Why Is Income Disparity Widening? (August 21, 2010)
That income disparity is increasing is not in doubt, but the causes--and thus the solutions--are not easily parsed.
The statistics are unequivocal: The Gap Between the Top 5% and the Bottom 95% Is Widening in America. Is this the result of "natural" forces, or of government favoritism?
In a nutshell, the potential causes of the widening gap can be divided into two camps: "natural forces" of capitalism and Central State intervention.
Causal factors in the first camp include:
-- The differences in education, motivation and skills in people; the hardest working, most ambitious and most highly skilled people will naturally end up making more money than those with less skills and drive.
-- The differences in humans' propensity to save/invest or consume/gamble. The Pareto Principle suggests that 80% of the property and wealth ends up in 20% of the populace's hands, regardless of the initial state (in other words, even if income is evenly distributed to start with).
-- The globalization of trade and manufacture has introduced an extremely competitive wage arbitrage in which American workers are often competing with workers not just in different states but in different countries.
In general, this camp is discounted by "progressives" to whom innate differences between people are verboten for ideological reasons; the "liberal" ideology often confuses equal rights and opportunities with equal ability and drive.
The "progressive" agenda is thus set on equalizing not just rights and opportunities but skillsets, education, etc.--everything which is perceived to be a sociological wellspring of unequal skills and motivation, and thus of future income. Government intervention is thus essential to keep the society from diverging into financial nobility and serfs.
The "conservative" ideology discounts these sociological factors--education opportunities, marital state of the family, living conditions, etc., on the grounds that immigrants to the U.S. often arrive with little money, skills or education, yet many prosper quickly despite these (for U.S.-born citizens) supposedly insurmountable handicaps.
The "conservative" ideology is more accepting of what is often (mistakenly) called the Darwinian characteristics of capitalism; those with less motivation and fewer valuable skills must either try harder or be left in the wake of the economy.
(Darwin's work described the forces of natural selection between and within species, not between individuals in a community. Thus the struggle between "species-like systems" such as U.S.-style capitalism and Soviet-style Communism could be rightly viewed as Darwinian, as the competition, mutation/adaptation and selection process was systemic rather than individual.)
The "conservative" ideology objects to the government's role in attempting to correct sociological inequalities by redistributing income on the grounds that those who work the hardest are being penalized while those who make less effort are in effect rewarded.
I reside in neither camp, though I am sympathetic to various arguments on both sides.
I have observed that no sociological incentive can motivate a human being; they must find their own path to motivation. Giving people endless free stuff merely makes them dependent and atrophies their self-reliance and ability to work with others. Whatever is given as "free" is rarely valued, education being the most obvious example.
I live in a high-immigration state (California) and thus I have personally witnessed immigrants arrive with nothing, work two jobs, save every penny they can from their earnings, and buy houses, cars and businesses for cash a few years later. The only U.S.-born citizen I know who achieved the equivalent is my wife, who worked and saved enough in five years of ceaseless toil at low-wage jobs to buy her mom a house and pay off the entire mortgage. My wife completed this goal when she was 23 years old, and then she finished college. I am sure there are many such U.S.-born people, but I don't know any.
One of the dirty little secrets in America is that excuses are offered in endless millions here; my wife was raised in a single-parent family and her Mom worked at low-level jobs her entire life. Many Americans will devote more energy to creating excuses than they will to changing their life circumstances, and they often resent anyone from humble backgrounds who has accomplished a positive life change. (This is called "the crabpot syndrome" to those in the know.)
In our politically correct society, these observations are verboten, and quickly marginalized or dismissed.
I have also observed that many people I know make large sums of money yet they are continually "broke" and own little to no assets. Their consumption ratchets up with their income and their low propensity to save/invest never strengthens.
I suspect long-term cycles of innovation/stagnation, complexity/marginal returns and habituation to a "prosperity" that is no longer sustainable play roles in income disparity, as does globalization.
But if we ask cui bono of the status quo (The starting point of the Survival+ critique), I think we will find the Central State (Savior State) is heavily favoring unearned income over earned income and "gaming the system" financial speculation using other people's money over productive labor. The profits from gamed embezzlement/speculation is private, while the losses are backstopped by the government, i.e. profits are private, losses are public. That doesn't hold true for the 99% who are not financial Power Elites.
Thus I conclude that government/Elite-dominated policy heavily favors the Elites' conservation and accumulation of wealth, and that these factors are systemically (and thus policy) causal factors that we could change if we had the political will. "Fairness" and "hard work" have nothing to do with this set of policies; they are the result of concentrated wealth which buys political favoritism.
Consider the Russian oligarch's $300 million yacht. Did this gent earn his fortune by the sweat of his brow and by generating amazing innovations, or did he merely buy the State's crown-jewel assets for pennies on the dollar in a classic State/Elite sweetheart deal?
A number of readers offered cogent comments on the topic. First up, frequent contributor Michael Goodfellow:
1. Increased opportunity always produces increased inequality. That's simply because the ambitious people will take advantage of the new opportunities and some of them will profit. The more cautious people won't do anything new and won't profit. "If you don't bet, you can't win."
Your article about the "Two Americas" and the growing divide between the top 5% and the bottom 95% is very astute. One thing I have noticed, that you touch upon, is that it has become very easy to fall out of wealth but very difficult to climb into it.
Though the top 5% of income earners are much better off than those below them (generally), as you state, these are not really elite at all. Most of them by my reckoning are still solidly middle class. If an income of $216,000 is the cut-off, that is only the equivalent of a married couple who each make slightly over $100,000. I suspect that many of these people do not fit the profile of the typical millionaire (which is not even 'rich" anymore and was not then either) included in the 1996 book "The Millionaire Next Door".
Thank you, readers, for your thought-provoking observations. There is no
one "answer" or "solution" to income disparity, but we should not be hindered
from seeking out disparities caused by policies designed to enrich financial and
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