Income Inequality: An Uneven Playing Field

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?