much less expensive than a 4-year bachelors degree), many can develop the technical skills necessary to succeed in today’s manufacturing environment.  In doing so, they can bolster their earnings, as a 2012 study by Georgetown University’s Center for Education and the Workforce identified over 1/3 of those with bachelors degrees as earning smaller salaries than those with more specialized training.  Ultimately, therefore, it seems like an increased promotion of skilled-trade training is a policy that the United States should at least consider as it works to rebuild our quickly vanishing middle class.

 

Income Inequality

It seems like as long as America has existed, equality has been a key virtue.  Thomas Jefferson opined in the Declaration of Independence that “all men are created equal“, and I believe that value has stuck in American society as a whole.  Lately, there has been much discussion of the topic of income inequality, namely how income inequality is at an all time high, and also how incomes of the richest people in America are growing substantially faster than poorer people.  However, I believe that much of the discussion of this issue is misguided and misinformed, either by asking the wrong questions or misusing the data.

incomeinequality

Those most opposed to income inequality often point to the fact that the richer someone is, the richer they are getting.  You have probably seen graphic likes the GIF to the right (click to make it work).  The graphic shows how the incomes of the top 1% are skyrocketing compared to the bottom 99%.  However, this GIF is a typical overstatement of the probably for income inequality.  The researcher behind this study, defines income as “pre-tax cash market income — wages and salaries; dividends, interest, rent and other returns on invested capital; business profits; and realized capital gains”.  This is to say, no tax payments are incorporated into the GIF.  However, considering that the top 1% pay a higher tax rate than the the bottom 99%, this graph overstates the problem with income inequality.

after-tax-income-growth201207251048

While it is true that wage growth for that top income earners is far higher than for low wage workers, the more important question to ask is whether low wage workers are better or worse off.  The chart of the left illustrates that while top earners have seen a much larger increase in wage over a 28 year-period, real income growth for the lowest quintile was about 25%.  Is the fact that top incomes increase more rapidly a problem?  Clearly wage increases are not a zero-sum game; the top earners are not necessarily benefitting at the expense of the poor.

Another measure that is used for income inequality is the Gini coefficient, which attempts to fix into one number how wages in a country are distributed, on a scale from 0 to 1, where 0 is perfect equality, and 1 is perfect inequality.  The following chart show 2000’s Gini coefficients:

cassidy_03

The before-tax Gini coefficient of the United States is actually fairly close to places typically well known for high equality, like Sweden, Finland, and Norway.  However, the U.S.’s post-tax Gini coefficient is the highest of any of these nations.  This suggests that through taxes, all these other countries do a better job of redistributing income.  Critics equate this to mean that the U.S. doesn’t have a progressive enough tax system.  However, a 2008 study by the OECD indicated that the U.S. actually has the most progressive income tax system out of the OECD-24 nations, which includes all of the richest European nations (With the recent increase on taxes to the highest income bracket in the U.S., our system can only be more progressive now than previously).  How does this all make sense, one might ask?  Although I’m not entirely sure, one solution is that higher overall taxes, on all people, would create such an effect.  By the government taking, and redistributing a higher percentage of the income of the nation overall, the Gini coefficient will be lower, but could also lead to a less progressive tax system.

However, the most important issue with income inequality is “Is it necessarily bad?”  For a long time, many economists theorized that inequality was good for growth (because inequality might boost investment).  I think such a theory has some truth to it; I believe that an economy with perfect income equality would stagnate quickly because incentive to work would plummet.  In it’s recent revision of the long-term effects of the ACA, the CBO essentially admitted that an increase in the marginal tax rate makes people want to work less.  Recently, many economists have started to believe that perhaps income inequality hinders growth, but have had difficultly proving this empirically.

I think that much of the ire directed towards income inequality is actually misdirected.  For example, the problem of poverty is not the same thing as income inequality.    As I explained earlier, real incomes can rise both for the poor and the rich, even if income inequality is increasing. If the total amount of income in the economy was fixed, then income inequality would “cause” poverty, but this is not the case.  Income inequality does not cause poverty; low wages, not enough jobs, and many other factors cause poverty.

The American Dream is alive and well

Income inequality has been a divisive issue the past few years.  It has been a goal of the Obama administration to lessen this inequality due to its perceived effect on labor market outcomes, where the rich at a distinct advantage over the poor.  A post on Greg Mankiw’s blog about a piece of research seems to shed some light on this issue.  The research indicates that since the 1970’s, social mobility in the United States has remained at worst the same and could actually be easier.

Mankiw’s back of the envelope calculations show that the income one earns as an adult may be minimally effected by your parent’s income. He calculates that roughly 2% of the variation in income can be accounted for by parental wealth. The research is more comprehensive and seeks to address not the variation in wages, but whether parental wealth has an affect.  By tracking 3.7 million parents and children born between 1980 and 1993 for income and things like college attendance, Chetty et al determined that social mobility has increased.  While there is a perception of increased inequality, the paper points to this is due to the top 1% moving away from the center, skewing the distribution as it goes.  The authors note that how far away the top 1% is from the rest has nothing to do with social mobility, and compares the effect with the a ladder:

The rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed (rank-based mobility has remained stable).” 

This is strong evidence that the extra money spent by rich parents is not having an outcome altering effect.  While there is increased income inequality, the distance isn’t becoming harder to cover, only the disparity in outcomes between those that chose to put in the work and those that do not.

While there may be a correlation between having rich parents and going on to earn a similar (or larger) amount of money, money itself is probably not the cause.  Traits like talent, motivation, and genes are hard to include in a regression.  The question that society must answer is that if wealth isn’t affecting the outcomes of the next generation, is the redistribution of wealth really necessary?  A strong case could be made for redistribution if the current distribution was binding in some way, making it more difficult to improve ones standing standing.  However if it just making up for bad decisions, then the rationale is not nearly as strong.  What is clear is that the American dream is alive and well if you know how to go about getting it.  The tragedy is that so many don’t.

The Inequality Problem: Series Introduction

As we are utilizing this blogging format for the course, I wanted to find some interesting and relevant topics to explore through multi-part series that will dig into an issue in greater depth than could be done through one post or paper alone. The first issue I want to address is economic inequality.

First, why do I think inequality is an important issue to discuss? Since the Great Recession, observers have noted a sharp increase in economic inequality. While everyone felt the immediate effects of the recession, the recovery has greatly increased the wealth for the highest income earners while the poor and middle class has stalled. High income earners had a high percentage of their wealth invested in the stock market, which tanked in 2008, but has rebounded to nearly the same level since, with a little help from the Federal Reserve’s expansionary policies. Their wealth has essentially fully recovered and for many, has reached new highs. The middle class and the poor have faced a much more difficult path. They rely primarily on wage income – they are the backbone of our countries labour force. And since the recession, unemployment has remained high – above 7% until the end of 2013 – as shown in the chart below from the St. Louis Fed.

Unemployment Rate - FREDThe unemployment rate does not necessarily tell the full story even as many long-term unemployed have quit looking for work altogether and so no longer are counted in the Bureau of Labor Statistics official statistic.

The issue has also made news as law makers have argued over reforms that would help the poorest Americans. Last month, Congress failed to extend long term unemployment benefits as the WSJ reported. There has also been wide spread discussion about increasing the minimum wage, to improve living condition for the lowest level of income earners. President Obama made a move in this direction by introducing legislation that would boost the federal minimum wage from $7.25 to $10.10 by 2015 according to the New York Times. However, raising the minimum wage is seen as controversial by some because they believe it could raise unemployment as employers are forced to pay low income employees more. I will explore the topic of minimum wage and the different viewpoints in an upcoming blog post.

Finally, the one of the most interesting questions related to the rise of inequality is what is the cause? Some people believe that we are facing a structural change in society as tasks which previous required low skilled workers to perform rote tasks are becoming automated by computers and machines. Economists typically see such arguments as naive “Luddite” theories because technology creates newer, more advanced jobs while making society more productive with the same resources, but the current inequality problem could be a symptom of this shift to automation. I will explore the causes of inequality in an upcoming post.

In the end, why is inequality an important concern? While it is true that there are winners and losers in a capitalist society, a rich country like the United States should find ways to share the wealth its productive population creates amongst as many people as possible. Extreme inequality can lead to unrest and political upheavals. Now is the time to dig into how bad is the inequality, to see what gives rise to it, and what we can do as a nation to slow or reverse its course. I hope to shed greater light on these three issues in future posts.

 

Is Inequality Really a Problem?

Many report shows how bad the income inequality in the U.S. is in many occasion.  One report tells us that the ownership of wealth among households in the U.S.  tends to be more concentrated since the 1980s. Top 10 percent of households controlled 73.1 percent of the total wealth in 2007 compared to  68.2 percent of the total wealth in 1983. On the other hand, bottom 60 percent of households only controlled 4.2 percent of the total wealth in 2007, reduced from controlling 6.1 percent in 1983. Another report like one in Wall Street Journal says that the gini coefficient of the U.S. is behind many other developed world such as Sweden, Germany, and UK.

One thing that I have found interesting here is that the poor seems to accept this situation or as in the language of Matt Miller in his Washington Post’s opinion, ”If things are as awful as we think they are, why hasn’t there been a broader revolt?”

He outlined the answer from Will Wilkinson’s essay for Cato Institute in 2009:

“Wilkinson argued that technology’s impact on quality and prices complicates the way people perceive these matters and how we should judge them. That’s because the surging income gap often masks a narrowing difference in the actual consumption experiences of the rich and the rest of us. “At the turn of the 20th century, only the mega-rich had refrigerators or cars,” he wrote. “But refrigerators are now all but universal in the United States, even as refrigerator inequality continues to grow.””

He pointed it out more clearly by saying,

“The difference between the rich man’s $11,000 Sub-Zero “monument to food preservation” and the poor man’s $550 fridge from Ikea is smaller than the difference between being able to enjoy fresh meat and milk and having none. “The Ikea model will keep your beer just as cold as the Sub-Zero model,” he wrote dryly.”

It does seem to me that this argument is plausible. Although the absolute income inequality has steadily increased from time to time, the real standard of living does not move a lot. The comfort that the rich perceived from driving a jaguar is not far away from what the poor perceived from driving an affordable used car. Both can live in the house each with heater, can eat meat and drink milks without burden, even if the poor getting it through the WIC (the special supplemental nutrition program for women, infants, and children). Thus, how much they each spend to fulfill their need is not too relevant given that the poor can still afford relatively the same things as the rich can do in spite of the difference in the quality. Therefore, keep the poor to be able to afford their need is a key for the income inequality not to be a problem.