Income Inequality: Should it matter?

http://www.cbo.gov/

All the info you ever could want. This is where those income charts come from showing the exponential growth in high earners, compared to the low.

Income inequality is not an issue. If you look at tax rates and % of tax burden, it has lowered the most for low income individuals. The tax burden falls primarily on the upper earners. The poor don't pay.

http://www.cbo.gov/ftpdocs/53xx/doc5324/04-02-TaxRates.htm#table1A

The reason low income salaries haven't rose is because you add no value. The only way they will rise is if the government does a couple things

1) Mandate higher minimum wages

 - people will get laid off
 - prices will increase
 - outsourcing will increase

2) Direct payments from the rich to the poor

 - this will just increase the floor, but won't give the poor the tools to get rich or invest

The poor are poor for the same reason there have always been poor. Education, effort, or a combination of things.

Income inequality is bullshit because it is under the assumption that people are equal or there is some ideal of equality. We all have opportunity and freedom. Some have it easier, some harder, but that is life. Some invest, some save, some spend. We each make decisions in order to maximize our personal utility.

As long as people have opportunities to advance themselves then income inequality is a red herring.

"As long as people have opportunities to advance themselves then income inequality is a red herring."

This is the crux of this issue. Equality of opportunity.

Unprecedented levels of (growing) income inequality are not alarming to moderates like me because we expect equality of outcome. In fact we expect the opposite. People are not equal, and given equal opportunities individual outcomes should vary widely. I'm OK with that, and in fact think that this is the moral way for society to be structured.

What worries me about growing income inequality is that it signals to me that equality of opportunity is fading. I accept that the stupid and lazy will do poorly, and I'm glad that the smart and hard working will do well. I just don't understand why the stupid and lazy of today are doing so much worse than the stupid and lazy of 30 years ago. Similarly, I don't understand why the smart and hard working of today are doing so much better than the smart and hardworking of 30 years ago. Call me crazy, but I just don't believe that the bottom has gotten any stupider and lazier and that the top has gotten any smarter and harder working. The underlying abilities (IQ distribution, etc) of a population just don't change to the observed degree in such a short time frame. So something else must have changed.

Part of it is tax policy. The rich keep a larger share of there income then at almost any other time (which I think is good). Part of it is social policy. Excluding entitlements (SS, Medicare, Medicaid), social welfare spending as a % of GDP has been declining steadily and substantially since the 1980s (I'm mixed on whether this is good, but am mostly OK with it). Part of it is globalization. There can be little question that trade liberalization has greatly increased returns to capital (a good thing) while simultaneously reducing returns to labor in the U.S. and other first world countries (not so good in my opinion). When you combine all those things, even though they are all good things from the perspective of growing GDP, generating new wealth, spreading democracy etc, there is no doubt that they've had a devastating effect on the American middle class.

The question is what do we do to ensure equality of opportunity in an environment where these macro factors are generally working to consolidate it in the hands of the few. Moreover, how do we do so in a way that keeps the pie growing in an absolute sense. Neither the rhetoric of the right or the left seems to offer a satisfactory answer.

Income inequality doesn't matter as there is relatively high mobility, the reason that there is less now is that smart begets smart and rich begets rich. Look at the top 5% of income earners most are doctors, lawyers, engineers i.e. positions that require intelligence and drive, America is largely meritocratic.

Well you are starting to see white collar outsourcing also. There are a multitude of reasons. There are also new opportunities also. How many people are selling stuff online, have e businesses, can now learn online. Many great schools have online classes, night time classes, part time programs.

Things just change. More so now. Flexibility is the key. I am almost 30 and look back at my career and the jobs I have had and it has been a whirlwind. Some people just can't handle that pace.

I feel bad, I do, but what can you do. Other than just having a large portion of society forever on the public dole, you have to take responsibility. Life is pretty damn hard.

I think the issue is really becoming this. Are you willing to be satisfied with a small, but livable government hand out or do you want to risk it and live a great life.

This whole 1% crap is obscuring the issue. There needs to be either a big cut in spending or broad based tax increases on those who pay.

So according to ANT, all poor people are poor because they are feckless and lazy. great analysis there moron. nobel winner right here. smh.

Income Inequality only matters when access to opportunity is not equal across the board.

In the US, only 30% of adults have a college education. These are the only people that are going to be able to compete globally. Why? Because they control the global economy. The top 30% (and more specifically, the top 1%) of American's own and manage a significant portion of the assets in our economy. Thus, wealthy people own shares of American companies. American companies are run by wealthy managers, who also own signficiant stakes in those companies. For both to get more wealthy, they move factories offshore, they cut costs, and they profit as a result. The uneducated worker cannot compete in this type of society. For the record, I am not saying this is a bad thing. I am simply saying that globalization benefits the wealthy tremendously, and so it is in their best interests to promote it.

Your lifetime potential income is a direct function of your educational network. Your educational network is the level of education you attained, as well as the network of people you met while attending a specific institution (in other words, target schools vs non-targets).

Ok ant you've clarified it. sorry but ur original post just came off aristocratic in a very bad way. sure some people are poor cos of their own bs. but for the most part it's society's failure to put these people on track. you can't just hold ur nose off at the peasantry. history shows that they bite back and bite back hard! i ditched my bb now i'm using this pos backup phone with number keys hence the abbrevs. goddamn rim!

Societies failure to put them on the right track?

Take note, cause now I am going to be an asshole.

Society has nothing to do with it. I have no part of this and I could give a shit if someone succeeds or fails. Only time society has an upheaval from the peasantry is when it is totalitarian. The majority of people in this country still believe in a working class ethic. We have countless safety nets and social programs. If some kid wants to get high and blow of school, I am 100% ok with that.

But don't expect me to give a shit if you can't afford a nice life. You've made your bed, now lay in it.

There have been and always will be poor. I don't know why we are even discussing this. Poverty in the USA is relative. The poor here are kings everywhere else. If you gave every poor person 50K per year in income we would still have poor people.

Some would shit out 10 kids. Some would piss it away on dumb stuff. Some would party it away. Maybe a few would invest in their education or kids.

As someone who has worked with and managed people who barely graduated high school, each and everyone of them deserves less than the minimum wage.

I usually say let them eat cake, but I just realized that I would be buying the damn cake for them.

And this is why I only donate to charities that benefit animals or educated people.

Also, this whole concentration of wealth thing is bullshit.

Take a look at a wonderful experiment called the housing crisis.

People with shit credit finally could afford houses and had access to credit. What happened?

Oh, people with bad credit bought small houses they could afford and used this new found credit to buy school books for their kids.

NOT

They bought material things (that also depreciate instantly). Rich people stay rich because they invest their money. They save. People with no assets piss their money away. How many poor people smoke, drink, gamble. The lottery is just a tax on the ignorant. Same thing with cigarettes.

You cannot stop people from being and acting dumb.

The only reason why man became the apex species was because unlike other animals, we care about our fellow beings and strived to achieve goals as groups. i see poor people as failed potential. it's not enough to just walk away. Our society is the victim here. this whole dog-eat-dog every man for himself bullshit is overrated. we need to inspire the unproductive to produce. and i don't mean throwing money at them. get em into the army, stick em in a classroom till their ears bleed with knowledge or something. dammit let's get these fuckers working!

Double post demon strikes again

It's all about culture. I've spoken and mentored many poor (mostly minority, some not) students. It's just a totally different mindset then from what I was raised. It's a mindset that focus on things locally (what the hip bars are in town, how people are doing in town), not a more global, international mindset. The people seem much more focused on short term goals (my paycheck, my club money, whatever).

There's no concept of saving and investing with these people who are working minimum wage and barely getting by. The only thing they see is getting enough money to do whatever they need to do. I'm not saying all are irresponsible, but I can guarantee you many more drug users, smokers, etc. etc. are of lower income.

Wealth is generated (usually) by a certain culture: save, live prudently, invest, etc. The parents who do this teach this to their children. The parents who don't give no example for their kids to live by. Most of these parents are young, sometimes single mothers who are just trying to get by. It's a very cyclical problem that is extremely tough to end. Transfers of wealth would do virtually nothing for these people, since they don't have the institutions, culture, or mindset to use the money to establish a financial base and dig themselves out of the poverty cycle. Since I saw my parents finish a college degree, save for retirement, etc. etc. I feel much more knowledgeable of these issues AND much more aware of the future. I know what I need to be doing in order to live at least comfortably. That's the reason I'm on this site, the reason I'm at a top 15 school, the reason I am investing in my own future and the future of my (future) kids.

People in poverty have to want to change. It's more of a bottom-up solution that, while difficult to stomach for the people who want to save the world and fix everything, is much more plausible. People have to see their sons and daughters busting their ass to make it into and get that scholarship to Yale, save money, get an awesome job, and teach all this to their children. Until that happens, all of the spending, reforms, and preaching in the world won't change a thing.

Wish there were more people like you rain. See so clearly at such a young age.

I didn't read most of the posts but I don't understand why any American would support outsourcing of jobs to the Phillipines or India. It's one thing for Patrick to hire a Personal Assistant based in the Phillipines, quite another for the CEO of an Investment Bank to outsource an IB analyst job to India. If we keep encouraging this, our jobs are going to be on the chopping block soon enough. We have to be honest with ourselves, a large portion of an Analyst's job can be outsourced. This is too much.

We don't need class warfare, we need age warfare, the rich, fat, old, white CEOs don't care about the young people. They will do anything to save a $ and line their own pockets. They enjoyed 40-50 years of a boom economy and now we're screwed. They had their fun now it's time to tell them to take a hike. We need to bumrush any company that outsources jobs and threaten them with physical harm if they outsource even one job.

A lot of technology innovation still comes out of America, so we're lucky in that regard. But what if China and India catch up to us in that regard ? Then they'll control the innovation, manufacturing jobs AND entry level white collar jobs.

Banking jobs are already being outsourced to India. And while I agree that outsourcing hurts everyone, including eventually you and I, I think blaming it on some ethereal CEO is unfair. The CEO is just doing what the shareholders want. If they decide to pay higher costs for labor and become less competitive, the share price will suffer and he will find his own job outsourced to a better leader.

Jobs will leave this country and return to this country. We demonize outsourcing, but fail to realize that the worst culprit when it comes to stealing American jobs is technology and mechanization. If John Deere went out of business tomorrow we could have full employment from farming jobs alone. Think of how many machines put humans out of work.

We are competing in a global economy. We either adapt and get used to this or try and swim against the tide.

some thoughts: The best policy to lower the gini coefficient and create jobs any president could pursue is tax reform. Remove all deductions (which is basically another form of spending) and eventually slash rates. Of special importance is removing the offshore profits exemption.

The last boom was fueled by the twin terrors of cheap credit and irresponsible hands. Consumption is going to stagnate for a while and we need to look at other avenues for growth which brings me to point three:

Throughout history we've had some technology, idea, or discovery that accelerated job and wealth creation(e.g. the steam engine, homestead act). As of now we have nothing. There also happens to be $2 trillion of cash not being put to use right now. To get that moving and into the pockets of the bottom 80%, we can either confiscate it or try giving those evil corporations an actual reason to spend it. This can come in the form of government funded research as well as entrepreneurs creating new businesses. We live in a $15 trillion economy. There has got to be something you're good at, someway you can create value.

Wages and prices are still too high. The credit boom created an artificial increase in aggregate demand which caused wages and prices to to rise above their productivity and real value. If we let them fall (I'm looking at you Ben), we can get closer to full employment. Perhaps the fed should target unemployment or maybe just maybe let aggregate demand fall.

The middle class is dwindling due to wage stagnation????

It's not wage stagnation that is causing this, it's what they spend their income (I mean increase their credit card balances) on.....they spend their money mostly on short term consumables rather than on long term assets like education. I was in one town on the east coast and I remember the people at the next table were talking very excitedly about some contraption they bought for 19.95 that automatically scrambled an egg inside its shell. When I overheard them talk about their "benefits" I am thinking like WTF, why don't you save your money (i.e. my tax dollars) and just use a fork?? In my anger, I realised that I asked the wrong question. It's not why they spend our tax dollars on that kind of crap, the question is why do we keep subsidising it.

I think the solution is to remove the incentives to doing nothing while protecting the obvious disadvantaged in society.

I love this site. I am learning so much... Thank you all.

I wasn't arguing that there wasn't wage stagnation, I was arguing that wage stagnation wasn't the cause of the dwindling of the middle class as you stated in your piece. I offered another cause in its place, and something that would contribute toward a solution. I would further argue that wages/income levels for the middle class were artifically boosted through credit cards spending.......and what did they do with that extra income.??? They spent it on consumption.

I focused on that because this segment of society appears to be destroying themselves through their own behaviour. If anything, the stagnation in the income levels is a result of the behaviour and spending habits.

Yes, too much wage disparity in a country isn't good as we see.

What are some possible solutions? Well, I think decreasing the incentives to do nothing would certainly contribute toward part of the solution. Some of those people I saw on TV at this Occupy Wall St. thing....may be beyond help.....(like that animal who took a shit on the police car) but for others who are genuine and want to do something with their careers, perhaps people in finance or anyone employed could volunteer some of their time to help people think through their job search, etc....sort of a "Wall Street Mentor Exchange". Match a finance/consultant/executive with a particular skill set or interest with someone who needs advice in that particular area. As a model of how it could work, I volunteer with a group called Grow Movement that matched me with a young real estate entrepreneur in Uganda. I spent 8 one hour sessions with him over the course of three months on Skype to help him think through his strategy, marketing plan, etc. Within a year he sold off one small shop that sucked his time and contributed little to his income, focused only on real estate, hired five extra staff and grew his revenues 4x. What's this guy doing with his extra money?? Investing in an accounting course I last heard rather than on some consumable like an egg blender.

As long as America allows freedom and liberty, people will always be poor and fail. Some retard drops 200K on an anthropology degree and they will be broke trying to pay it back.

But who am I to make decisions for another free person.

http://studentaid.ed.gov/PORTALSWebApp/students/english/cancelstaff.jsp

People who complain about crushing student loans could always serve the government, who will in turn forgive student loan debts after a number of years.

See, there is always an answer or way out. Some people just are too lazy to seek the truth.

This country is perfectly fine. We don't ask the poor to pay Federal taxes, we provide multiple safety nets, we have free grade school and low cost college. If you succeed cool , if you fail cool also.

I don't see an issue.

So far this has been a pretty solid and rational discussion (by WSO standards anyway). However, by focusing the conversation on those folks in the bottom 10% on government assistance I think that we're largely missing the point of why OWS is angry.

People in the bottom 10% have always a pretty raw deal in life, trapped by some combination of lack of opportunity and their own terrible choices. The reason OWS is angry is because that raw deal is rapidly spreading upward. The lives of those in the bottom 40-50% today are very quickly coming to closely resemble the lives of the bottom 10% of 30 years ago. What was once the plight of high school drop outs (high unemployment, drug problems, high levels of single parenthood) is now the plight of the high school graduate and even the mediocre college graduate. Even the top of the college graduate pool is barely treading water economically. The Atlantic had a great article on this a few months back:

http://www.theatlantic.com/magazine/archive/2011/09/can-the-middle-clas…

Since people are breaking out the personal anecdotes, I thought I'd offer one of my own. My father studied engineering in college. While he was in college he worked stocking grocery store shelves at night. He studied all day and worked all night to support his young family. The pay was low, only $5 per hour, and tuition at his elite private engineering college was high at $300 per semester. His hard work paid off though. Eventually he graduated and landed a job as an engineer with a starting salary of $43,000 per year. Soon after he bought his first home for $78,000.

Sounds good right? The American dream. Let's look at what a comparable experience would look like today:

• $5/hr in 1974 would be $21.85/hr today if we use CPI as a gauge. When was the last time you heard of someone working in a grocery store making $22/hr?

• $300 per semester was $600 per year in tuition. Comparable tuition today would be $2622 per year. When was the last time you could go to a good college for $900K. It had not been renovated since the mid 1980's.

So in 1974 you could pay $3000 per year to go to a good college while working at night for $22/hr. You could graduate and take a 9-5 job that paid $188K/yr right out of school, and you could buy a house in a major urban area for $350K. Wow, that sounds awesome. Especially to me since I graduated from the same college with the same degree in 2003.

Only my experience was different. I had $70,000 in student loan debt because my tuition was $34,000/yr (today its approaching $50K/yr). I also worked nights to help pay for school. Only my night job paid about $9/hr. It was all worth it though because I graduated and got myself an engineering job in the same field as my dad. My starting salary was $49,000 per year. Now I don't want to sound like I'm complaining. I had good opportunities and I've done well for myself. The point is, compared to 2011, even my experience (much less my dad's) seems like the good old days.

Rightly or wrongly, this is why OWS is mad. Its not because Shaniqua and her 9 kids can't get enough food stamps. Its because little Johnny just graduated from the state college, his tuition was $15,000 per year, and his only job options pay $12/hr with no benefits.

$15,000 x 4 years = $60,000 = $700 a month in student loan payments for 10 years

http://www.finaid.org/calculators/scripts/loanpayments.cgi

$12 bucks an hour is 480 a week, about 2K a month. He isn't paying health insurance, so that is out. No 401(k) which is fine since he can start when he delevers and gets a little older.

Lets suppose he lives in Philly.

38.4 in state and city tax. Sucks, but he can walk and use public transportation.

With the tax bracket he is in he is paying 62.4 per weekly paycheck.

That plus city/state brings him to 380 per week or $1520 a month. Social security and Medicare will reduce this also ($41.00 a paycheck) so now he is at about $1350 a month.

Splitting a really nice place in Philly is $600 a month. So that leaves him with $150 a month after all is said and done. Now this isn't taking into effect that the interest on the student loan is deductible or that Philly taxes aren't exactly 8%, etc. But this is close.

So what to do. Well, you could work during college and come out with less than 60K. You could easily work another job and have much more money to spend and save (or de-lever quicker). We all work way more than 40 hours a week and I don't think it is unreasonable to expect this person to do so.

He could also do a variety of things that the government recognizes as part of their loan forgiveness program. After 7 years the government will pay off your loans and during that time you will get a reduced loan amount.

Also, he could choose a different major. Back office finance jobs pay more than 25K a year. Accounting jobs do. Government jobs do. Teaching does. Etc.

He could also live with his parents for a year, aggressively pay down those loans and wait to get some experience so he can make more than 12 an hour.

Problem is, this isn't easy or fun. It requires self discipline, hard work, sucking for a while. This is EXACTLY what OWS is protesting. They want an easy life. They think rich people just magically woke up one day. They ignore the hard work, prudent financial decisions, etc that all went into getting wealthy.

ANT,

That's all well and good, but it doesn't change the simple fact that things are worse today then they were yesterday. It doesn't change the fact that while $15,000/yr tuition is reasonable, 10 years ago it $7000/yr. It doesn't change the fact that 10 years from now that same school's tuition will be $30,000/yr (yes, public school tuition has been increasing at 7-8% CAGR for the past 30 years). It also doesn't change the fact that in 10 years that first job will still pay $12/hr (if it exists at all).

Say all you want about choosing the right major, the right school, getting the right grades, or making the right choices. People are mad because, while its still very possible to make it, its gotten a lot harder and all the trends are negative.

I made all the right choices. I got an engineering degree from a top school, I got top grades, and I got a good job in the field. Then I got a masters in engineering from another top school and completed an MBA on the side all while working full time. I've saved, I've lived modestly, and I've invested. Now I'm a 3rd year associated at one of MBB and I just bought my first house. My life is good.

All that doesn't change the fact I'm 30 and my salary has just caught up to that of my 21 year old father in his first year out of undergrad. It doesn't change the fact that I work 100% more hours than he did. It doesn't change the fact that my ugrad tuition was 6X what his was AFTER adjusting for inflation. I'm one of the "winners" at this point, but I can still see why the "losers" are mad.