The topic of Income Inequality, is an unfortunate name for
this issue. Whether this misfortune was unavoidable is not particularly
instructive as to the importance of the issue in American society today. What
is salient about Income Inequality isn’t its name, so regardless of the words
selected to establish it as an iconic political issue what is important is what
the underlying is to the nation. Equally important is that what the issue is
isn’t understood to mean some commonly accepted set of ideas or concepts. Certainly
there is no assurance that any two individuals agreeing or disagreeing over the
issue are actually working from a framework that allows them to meaningfully
communicate with each other.
How then is Income Inequality to be properly and effectively
discussed and debated by politicians? How are they to present their views,
explain their reasoning for what policies and approaches they are advocating
for legislative efforts, building support for in their campaigns, and
persuading voters that their answer for Income Inequality is superior to others
being touted? The answer should be obvious but it’s not apparent that anyone is
doing the one essential thing that the nation needs: Framing the issue for the
public.
What then is Income Inequality? If we were to ask
politicians, members of the media, or you how likely would it be that any of
the answers match? If they don’t match, how could a sane and rational national
policy be formulated?
Let’s take the simplest and most basic definition of Income
Inequality: Each person in the US doesn’t make the same income as every other
person in the US. This can’t be the issue since it is disconnected with every
aspect of America’s economic system, society and would even violate the religious
beliefs of many. From this we can conclude that the Inequality is not that
different people make different income amounts than others make. In fact we
actually expect this to be true and accept it.
We are going to have to explore the issue further. Is the
issue related to the ‘Income’, to the ‘Inequality’, to both, or to some
indirectly referenced concept that is obscured behind the Income Inequality label?
On its surface one might think that Income isn’t the issue.
No one is against people having incomes, no one can rationally think having
ranges of incomes is a de facto bad system, and no one can expect incomes to be
untethered to some productive value of exchange. What then could be a source of
disagreement about Income? Wait! Could it be what we agree that we have defined
Income to be?
We all know and understand what we mean by income, right? It’s
the same for everyone …, hmmm?; well
maybe not. There’s salary/wages, there’s tips, there’s stock grants and options,
there’s gifts, there’s capital gains or losses, interest, barter, charitable
donations, prizes, and … . So what actually constitutes income may be part of
the concept encompassed within the Income Inequality issue. Even if we all
agreed which types of ‘values’ were considered income or not, we should all
agree that some of these value-based categories are not treated equally. Is
that what’s at core of the Inequality issue?
The fact that different kinds of income are treated
differently would only be an issue if their availability were somehow biased or
constrained to some income earners and not others? So this may be a factor in
the Income Inequality issue. Now I recall debates about the fair versus unfair
aspect of these different categories for years, so these differences are not
new. The argument for the different treatment of one type of income versus is
usually based on how it benefits the overall economy compared to other types.
Hence, long-term capital gains are taxed at lower rates than wages; with the
justification being that the investment promotes and produces increased value
in the overall economy. This income opportunity is available to anyone who
assumes the investment risk, as long as they have financial resources to make
the investment. While not truly available to all income earning levels in the
country, the openness to investments are generally unbiased. I am sure there
are some that are significantly biased or constrained to a very small group in
the population; but I am not sure this is where the Inequality issue resides.
I don’t think we should get into the question of whether
allowing some individuals receive ‘value’ that is not treated as income in the
same context as say a basic wage earner’s income is. Allowing an executive to
be granted $10M in stock as part of their compensation should not impose any
treatment of the value of those shares are income. Yes it seems set up to
benefit a small group of individuals, I think the root problem that people may
have here is actually contained in a dimension of inequality discussed later.
Is the Inequality issue related to how income earners are impacted
by other dimensions of the economic environment? Don’t factors like inflation
or wage growth rates impact everyone more or less equally? The answer is no,
they do not. Perhaps we are getting closer to what Income Inequality is
connected to. How so?
If everyone received a 2% raise in a given year, the more
you made before the more you make from the raise. That’s fair, isn’t it? If you
earned $10K, you get $200 more. If you earned $100K, you get $2,000 more. If
you earned $1M, you get $20K more; and if you earned $10M then you get $200K
more. The mathematics of this is one reason that the Income Gap increases
between any two groups. Why is 2% for everyone what constitutes fair?
I know that raises often are driven in part (or completely) by
the need to meet inflation or workers would be losing ground (buying power) to
inflation. But a 2% raise doesn’t have the same impact or consequence to every
earner. There’s a proportion of the population that still lose ground to
inflation with a 2% raise. This is because their income is already below the
Consumer Price Index amount that would keep them even with a 2% inflation rate.
This group will not be able to buy the same amount of food, shelter, energy,
clothing, transportation, … that they use to be able to purchase. This group truly
is worse off despite getting a raise. Anyone not getting a raise is also worse
off, so our fixed-income population is pressed more. The Inequality dimension
appears to be surfacing along this perspective of our economic system. If the
2% wage (income) increase was the amount required to keep the average person
making the average income whole then everyone below the average is losing
economic ground from where they were the year before. Conversely, everyone
above the average is making some progress in increasing their economic value;
with those higher up the income range gaining more over everyone below them.
This is why there is an element of truth to the “rich get richer, and the poor
get poorer” observation. So the gap grows even if everyone can hold their
relative position. Now remember that the average income is significantly
greater than the median income amount. So in fact, more than half the
population is disadvantaged with a keeping up with inflation view if it’s the
average that is the ‘breaking even’ point. Keeping doing this year over year,
the math doesn’t change and the gap increases faster and faster. But this is
all driven by the math, there is no ‘value’ proposition for why this is fair.
There is no rationale that explains how this is in the best interests of a society
or a nation. There is also no reason to
believe that such an economic system is sustainable. Is the Inequality issue
perhaps nothing more than a predictable consequence of the unstable economic
state that such a system produces?
There has to be some other rational for why the system
should reward the higher income earners to a progressively greater degree. In
fact, we hear lots of arguments to this effect. Investments create jobs and
that benefits the economy and everyone. This argument sound good, and I would
agree that there should be some benefit to those of make investments. But that
argument while useful in establishing a principle that investment is an
important element in a competitive economy, it need not guarantee that
investments result in what is good for the economy, for the nation or for the
majority of the public.
If the widening Income gap is part of the Inequality issue,
is it nothing more than recasting that an “expanding middle class” is key to
strengthening the nation’s economy and security? The principle that Henry Ford
used to have a wage for employees that would also make them customers was an
early insight into the wisdom of the business community understanding that
wages are a double edged weapon. One side may have a short-term cutting edge
while the other produces damage in the long-term.
Income Inequality is coming into focus but still it exists in
a foggy landscape. Given the hazy view, are the politicians just blowing more
smoke contaminating the view more; or are they clearing the air so that we can
all see what the issue is, how it affects us personally, nationally,
economically and supports or degrades our American values and goals?
