Wednesday, February 24, 2016

Is Income Inequality a Bad Thing?

This corrected protest sign illustrates how the average person doesn't really understand statistics - but understands sloganeering.


The far Left has used "income inequality" as an issue in recent years, with the supposition that income inequality is a bad thing.  Is it?

In any debate, challenge the premise of the argument being raised.   Oftentimes, people will slip one past you by making an argument that is little more than a conclusory statement and if you accept this, you have lost the debate.

In recent years, people have been posting alarming graphs and statistics that show that "income inequality" is on the rise.   We are told this is a horrific thing and needs to be changed.   But what is assumed in the argument is that income inequality is bad and moreover needs to be changed.

Now to some, this seems rather foolish.  "Well, of course it's bad!  There should not be such a great disparity in wealth in the world!  1% of the people shouldn't control all the wealth!  This is a bad thing!  Everyone knows that!"

The problem is, these arguments are made on a lot of assumptions, poor definition of terms, and often loose statistics.   For example, as we have harped upon a lot here in this blog, there is a huge difference between income and wealth.   By world standards, I am a "wealthy" person as I have saved up enough money to retire on (as the law now requires me to do, basically).  But in terms of annual income, I likely make less than you.  I make less than the mean household income in the USA, which is about $50,000.  Does that mean I am "rich" or "poor"?  In terms of wealth, I am rich.   In terms of income, I am not far above the "poverty line".

It is a valid question, because on the other side of the spectrum, there are a lot of people making $100,000 a year, or even $250,000 a year who are flat fucking broke and I almost became one of them before I sobered up.   There are a lot of people in the USA who make a lot of money - and spend even more, and thus have a net worth of zero or even negative.   During the recession, a lot of these high-rollers ended up destitute overnight once they lost their high-paying jobs and could no longer afford to make payments on all their debts.

So we should, when discussing this issue, make it clear what we are talking about - wealth or income.  Because people confuse the two, often in the same sentence, such as "the top 1% of income control half the world's wealth!"   The actual statistic, of course, is that the top 1% of wealth in the world control half the world's wealth.
"Worldwide, there are 34 million people who have a U.S. dollar net worth of at least $1 million, or 0.7% of the global adult population, and they account for 45% of global wealth."
OMG!  That's horrible!  We need to change that!   Or, maybe not.  You see, by the definition of "wealth" I am one of those top 1% - anyone who has saved up a million bucks.   That sounds like a lot of money until you realize it barely covers your retirement these days.  A million dollars generates only about $50,000 a year in income in retirement for 30 years or so, before it peters out - as we have gone over in the past in this blog, in excruciating detail.

Many of these Wall-street protesters and young people graduating from college today with their staggering car-sized loan debts (another issue in which the premise goes unchallenged) will, in a few decades, have well more than a million dollars in their 401(k) plan.  It isn't hard to do, over a 45-year working life - provided you are willing to sacrifice things like cable TV, your daily Starbucks, and that smart phone you are reading this on.

In other words, these "1%'ers" are likely your Mom and Dad.  Do you hate them as well?  Moreover, if you are a middle-class person in the United States, odds are, you will become a 1%'er in short order.  Do you hate yourself, too?   It sounds fun to protest when you are 25 and broke (as I was when I was 25), but 20 years later, when you are on the other side of the fence (after two decades of hard work) do you want someone else taking away what took you so long to scrape together?  Think about it.

The fundamental problem with this "income inequality" or "wealth inequality" argument is that it assumes that everything is worse when incomes are more unequal.   This may seem like a given, but like anything else, it bears investigating.

As I noted before in this blog, comparing yourself to others is a dead-end game.  You will never win that game, as there is always someone else making more money that you, having more sex, or happier or whatever.   You have to look internally and see whether you are content with your own life.

And in that regard, the real test of whether our economy is in trouble or the 1%'ers are bad is whether the standard of living of people today is better or worse than in the past.

I mean that really is the big deal, ain't it?   It is not whether Joe Gotrocks has a 100-foot yacht, but whether Jerry Plebe has a nicer hovel than he had ten years ago.   And if the Plebes of the world are doing better because the Gotrocks got more maybe this is not such a bad thing.   I am not saying this is necessarily the case, only that it is a possible outcome that is overlooked by the bold assumption that income inequality is "bad".

This chart looks alarming until you realize that the Y-axis has been stretched quite a bit and the X-axis ends in 2011.

By some measures, median household income has dropped in recent years.   Granted, this trend started in 2008 during the recession.   But the Y-axis of this graph is really stretched, and the real variation is only +/- 5% overall since 1989.   Of course, statistics can be misleading in a number of ways.   First, numbers like this, which measure only dollar amounts, fail to take into account standard of living compared to earlier generations.  And our standard of living is one of the highest in the world:
"The homeownership rate is relatively high compared to other post-industrial nations. In 2005, 69% of Americans resided in their own homes, roughly the same percentage as in the United Kingdom, Belgium, Israel and Canada.  Residents of the United States also enjoy a high access to consumer goods. Americans enjoy more cars and radios per capita than any other nation. and more televisions and personal computers per capita than any other nation with more than 200 million people."
And I have noted this before.  Comparing a dollar today with a dollar of 1970, even accounting for inflation, fails to take into account other factors.   A television in 1970 was a piece of shit that cost over $500 and got three channels.  Today, $500 buys you a flat-screen that is 50" wide and gets 500 channels.  The quality of life we have today is far greater than in the past.  Statistics based on money alone fail to account for this.

Sure, cars today are more expensive than in the past - but accounting for inflation, not that much more.   But comparing the empty steel box that is a 1970 Chevy with the electronics laden safety-mobiles of today is apples to oranges.  Moreover, cars today get better mileage and last longer.  Has life really gotten worse?

Moreover, is dollars in income really a way of measuring wealth?   If you are "poor" in America, you can qualify for food stamps, subsidized housing, subsidized transit fare, free cell phones, free medical care - and a host of other "freebies" that really raise your standard of living up to a middle-class or near-middle-class standard.   If you are working a low-wage job, odds are, you also qualify for a host of Federal and State subsidies.  Are we counting these when we talk about income disparity?

The other side of the coin is this - is income equality some sort of desirable goal?   Is a perfect world one in which everyone makes the same amount of money?   Should a day-laborer make as much as a bum who sleeps under a bridge all day?   Should a car salesman make as much as a Doctor?   Should a CEO make as much as the man on the assembly line?   Believe it or not, some people on the Left really think so.

This also begs the question:  Who gets to decide who makes how much?  Do we set up government agencies that dictate salaries or wealth?  You laugh, but it has been tried - and failed - in every Communist country out there.   While Capitalism is far from perfect, it does assign wealth largely based on the worth of the person to the economy.   You and I might not think a baseball player deserves millions of dollars a year, but the team that hires him (and the fans that pay for ticket) seem to think so.   Should we disrupt this market assertion of value?  Perhaps.  To even ask the question is deemed to be a heartless bastard, however.

Moreover, is such a scheme even possible?   Imagine a world where everyone paid the same.  How long would that last?   The smarter and cleverer of folks would find ways to make money out of the less clever, and before long, income disparity would occur.    Philip José Farmer sort of addressed this concept in his Riverworld novels - which describe a planet where the entire population of Earth (from all time) is plunked down and each given identical "incomes" in the form of food and supplies.   Within a few years, of course, some end up Kings, and others end up slaves.   Farmer had a keen eye for the human condition.

There is another aspect, and that is means and averages can be misleading, as they can represent a few people who make a lot of money and a lot of people who make no money.   And a dichotomy in incomes is occurring in the United States to be sure.  People with no skill sets are finding work hard to come by and pay very meager.   Unskilled labor in this country has found its paychecks getting smaller and smaller in recent years - or at least not getting larger.

But by no skill sets, I don't mean "lack of a college degree" but rather no usable job skills.  People who know how to wire or plumb a house or weld a beam or repair an airplane are finding plenty of good-paying jobs (and indeed, starting their own businesses) without much trouble.   The people protesting "income inequality" are largely college graduates who wasted a lot of money on useless degrees.   Do they deserve automatic pay raises for making bad life choices?

Moreover, does it make sense to pay unskilled laborers as much as skilled labor?  As I noted in earlier postings, the workers at GM back in 1978 when I worked there were making about $15 an hour.  Today, the Nissan plant in Mississippi pays about as much to part-time workers who have no benefits.   Wages have not only stagnated, they have fallen behind.

On the flip side, though, in 1978, $15 an hour was $2.65 an hour, so the wages the union workers were getting were almost five times that.  Today, it is only double.   This doesn't mean workers today are underpaid, only that unskilled union workers in 1978 were vastly overpaid.  Back then, about 1/3 of the blue collar workforce was unionized, and unions used the blackmail of strikes to demand (and get) higher wages.   Were shitty UAW workers who destroyed the US auto industry worth even 50 cents?  If you owned a car from that era, you might not think so.

Higher wages meant, of course, higher prices for consumer goods, which is why we had much less back then (one television, maybe two dial phones, two cars).  It also lead to an era of "stag-flation" where prices kept going up, productivity kept going down, and the economy stalled.   This started in the Nixon era.  Nixon enacted wage and price freezes which is a radical concept for Republicans today and illustrates how bad things were.  When a Republican turns to the command economy, things are bad.   Of course, Nixon had his hands full the next few years, and when Jerry Ford became President, he was ridiculed for his "Whip Inflation Now" (WIN) buttons - as if inflation could be willed away.    Jimmy Carter didn't have much better luck with the economy, as oil prices spiked again, and wages kept spiraling up to keep up with consumer prices, which went up with the price of labor.

Some have argued that we should just have the government raise everyone's wages and that would fix the problem.  The problem is, as the experience of the 1970's shows, when you raise wages, you raise costs of retail products, so the increased wages have less purchasing power, which leads to demands for higher wages.   If you make the minimum wage $15 an hour, then $15 is worth eight bucks.

The flip side is in taxation.   The GOP has done a good job over the last two decades of bringing down tax rates for the wealthy and upper classes.  The Bush-era tax cuts have finally expired, but we still have far less progressive tax rates than in the past.   The Gifts and Estate tax ("death tax") is still in place but has an exemption of about $5M which is helpful to the upper middle class.   The very rich, of course, pay themselves in Capital Gains (the "Romney Rate" of 15% or so) and avoid paying any Social Security or Medicare taxes.

Bernie Sanders says he wants to tax "Millionaires" but he isn't quite clear on what this means.   Does that mean he wants to tax me or just tax people making a million dollars a year?   It appears to be the latter, and Bernie is proposing we go back to the 1950's and 90% plus marginal rates.  The problem with his proposal, of course is twofold.  First of all, no one will pay the taxes.    When you make that much money, you can afford tax shelters and tax dodges.   You pay yourself in dividends.  You move to a friendlier country.   Even left-wing artists and rock stars will dodge taxes this way.  They will do a "We are the World" promotional song for income inequality and then move to France to not pay taxes.  Irony alert.

That right there is the problem - we all want to tax "the other guy" to pay for our swag, but when it comes down to us paying taxes we shy away from the deal. And that's the second part of the problem.   It all sounds like fun to beat up on the "very wealthy" until you realize that the people Bernie is talking about might include you.

The sign above claims we are 93rd in "income inequality" (or equality, she doesn't seem too sure) and that this, on its face, is a bad thing.   But comparing yourself to others, whether it is on an individual basis or a country basis, can be misleading and miss the point.   Yes, people in Zimbabwe all make the same amount of income - one pile of cow dung per month.   There is arguably less "inequality" there than in other countries.   In the former Soviet Union, everyone was "equal" in pay (except a few wealthy party members) but everyone was paid shit.   Do we really want to go there?

Perhaps our tax system could be tweaked a bit to be a little more progressive.   But if people are resorting to tax dodges at the 39.5% marginal rate, raising that rate probably won't collect much more in taxes (particularly if the capital gains rates are not raised).   And maybe the minimum wage could be raised a little bit to account for inflation and rising rent costs.

But doubling the minimum wage?  90% marginal rates?   This is akin to locking on the brakes or putting the pedal to the floorboard.   It is overkill for a "problem" that really is more of a meaningless statistic than any indicia of how wealthy or well-off we are as a country.

We should think about this more carefully than Bernie Sanders has.




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