Monday, October 18, 2010

Income Inequality

I liked this article from the New York Times: Income Inequality: Too Big to Ignore

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

This part echoes what I've said here myself about the bar being raised for everyone when we're exposed to the spectacle of how the rich spend their ever-increasing wealth:
The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.
It's to everyone's benefit to have a healthy middle class:
The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

Ultimately, the article concludes that increasing income inequality doesn't benefit anyone-- the rich people who benefit from it aren't really happier, and everyone below them on the ladder isn't happier, and the costs to society affect us all. This doesn't mean that "income equality" is the goal, as those paranoid about communism and socialism may fear-- there will always be rich people and poor people, but when the division between them grows too out of proportion, we all suffer.

If you want to read more about the negative effects of income inequality, I recommend the book The Spirit Level: Why Greater Equality Makes Societies Stronger.


Nick said...

hint of socialism already bothers me that the rich are taxed at a much higher rate even though they may have made all their money just like the middle working hard!

stephanie said...

I don't understand how the rich spending more makes everyone else worse off. If the rich are spending more, it means they are putting that money back into the economy, supporting business, creating jobs, etc. etc. The only way it would negatively impact middle class families is if those families decide they 'deserve' everything that wealthy families do, and therefore decide to buy cars and houses outside of their price range to try to 'keep up with the Joneses.' That isn't the fault of the rich, its the fault of the people who decide they can never be happy with what they have if someone else has more.

I have done a LOT of volunteer work over the years, and for the past 2 years I have worked at a nonprofit that provides financial assistance for people who are struggling to pay their rent and utilities. Almost all of the people that come to us for help have cable and internet, cell phones, computers, and other things that would be consider luxury items by most of the world. We are a truly wealthy nation if even most of our /poor/ have TVs and cars, while so much of the world doesn't even have running water or electricity.

Anonymous said...

I echo the other comments. If everyone is getting richer, aren't we better off? To define the middle class as a relative benchmark is misleading. The "middle-class" is better off than the upper class used to be.

Anonymous said...

That's the issue here. The point is the middle class is not better off than it used to be. There's simply an illusion that they are.

Technology has driven the prices of some products lower, specifically electronics and the like, and it extends to other products such as cars, which each successive year in the same class provides more car in size/space/fuel efficiency/features for the dollar. That's all true.

But the argument falls apart when you begin looking at things like health care which are eating up the income of middle class earners at a staggering level increasingly every year. And it shows up when the wages now include less and less employer support for retirement plans like the abolition of pensions, and decreasing contributions to 401Ks (or how my former employer completely abolished their 401K altogether and never reinstated it).

And even if you take these things into consideration, the previous decades before the middle class declined also saw repeated advances in technology that did the same thing for cars, houses, etc.

At some point, like it or not, even the rich suffer when wealth is concentrated too strongly in their hands. That's not a socialist or any other ideological statement. It's simply pointing out that unbridled capitalism eats itself alive. For some reason, people around the world eventually came to accept that communism and socialism have inherent flaws, and there truly are inherent flaws in those economic systems. But for whatever reason, and especially in the US, there's a strong resistance to recognizing that capitalism has inherent flaws as well.

Rich said...

No denying that the smart and rich are getting richer, the dumb and poor are stagnating and those in the middle have declined for decades. The obvious problem for the U.S. is that 3rd world labor now manufactures what middle-class America once produced.

The answer from unions and liberals is to socialize our country, create more public employees and tax the wealthy (and corporations) even more. The conservatives believe that Americans can still compete against cheap overseas labor and that making the U.S. more attractive (low/no tax) for investors and corporations to locate here will bring jobs back to our shores.

I don't have confidence that I've heard a perfect answer. I also don't think we realize that what we've done by 'securing' the world (costing us billion of dollar each year), keeping the seas and air safe for shipping goods along with assuring we have peaceful trade around the globe, makes it safe risk for investors and corporations to build their production facilities in areas where cheap labor and lax environmental concerns are the most competitive and profitable. Until we address that, the labor-class in the U.S. will continue to see their future dim.

BTW ... great site Madame X!

Jeff Turner said...

I would have to disagree with the first anonymous post. The middle class is getting taxed more and more. The rich do pay the share of taxes. About 15 percent of tax revenue is from the wealthy in the highest tax bracket, but the middle class is getting drawn into a normal cycle of higher taxation over the generations, i.e. your kids will be used to paying high taxes so they will not give it a second thought.

Good site too....