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Does Income Inequality Matter?
theodp is concerned about the following: "Alarmed by Goldman Sachs CEO Lloyd Blankfein's record-setting $53M bonus, Charles Wheelan (aka The Naked Economist) argues that income inequality matters. Wheelan notes that the Gini Coefficient (a measure of income inequality) for the U.S. has been moving away from countries like Japan and Sweden and closer to that of Brazil, where the murder rate is 5X that of NYC and crime is materially impacting GDP."
Income inequality drives crime. When everyone is poor, no one steals from each other. When everyone is rich, everyone steals from each other, but there are rules. When some people are very, very rich and some are poor, the poor feel justified in evening out the unfairness through direct action. If everyone had their basic needs met, I don't think income inequality would matter as much. But as long as some people are desperare and feel they are being screwed, and they can find an easy target in a rich person, there will be crime.
- None can love freedom heartily, but good men; the rest love not freedom, but license. -- John Milton
Causality is different, of course, though "indirect cause" is a very medieval concept.
I don't think anybody would suggest that paying a banker a lot of money will suddenly cause someone to become a street robber. But if there is a correlation become income inequality and crime, and given the high cost of crime, there is a case for investigating the nature of any relationship.
As an example, it is known that high incomes in the City of London are associated with cocaine use. This inevitably brings rich people into contact with drug dealers. Given the profits to be made, it might be that the existence of a rich and rather well protected class of drug users made them a very attractive target for drug dealers, causing increased competition for access to this market. Since drug dealing is an illegal, unregulated market, this might cause more turf wars and therefore more visible drug-related crime. That is a possible chain of causation which, if correct, could have implications for policy on drugs (e.g. toleration and a legalised market.)
The US has, I believe, nearly 2 000 000 people in prison. This is a big enougfh cost item that it needs proper study.
Pining for the fjords
Things people that want money should do:
:-p
1.) Limit your liabilities; pay off your debts as fast as you can, especially credit card debt.
2.) Stop using credit cards. Seriously.
3.) Stop trying to hit it rich by playing the lottery, unless you find that particularly entertaining.
4.) Keep an emergency fund of some sort so you can stop using credit cards.
5.) Don't co-sign loans, ever.
6.) Spend less than what you make.
7.) Don't lease a car.
This list is based on what people do to get in financial trouble:
1.) People get in credit cards and pay more interest to Visa and MasterCard over years that they could have saved.
2.) People, especially poor minorities (see the statistics) try to win millions when the odds of being struck by lightning are less.
3.) People don't have money saved aside so they don't use credit cards, so they pay Visa and MasterCard interest instead of having money.
4.) People co-sign for other peoples things, they don't pay, so they're stuck with the bill.
5.) People pay ridiculous amounts of their income to car bills.
6.) People use credit to look wealthier than they really are.
The reasons for this are social ("use debt as a tool!"), cultural ("I need more stuff to impress people!"), patently unfair (the less educated are far more likely to be paid less, and so get into trouble more easily; medical problems), and selfish ("I 'need' this! I 'need' that!"), and could be a thesis, but they're hard to argue, and the concepts don't require an economics degree.
I think I've been listening to Dave Ramsey a little too much.
-Rob
Biblical fiscal responsibility
I've lived in Canada for many years now, but before then I came from Taiwan, which as a country is really not as poor as it gets in southeast Asia. I can tell you that the wealth gap certainly does matter.
Fellow Taiwanese feel free to disagree - but as a child over there I was constantly being protected, my father having worked for one of the larger multi-nationals with an Asian presence in the 80s. Daily you would hear news of kidnappings, children being snatched on their way to their fancy private schools; chauffeurs, butlers, maids, and servants selling out their employers and helping in kidnappings, extortions, and other crimes.
I went to a fairly exclusive private school that taught mostly the children of foreign execs stationed in the country, and also the high-level Chinese that worked under them. All of our parents were paranoid about our security to the extreme. At many points it wasn't a matter of *if* someone makes an attempt to kidnap your child, but *when*. It wasn't the greatest of times to be a wealthy parent, though as a kid I never really felt threatened - I was probably too young to understand.
Then I came to Canada and that turned upside down. I can't remember the last time a kidnapping happened in Canada that was driven by the ransom - usually it's some sick f--- getting his jones on molesting little girls, not an organized group out to steal from the rich.
The difference? Canada has well-established social security. The average income is extremely high compared to most Asian countries, there is health care and welfare. In Taiwan (at the time) there was no health coverage *at all* for those who were not privately insured, almost no social assistance at all, and the wealth difference between the majority, still toiling for pennies in unsafe factories, vs. the newly-minted elite that was being quickly created by American investment, was massive.
America isn't quite at that point, but I get the distinct impression that the gap is widening. If it continues, we will reach a point where the majority of the country is unable to afford the necessities of life. Then the violence will start.
Perhaps a link to Paul Graham's Mind the Gap essay would be worth reading as well.
There's at least four fundamental errors that are made or implied by the Inequality Matters argument:
The present situation in which the middle class is losing ground is not as some would have it, the mysterious workings of a competitive, dynamic free market economy. It's the direct result of decades of corporate controlled multi-national trade agreements and labor arbitrage provisions facilitating the offshore outsourcing of work and the importation of "cheap labor" into the U.S.
I've fought this fight in the IT sector for more than 5 years now. Middle and upper middle class American IT workers have been methodically targeted for replacement with lower wage foreign replacement workers. Carly "the Outsourceress" Fiorina was notorious for this activity but she is hardly alone. Her successor at HP, Mark Hurd was part of the same dynamic during his tenure at NCR in Dayton, Ohio. Larry Ellison and Bill Gates have been whacking their American workforce for years while whining to Washington politicians that they can't find qualified American IT workers. The result: politicians keep expanding the number of foreign "guest workers" permitted into the U.S. under non-immigrant visa programs such as H-1b. (There's a push underway even now for an increase.)
I think that the many Americans seeking a middle class life, well-qualified to perform even advanced work who may have lost jobs, are under threat of job loss and seeing their wages/salaries pushed DOWN by offshore outsourcing and NIV work programs SHOULD be outraged at both the politicians and the so-called business leaders and the Wall Street investors who demand that American workers get kicked to the curb.
The wealth now accruing to the already wealthiest segments of our society represents an illegitimate TRANSFER of wealth from the American middle class.
The increasing share of wealth controlled by the richest Americans is NOT the result of any Darwinian "survival of the fittest". Offshore outsourcing, "free trade" and NIV worker replacement programs are POLITICAL creations driven by lobbies funded by the wealthiest segments of our society.
This is a recipe for CLASS WARFARE. You'll find that Sen. Jim Webb of Virginia has spoken out re. this situation since before he entered the Virginia primary in which he defeated longtime ITAA pro-outsourcing and pro-NIV President Harris Miller.
By allocating capital to where it is best used Goldman Sachs produces huge wealth for everyone.
What kind of brainwashed bullcrap is that ? There is no way to "produce wealth for everyone", at least not in material form. Being wealthy essentially means having a lot more money than the average joe. If everyone were equally "wealthy" then the word would lose its meaning. You cannot truly create wealth out of thin air, you simply transfer value from one entity to another. There is no net gain. By giving some guy a 53M bonus, you're just shifting that money (aka POWER) away from an immediate group of people. The recipient, in turn, will probably spend a small portion of it on luxuries (high markup low value), and lock the rest away in the bank (or investments). The money that is spent will recirculate to some extent, trickling back down to the common people but still resulting in a pyramid of profit for the middlemen. The rest of the cash just sits idle and creates a void, which is then filled by inflation.
When you have more money than you can spend, you're actually creating a cascade of economic problems. Way back when money was invented, it represented effort and value. You trade the fruits of your labor for money, which could then by traded for other people's goods and services. Today's money has little to do with its ancestral purpose. What has Lloyd Blankfein done to tangibly benefit the people around him, that is worth 53 million ? 53 million bucks can build a shitload of houses, educate a ton of kids, or feed tens of thousands of people to satiety. Or it can buy one man some short-term entertainment, maybe get his kids through college and pay off a few gold-diggers.
To me, the only currency that matters, the only one whose value is fixed and whose purpose is clear, is energy. We are living on a planet with finite resources, yet population is growing out of control. All the money in the world won't help when there's no more oil to power factories, no more heat to cook our food, no more electricity to run our hospitals. The fact that such a disaster is centuries, perhaps millenia away doesn't make it less of a problem, that's where we're headed and unless something radical comes around to change our course, humankind will be doomed. It's hard to be rich and famous when you're extinct.
-Billco, Fnarg.com
Zimbabwe is now infamous for having what is possibly the world's most messed-up economy. Their inflation rate was 1204.6% a year as of last August. Poverty is everywhere and only getting worse. And, of course, no one in their right mind is going to invest anything in the country. As Wikipedia puts it:
For reference, the CIA World Factbook places their Gini index at 56.8, as of 2003.
The World Wide Web is dying. Soon, we shall have only the Internet.
I can tell you that I get pretty pissed off when I hear about million-dollar bonuses when if I had 1% of that money I wouldn't have to worry about college tuition for the rest of my career. It makes me angry, so I try to ignore it. Watching commercials also gets me a little mad because of the huge disparity between the way the "average american" is depicted on television, and the way we actually live. If you're willing to buy into the commercial vision, then you start to think that everyone but you is living like that, and then you start to wonder how you can get to that point. When you start to think that you can't, you get angry.
You get angry or jealous? There is a difference.
1% of one million is $10,000. I spent more than that on college but I'm sure you could get an education for less than that. But let's say that a million-dollar-bonus earner was forced to give it away in 1% increments. He would be able to give $10,000 to exactly 100 people (all before taxes of course). After taxes, he could give approximately $6000 to 100 people, who in turn would only receive $4000 each (after taxes again). Could you go to college on $4k?
Finally, in your perfect world where the rich have to give all their money to pay for your college, why would you want a college education anyway? You bust your ass through college, work hard, long hours in your job, and when you are successful, you'd have to give away your money to some angry kid who despises you for your hard earned success and is too lazy to pay for his own education!
There is no "I disagree" mod for a reason. Flamebait, Troll, and Overrated are not substitutes.
This brings to mind the stuff in freakonomics about drug dealers. A guy in Chicago went into a gang and got to know them, and analyzed their economics. The guys on the street dealing the drugs, taking most of the risk, earn about $10 an hour all told. They work really hard at it, and regularly risk their lives. They are willing to do this for the chance it gives them of getting to the top, where they make a pretty decent living(~$100,000).
Basically, they are born into a crisis and never realize it, and they see the horrible 'career' of dealing drugs as one of the better ways out. Putting them in prison is an excellent waste of money, the next generation is always ready to replace them.
Nerd rage is the funniest rage.
"... happiness and contentment is not so much our absolute wealth, but our relative wealth"
This is almost correct. I read a research paper a few years ago ( If I can find the link again, I'll post it ) that said that it was a combination of relative wealth and opportunity that lead to contentment.
Specifically, the authors were looking at revolutions, and noted that they tended to occur when the top quintile made 40 times as much as the bottom quintile, AND there was little or no movement of individuals between quintiles. But if people had the opportunity to move, revolutions did not occur even with greater inequality.
In other words, if people believe that they can someday earn a pile of money, they are much less likely to resent those who have. They will view the rich guy as an incentive.
But if they believe that they cannot get rich - due to caste sytems, monopolies, licencing, racial laws, or some other artificial means of locking them out - then they are far more likely to become violent.
It was reassuring to me that the author said that the US has far greater mobility between quintiles than most developed nations.
What business is it of yours how much the CEO makes?
If a CEO gets an extra $100 and his employee gets an extra $1, is the employee worse off? No, he's better off by $1.
I agree with you, but there's a caveat that may be worth mentioning: inflation. Without getting into the details, if you inflate everyone's income, then prices will reflect (oversimplified, but not incorrect). Thus, if you have a bunch of CEO's whose incomes are growing faster than inflation, but employees whose incomes are growing at less than the inflation rate, then the income disparity between them grows, and you end up with an ever widening class disparity. Thus, there is a reason for concern over the richest getting richer, and the poorer not getting richer.
Example in point: I can't speak for anywhere else, but in the US and Canada, I understand that when adjusted for inflation, the average income has gone down $800 in the last 20 years.