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How do you judge income inequality?                                                                                    

Posted at: Aug/03/2013 : Posted by: mel

Related Category: Economics, People,

I don’t consider myself a news junkie, but I do read a lot. Some of my reading is for entertainment, some is for education. I like to think I can hold an intelligent conversation with just about anyone on a broad range of topics. To fulfill this personal mission takes a lot of reading on current events. One of the most common practices in our media today is the use of statistics. Numbers and numbers from studies have an official sound to them. When news and commentary is laced with statistics and references to studies, it just sounds more factual; “numbers don’t lie”, so it's got to be true! In a recent speech on income inequality in America our President said “the average CEO has gotten a raise of nearly 40% since 2009, but the average American earns less than he or she did in 1999.” "Even though our businesses are creating new jobs and have broken record profits," the president said in his prepared remarks, "nearly all the income gains of the past ten years have continued to flow to the top 1%." Are you shocked by these statistics, or are you so numb to numbers at this point they just bounce off your forehead?

Americans know they live in a two-tier country -- one where the uber-ultra-rich are leaving the rest of us behind. Some people make reference to the 1%’s and the 99%’s, for some it is the terminology of “Main Street” verses “Wall Street.” The entire “occupy” movement was initially formed as a way to challenge the validity of these tiers and the chasm that divides them. What is new and unique to me is that on July 24, 2013, President Obama made a speech in which he defined this growing gap in America as “morally wrong.”

For years I have seen this growing inequality gap expanding, but the public debate has been more about the numbers, having the President call it immoral is new to me. For those who don’t like the religious reference implied by calling it “morally wrong”, the better terminology might be “it is unfair.” Analyzing the income gap in terms of “fairness” would be an interesting slant as opposed to the recurring barrage of numbers. Fairness is important in America because our vertical financial mobility has always had its basis in fairness. There will always be those who have more wealth than others, but what has made America special to this point in time is the ability to transition from one stratum to the other regardless of family position. If there is a fairness gap, it would impact politics, health care, education, and a host of other high profile items.

I have heard it said that the gap is really more about suffering. If true, imagine a society in which the poorest people are very solidly able to meet the basics of life. They have enough to eat; they have jobs that are sustainable, even if they are not stimulating or thought-provoking. They are comfortable enough in their lives to go to movies once in a while. Meanwhile, there would still be some people who are extraordinarily rich. I don’t know if this model is fair? Yet, if the suffering in our society is significantly reduced, I suspect there would be less concern about the gap that exists between the top one percent and the rest of us. Beyond that, extreme wealth is an incentive for a select group of risk takers and over achievers to work harder. If morality can be quantified, I would ask if it is associated with a degree of “avoidance of suffering?" If this is true, then by reducing suffering, being extremely wealthy potentially becomes acceptable and not perceived by some as abusive or wrong.

Others I have talked to use religion to establish the morality of the gap between the rich and not so rich. In the bible and biblical tradition there are a host of parables that cast a negative light on being rich. One of the most commonly quoted by Christians is Matthew 19:24: "Again I tell you, it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God." Clearly, from the Christian perspective there is something immoral about being rich, especially if you are not using your wealth to help those who are less fortunate. Of course, I’m always fascinated by the lavish lifestyle of many high profile evangelical preachers in American; is there a conflict or a little hypocrisy here?

It should be no secret that extreme inequality of personal wealth ruins democracy. Money is the driving force behind most of American politics. The Obama team spent $1.1 billion to secure their victory in the 2012 presidential race. As financial inequality grows, so does the political influence of money on polarizing politicians. As money is accumulated at the highest end of the spectrum, the average American’s ability to make a donation to garner access or encourage a specific outcome in politics is diminished. Instead, the ability of a small group of extremely wealthy to exercise influence on the extreme left or extreme right of the political spectrum is enhanced while further decreasing the power of those with a lesser income. Effectively, money creates unequal access to the political system and those to whom power is entrusted.

We as Americans often brag about the democratic process and the power of “one person, one vote.” Unfortunately, campaigning for office is now a very expensive process; therefore the person with the most financial backing has an easier path to election success. Once elected, lobbying and lobbyist rule the political spectrum and money rules lobbying. It's no secret to anyone paying attention that money rules politics in America. When financial inequality becomes extreme, it clearly undermines democracy creating unequal access to the political system and to positions of power. This phenomenon may also create a self-fulfilling situation: As the wealthy use their money for political access, they potentially create or influence legislation that is advantageous to further expanding and isolating their position.

For some observers, the inequality gap isn't just about income; it's about class-based psychology. Extreme income inequality, even if it's derived from a fair playing field, can lead to a society where the rich look down their noses at the poor and essentially force them into presumed positions of servitude. If this is true, it undermines the presumed social fabric of America. It would effectively create a multi-class society. In this multi-class society you would have people who have to flatter and endear themselves to others while being servile, and you would have those who use their wealth and resulting position to dominate.

There are social psychologists who believe the inequality gap can be quantified into acceptable and unacceptable levels. Receiving a PHD generally requires some new concept for how to view or understand some aspect of society. As we are a culture that believes numbers never lie, any time you can create some math or equation to explain our actions it will get a lot of attention. One of these PHD generated equations is the Palma Ratio, which measures how much income the top 10% earn compared to the bottom 40%. Ideally, in the Palma Ratio these two amounts should be equal if you believe in such things. The Palma Ratio in 2010 for the United States was calculated at 1.85. I have a difficult time with the notion that inequality can be quantified. If this were true, then you could numerically manage society’s interpretation of whether the gaps in social strata and wealth are tolerable or not.

In reality, a big part of America culturally is the “American Dream.” For some people the dream is about owning a home, for some it is about having their own business, for some it is sending their children to college. Regardless of which of these or some variation you believe in, the American Dream is really about opportunity and mobility. In this school of thought, it doesn't matter how rich your neighbor is, his children could potentially be lazy and spend their wealth down to nothing, vertically moving down. More important, you and your family have the opportunity with hard work to be vertically mobile and move up the income ladder. If at some point the income gap creates a situation where only the children of the wealthy will have access to the tools to perpetuate success, and the children of the poor and middle class are excluded, then the dream is lost.

When the dream is lost because the gap becomes too wide to overcome, it may not be a moral problem, but it is truly an opportunity problem.

Clearly, as the gap between the richest and the poorest in America grows, there are stresses and overt frustrations that manifest in our society. There has been a lot of talk about the declining “middle class.” From my perspective, the middle class appears to have been a relatively short phenomenon in our history. The peak of the middle class was during the two decades immediately after WWII when we not only consumed a great deal, but we employed a great many people manufacturing a great deal of what we consumed. We are still a society of consumers, but as bargain hunters, we have sought to purchase more and more of our products made with less expensive overseas labor. With a declining manufacturing middle class, we now have a more defined stratum between those to have, and those who don’t.

I am not sure that our current inequality gap is wrong. The nature of “capitalism” and a “free market economy” is that there are always going to be winners and losers. In truth, lambasting this demonstrate a failure to understand the nature of capitalism, or an attempt to move America towards European socialism. Capitalism, by its very nature must create winners and losers. Referring to the difference between them as an “inequality gap” implies it is wrong. When I first graduated college I was making a small portion of what I currently make. I initially enjoyed the generosity of friends who let me share a room in their home for months while I saved up enough for a deposit on a small apartment. More than 30 years have passed and through hard work and continuing education my income is more than 5 times what it was way back then. The president of the company I work for makes more than $4 million a year. I don’t begrudge him that as his efforts and risk taking have created many thousands of professional jobs. Regardless of the differences in what top wage earners make and others, as long as there is still an opportunity for vertical mobility, our capitalist system is still viable and functioning.

Clearly, government still has a role in ensuring the abuses are minimized such as tax shelters, corruption and insider information abuse. If government regulates away the gap, they also regulate in socialism eliminating the zeal to create wealth. There is the anecdote from the early years of the Soviet Union. As two soldiers are shoveling out the sewage at some party leaders dacha (country estate). One says to the other, “When Communism fully succeeds we shall all be equal.” His companion replied, “When we are all equal, who will shovel the sewage?” The appeal of Communism and Socialism are obvious, but the proven failure of these systems in other parts of the world is undeniable.

There is no doubt that the concentration of wealth in the hands of a few has led to abuse in America. Most clearly is the undue influence that wealth has on the politics of our democracy, but this is a place where government policy should be interceding. The notion of wealth being concentrated in the hands of a few is definitely not wrong and it offends me that the President would use the term “immoral” to define this difference. Fundamentally, the American Dream is about opportunity and an associated access to vertical mobility. Obviously, the wider the gap between ladder rungs becomes, the more difficult the ladder is to climb. I deeply understand that the gap between these rungs create social frustration and anxiety as a consequence.

As others have said, “America is not easy.” We guarantee through our Constitution many types of equality including liberty, civil rights and access to the law, but wealth and equal wealth is not on the list. There is no doubt that the widening of our financial gap puts strains and stresses on our society, but calling it immoral means our President does not truly understand the American economic system, our underlying social system, or the value and importance of ambition.

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