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Income Inequality, Is It A Problem?

7/12/2022

One of my favorite subjects to listen in on and discuss is income or economic inequality. It is often a hot topics for debate. Is the wealth gap and income inequality a real problem or is it not? How can it be addressed? Bringing it down to a personal level, does it annoy you to hear about the stupid stuff ultra-rich people spend large amounts of money on? Do you feel frustrated seeing great opulence in the world and the ridiculously expensive luxuries that people actually buy? When contrasted with the struggling of the millions of poor and lower middle-class, some can't help but think of how more should be done to help society.

People despise corporations and rich people for a variety of reasons. The biggest are probably plain envy and jealousy, but also because of the charitable heart, knowing so much good can be done for so many that need it. The other reasons generally stem from negative behaviors or apathy for the well-being of others. The negative stories I hear about rich people generally fall into one of the following:

They are jerks to everyone else with unrealistic understandings about what life is really like for the majority of human existence. There’s a sense of superiority regardless of the how much luck or outside influence built their status.
CEO’s, business owners, and other managers are often uncaring, unfair, or downright rude and inconsiderate towards employees and the hardships they might endure while working for them.
Owners of a large portfolio of rental properties or health insurance and providers are often accused of being greedy and squeezing every last penny they can from poor renters and sick people.

Ultimately, what I think is the key issue, is that with their resources and influence they are seen as having the power to change the world, but choose to only spoil themselves.

So HOW, exactly, are they supposed to change the world? Some things get thrown out there like pay people more (not just the executives), charge less for their products/services, provide better working conditions to employees and sources (fight sweatshops/slavery), donate more to various charities, community needs, and conservation "green" efforts.

Sure, it’s easy for all the rest of us to say what people should do with their money, but that's because many, or most families survive on less than $70,000/year while the people being scorned are bringing in many times that amount. If they can live on half of their large incomes, which would still be considerably more than most people, then the rest could be used to help the world while they still live a very comfortable life.

Now when being asked to give away more, how much is enough and how much good will it do long-term? If a family with $20 million in liquid assets, meaning cash or investments and other assets that can easily be sold for cash, gives away half of their wealth ($10 million), that difference could provide a much needed $25,000 boost to 400 families and they still walk away with the remaining $10 million ($100k/year for 100 years)! That’s a nice windfall to help all those families, but it would only be a one-time thing. That wouldn't be effective in the long run if it's just burned up in one instance.

What if, instead, the $10 million was invested like an endowment fund? For every million dollars squirreled away in investments, it is very likely to earn at least $80,000/year, every year, without even touching the original invested amount. Again, that's just one million invested. This is where we come in. Invested Alternative would only borrow the $10 million and then be able to provide an endless source of income for charity that is given to people in need and the donors get their money back to do with as they please. There are a few charities that already have their own funds, but Invested Alternative wants to make donating to help even easier.

I was listening to a money show on the radio one time while driving around that was talking about estate taxes, taking money from rich people wanting to pass a large inheritance to their descendants, and the discussion turned to income inequality. The program right after was a political talk show that eventually led to the same topic. It was a hot topic based on the amount of callers. The general discussion was about how more and more people are in favor of implementing or expanding government subsidies and welfare programs such as Medicare, Medicaid, all the WIC and food stamp programs, and social security.

One conversation that stood out to me, was the debate over why income inequality is bad and why it exists. In the many answers given to this, there were many generalizations and complaints made about poor people having to struggle through life and wealthy people controlling everything; but what everyone failed to answer was specifically WHY income inequality is bad and HOW it directly effects them. How is it more than just a jealousy problem? This is the main question that needed answered: "I earn $65,000/year and my boss earns a million dollars a year. How does that effect me? If my neighbor or boss makes triple the income that I do. How is that going to ruin my life?" None of the callers had an adequate answer. They all just bounced around the ethics of it being unfair and that's really it.

The idea doesn't seem right with me either. How can a handful of people have such vast amounts of wealth compared to the rest of the world NOT be a bad thing? A society of two halves with vastly different economic means and less and less of a middle class CAN'T be a good thing. That has to lead to trouble, but it's hard to describe what that trouble is and what those problems are. I did a brief search on why income inequality is bad and this question is rarely answered directly. Just more random facts and statistics about how the poor have it hard and the rich have it easy because, duh, money, but none of these answers seemed more - scientific. They just seemed like more jealousy problems and the idea that it sure would be nice if people share. There is rarely a direct correlation to answering the question of why it's bad and why it matters. I was beginning to think that the idea of income inequality as a problem needing to be solved is not really a "problem" in society, but really just a desire to improve the quality of life for more people by taking from others through government law and force. Below is my summary of some articles I found and how they don't actually address the issue:

1) https://money.cnn.com/2013/09/25/news/economy/income-inequality/index.html
A. "'Rich people are actually living longer than poor people. In the early 1980's, wealthy Americans lived 2.8 years longer than the poor, according to the Department of Health and Human Services. The wealthy and poor were defined as the top and bottom 10% on a number of different economic measures...by the late 1990's the rich were living 4.5 years longer, and the gap has only widened since then,' HHS said.
'The increasing disparity is a result of a variety of reasons including "material and social living conditions" as well as access to medical care', according to HHS."

My Response: So my neighbor will live longer than me because they have more money to pay for healthcare and maybe retire earlier in a life of luxury. Must be nice to have nice things in life, but it's still not their fault that I can't afford these things for a better life myself.

B. "For Americans born in the early 1960s, 5% of poor people went to college and 35% of rich folks did, according to the Russell Sage Foundation. They defined rich and poor as top and bottom 25% for income.
Only one generation later -- Americans born around 1980 -- the number of rich people going to college jumped by 20 percentage points. For poor people, it rose only 3 percentage points."

My Response: This argument is saying, "My boss and neighbor make more money than I, so their kids are probably going to go to college, likely tuition free with parents paying for them, and mine will probably have student loans if they go at all." Why is this someone else's problem? Colleges offer grants and scholarships to low income people all the time! Must be nice to have nice things in life, but it's still not their fault that I can't afford these things for a better life. However, there are some economic opportunity issues attached to people paying for college that I will get to later on.

2) Read this list of cultural problems:

People in more unequal societies live shorter lives. The United States is number 50 out of 222 in the world in terms of life expectancy.
Children in more unequal societies do worse in school. Out of 34 OECD countries, we are 14th in reading skills, 17th in science, and 25th in math.
More people are imprisoned in an unequal society. We have the highest incarceration rates in the world as well as the most people in prisons.
People in more unequal societies are more likely to experience mental illness. In 2003, 17-29% of Americans suffered with mental illness.
More children die in infancy in unequal societies. We are number 176 of all 222 countries.
Obesity is more common is unequal societies. Obesity rates in the United States are the highest of all OECD countries.
Teenage mothers are more common in unequal societies.

My Response: I believe poverty and poor living standards does result in more crime and bad life choices because people that are poor have less to lose and more incentive to engage in illegal activities as an attempt to improve their lives. My rich boss and neighbor have more money to spend on healthcare, education, healthier foods, and have less desire/incentive to commit crimes and make bad life choices. Must be nice to have nice things in life, but it's still not their fault that I can't afford these things for a better life (or make better choices?).

After all the searching nothing seemed to be addressing the real issues. It's all just jealousy and rage that some people were getting more than us. Many of us have had those bad bosses and company owners we worked for that made us upset. We were doing all this work making money for them and receiving mediocre wages and little to no respect in return. These abundant arguments I kept finding against income inequality were poor. They only addressed the issue as being bad because poor people can't afford nicer things to improve their quality of life. To me that's more of a personal issue, not something society should fix by forcing business owners to pay more to their employees.

However, I did eventually find some things that actually started making sense about how society as a whole is effected and how it can be fixed. https://ideas.ted.com/the-4-biggest-reasons-why-inequality-is-bad-for-society/ Below are the things I found and agree with:

High income inequality depresses economic growth. Some economists have argued that a widening income gap suppresses economic growth and job creation. When more and more of the middle class and consumer base has less disposable income, they buy less meaning there's a reduced drive for growth. The economy doesn't grow if more isn't produced and more isn't produced because there's less demand. There's less demand because there's less income going out to actually pay for products and services. The problem of too many people not earning enough is that they are using all of their money to pay for basic necessities. As costs keep rising they have less and less disposable income to use for anything besides rent and groceries. Only the richer people get to actually go out and buy stuff and they're not buying as much as hundreds of people would. They might be buying more expensive things like yachts, expensive vacations, or additional property, but those big purchases aren't as circulating as many people buying from each other's local small businesses.
Economic inequality can undermine the fairness of politics. Politicians need money and influence for their election campaigns. Of course they will be more responsive to the interests and demands of large contributors. I personally would love to see reasonable term limits placed to help alleviate this and maybe review some campaign finance laws. I'd say publicly funded campaigns with limits would be good, but I don't know how publicly funded campaigns work if many people want to run or how to prevent under the table donations anyway? I'd love to discuss this in a future topic.
High income inequality can give the wealthier people an unacceptable advantage and control over an economy and the lives of others.

Part 1) If wealth is very unevenly distributed in a society, wealthy people often end up in control of many aspects of the lives of poorer citizens. The most common issues are funky dealings in real estate markets where wealthy people drive up housing costs and absorb the multi-family properties as well to drive up the rent in a whole area. Another example is buying up public media outlets and social media influences and ads, which then gives them control over how others in the society view themselves and their lives and how they understand their society.

I think besides the housing market stuff the rest of this is less likely to be a cause of issue, but still have potential problems.

Part 2) High income inequality starts making it difficult, or impossible, to have equality of opportunities. Kids that have college paid for, especially to prestigious schools, have a much easier time getting a good job and have much higher earning potential. Wealthier people tend to have larger and more influential networks for job hookups and "taking over dad's business" scenarios. There's also a few at the top that receive large inheritances. Once you have such large sums of money in your possession, that wealth can live on forever and even grow further through investments. People with few assets and connections will find it much more difficult to access opportunities, such as dealing with loans and fighting to be on top of the resume pile of job candidates. In short, high income inequality leads to shrinking economic mobility opportunity.

The Income Inequality Debate Rages On over the rate of increasing economic inequality in our society. Inherited & accumulated wealth increasing among the rich, how much company income goes towards employee wages and benefits and company growth investment vs how much goes to executive bonuses and stock buybacks, and whether or not any of this is a problem, and how to address it.

There were some YouTube videos I came across produced by Jamie Johnson from the Johnson & Johnson family company. The two I viewed were about the lives of those that have inherited vast fortunes typically only because they were born into families whose wealth was created generations ago and is passed down, increasing continually. The Johnson movies were interesting, but I didn’t really understand the purpose of them. They do seem to foster a push for more income equality, but not much, if any, indication as to how that should happen. I think they were just eye openers for that world and life style.

This great country professes equal opportunity and “anyone can make it rich,” which I do still believe to be true, but it's becoming harder and requires a lot more luck than hard work. I also don’t believe it right to insist that people struggle miserably in the rat race if they can’t figure out.

Corporate Welfare: Socialism for the rich, capitalism for the poor. Privatize profits, socialize losses.

Another common source of grief among the masses fighting against income inequality is the belief that the holdings of the rich are not legitimate if they are acquired through competition from which others are excluded, and made possible by laws that are shaped by the rich for the benefit of the rich. Government bureaucrats and politicians being bribed with lobbying are to blame! As written in this article which I will then summarize:

In the conservative mind, socialism means getting something for doing nothing. That pretty much describes the $21bn saved by the nation’s largest banks last year thanks to Trump’s tax cuts, some of which went into massive bonuses for bank executives. On the other hand, more than 4,000 lower-level bank employees got a big dose of harsh capitalism. They lost their jobs.

Banks that are too big to fail – courtesy of the 2008 bank bailout – enjoy a hidden subsidy of some $83bn a year, because creditors facing less risk accept lower interest on deposits and loans. Last year, Wall Street’s bonus pool was $31.4bn. Take away the hidden subsidy and the bonus pool disappears.

GM has got more than $600m in federal contracts, plus $500m in tax breaks. Some of this has gone into the pockets of GM executives. Chairman and CEO Mary Barra raked in almost $22m in total compensation in 2017 alone. But GM employees are subject to harsh capitalism. GM is planning to lay off more than 14,000 workers and close three assembly plants and two component factories in North America by the end of 2019.

When he was in business, Trump perfected the art of using bankruptcy to shield himself from the consequences of bad decisions – socialism for the rich at its worst – while leaving employees twisting in the wind.

Now, all over America, executives who run their companies into the ground are getting gold-plated exit packages while their workers get pink slips.

Sears is doling out $25m to the executives who stripped its remaining assets and drove it into bankruptcy, but has no money for the thousands of workers it laid off. As Pacific Gas and Electric hurtles toward bankruptcy, the person who was in charge when the deadly infernos roared through northern California last year (caused in part by PG&E’s faulty equipment) has departed with a cash severance package of $2.5m. The PG&E executive in charge of gas operations when records were allegedly falsified left in 2017 with $6.9m.

Under socialism for the rich, you can screw up big time and still reap big rewards. Equifax’s Richard Smith retired in 2017 with an $18m pension in the wake of a security breach that exposed the personal information of 145 million consumers to hackers.

Wells Fargo’s Carrie Tolstedt departed with a $125m exit package after being in charge of the unit that opened more than 2 million unauthorized customer accounts.

Trump’s response has been to cut the estate tax to apply only to estates valued at over $22m per couple. Mitch McConnell is now proposing that the estate tax be repealed altogether.

What about the capitalist principles that people earn what they’re worth in the market, and that economic gains should go to those who deserve them?

America is on the cusp of the largest inter-generational wealth transfer in history. As rich boomers expire over the next three decades, an estimated $30tn will go to their children.

Those children will be able to live off of the income these assets generate, and then leave the bulk of them to their own heirs, tax-free. (Capital gains taxes don’t apply to the soaring values of stocks, bonds, mansions and other assets of wealthy people who die before they’re sold.)

After a few generations of this, almost all of the nation’s wealth will be in the hands of a few thousand non-working families. To the conservative mind, the specter of socialism conjures up a society in which no one is held accountable, and no one has to work for what they receive. Yet that’s exactly the society Trump and the Republicans are promoting for the rich.

Meanwhile, most Americans are subject to an increasingly harsh and arbitrary capitalism in which they’re working harder but getting nowhere, and have less security than ever.

They need thicker safety nets and deserve a bigger piece of the economic pie. If you want to call this socialism, fine. I call it fair."

My Response: You get the idea from reading this that the super wealthy are "cheating" because of their ties with government bailouts and tax laws, and I agree. However, I also understand that governments sometimes court relationships with large, influential businesses and industries as an attempt to strengthen or protect economies. The fear with the big banks and very large businesses is that their failures would exacerbate a failing economy by having even more people lose jobs and financial systems fail. There's gotta be a happy balance to this in someway. I just don't know what that is and welcome those that want to discuss this in a future conversation.

I received a response to this conversation already that I want to inject here. This person commented that executives are not owners and continued to say,

CEOs are generally employees who do not own the corporations they run. You need stop confusing management with ownership. Top athletes get paid millions even if their team doesn't make the playoffs. Top actors get paid millions even if their movie flops. Top executives get paid millions even if the company fails. They are employees."

The gap between CEO pay and average worker pay is meaningless. Your compensation is set by the market. It's relative to your peers doing the same job in other companies. Not people doing other jobs in the same company.

It is not Zero sum. Bill Gates being rich doesn't make me poor. Jeff Bezos being rich doesn't make me poor."

I'll admit, the statements about CEO's being an employee make sense, especially when compared with athletes and actors like they said. That actually makes sense; but they and their fellow executives ARE part owners, since they usually hold a lot of the company stock themselves! I also have a problem with this line where they say, "Top executives get paid millions even if the company fails. They are employees." Why should they? The vast majority of employees get nothing! No cushy severance check. If the CEO of a failed company is just collecting the remaining checks from their contract deal as they depart then I get it, but I am still on the side of executive pay being way too high in general.

Again, commenting that some people being rich doesn't make me poor goes back to that original question I heard on the radio that we struggle to answer. If them being rich doesn't make me poor, then is income inequality really a problem at all?

How I Think It's A Problem

Why does it matter that my boss/neighbor makes more? The answer to this question is not just a short, simple statement. The answer is that it matters because over time, if income inequality continues to grow apart there will be more civil unrest, an increasingly polarized community and nation, and a rise in more extremism in politics.

Why would these things happen? Because despite trying to do everything right, the cost of living continues to go up and the quality of life continues to go down as people struggle to keep up.

In a smaller setting, especially resort towns, we see exactly how income inequality is negatively effecting these communities. When the rich move in and start buying up all the property, housing costs balloon up to cost so much that the working class literally cannot afford to live and work there anymore. This is one of the big reasons people hate short term rentals. Rich investors buy up the housing inventory to rent them out and profit, but this causes all the housing prices to go up so high that locals and employees can't even afford to live there. All the touristy and small town businesses can't even stay open and operable at normal hours because there's no staff. These businesses can't pay enough for the employees to actually live in the same town.

Here's an example of how the rich get richer and the poor get poorer, and how economic mobility becomes increasingly difficult with increasing inequality. In a poor family where the parents, or more often today single parent, are barely making ends meet and weighed down by debts, and the high cost of living, paycheck to paycheck lifestyle. They can’t support their children much more than themselves. Even worse is when their child or children get jobs and have to help pay bills for their own parents & family. Sure there are opportunities for them to get scholarships for schooling or government assistance if they know how, but this is still a struggle to improve their economic situation. Even if they get a college degree, these kids coming from these kinds of situations will then be competing for jobs with the kids that grew up in wealthy families that have business connections and, usually, a padded resume from working for Mom & Dad's business and maybe already experienced in running parts of it.

So again, to try answering the question of why does it matter that my boss/neighbor makes more? On a micro scale, it probably doesn't matter; but in the macro setting, society deteriorates when there is far too much inequality. There will be less of a middle-class and there could be problems rising like those previously mentioned.

Solutions?

A little inequality is good for competition and investment. A moderate amount leads to public strife and small amounts of protests and class warfare. A large amount starts becoming detrimental to a society and economy. However, it's not about everyone making the same, or really close to the same, there needs to be a strong middle class.

One idea I saw floated that I thought was interesting was requiring profit sharing from companies with more than 5 employees, where employee wages/salaries are still different, but at the end of each quarter, a certain portion of business profit is distributed equally among all employees. Even down to prorated by month or weeks an employee has been with them if under a year. As already mentioned above, profit sharing is already being done, but very heavily to the top executives only. Another idea is requiring corporate boards to have 20% representation of the employee interests for the company. I don't know all the details of how that works, but it can be another discussion.

The solution is more than just taxing the rich more and redistributing their wealth artificially through cash payments and free government handouts. How the tax money is used and how the wealth is redistributed is key. Find the problems directly associated with wealth inequality, such as those previously stated, and remove those barriers that prevent equal opportunity. America should be a nation of true economic opportunity, not economic equality of outcome. What are your ideas for reducing income inequality?

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