Friday, January 23, 2015

What's Driving Income Inequality?

Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
--Everybody Knows, Leonard Cohen
NPR asks what the average household would look like if we rolled the degree of income inequality back to what it was in 1979. The pictorial graph is worth looking at (and can't be copied here--click the link and you'll see why) but the basic take away?

  • The top 80%-99% earners would gain the most. The article doesn't say how much but it looks like around 30k extra earnings per year.
  • Everyone else would gain less--but would still gain (on average for all groups it comes out to +11k a year--perhaps not coincidentally the average household credit card debt in 2010). Except for . . . 
  • The top 1% who would lose 800k per year.
You should have seen this graph already:
While The Omnivore isn't all that taken with "What they would like it to be" since The Omnivore thinks most people when asked that question will just spout some numbers that 'sound pretty,' it's an interesting perspective that what we think it is is fairly out of balance and we mostly "think it's bad" and have little idea how badOh, also, there's this:
"If poor people knew how rich rich people are, there would be riots in the streets," Chris Rock said in a recent interview with New York magazine.
The multi-millionaire comedian pointed out that poor people would be particularly shocked if they knew all the perks rich people get for being rich.
"If the average person could see the Virgin Airlines first-class lounge, they’d go, 'What? What? This is food, and it’s free, and they… what? Massage? Are you kidding me?'" he said.
Chris Rock isn't the only guy talking Income Inequality. Mitt Romney has flipped from 'Income Inequality is just about envy' (2012 v2.0) to:
“Under President Obama, the rich have gotten richer, income inequality has gotten worse and there are more people in poverty than ever before,” Romney said. “Their liberal policies are good every four years for a campaign, but they don’t get the job done. (2015 v3.0)
The Omnivore will note that while he's somewhat agnostic on exactly how income inequality impacts us--and what the perceived harm vs.  actual harm is--things like the way the inequality index tracks bank failure suggests that even if you are in the envy camp, there may be some cause for concern.

So--What Is Causing It?
The Omnivore suspects that the "bumper sticker fix" (Support Bumper Stickers: Simple Solutions To Complex Problems) of a tax code so progressive that the top 1% lost an average of 800k per year would be coterminous with  . . . us getting a new flag. So the question is, short of revolution, what do we do? What's driving income inequality?

It turns out Google has some ideas:

  • Maybe it's Capital Gains and dividends. The top 1% took home 71% of all capital gains. Kinda makes sense: once you are heavily enough invested in a boom-market, your money works for you . . . and it works hard, like an illegal lawn guy (right, Romney?).
  • A lot of it is probably structural. Technology (machines squeeze out low-skill workers), Globalization (low wage tasks are outsourced), the growth of part-time labor, education (higher education makes disproportionately more than it used to--a premium on skilled labor), and lower job protection (fewer and weaker unions) could be to blame. These are all imports from The Future. Thanks a lot, Future.
  • HEY?? Maybe it's the fast-food industry? There are 3.5 million fast-food workers in the US and the average fast-food CEO makes 774x what the fry-guy does. That sounds pretty unequal (and the margins on fast-food are getting juicier even while the gap is widening!).
  • At the end of the day, though, a lot of people agree that a huge driver is the financial services industry. Basically the financial services industry makes so much money above labor costs (rent-seeking) that it encourages a positive reinforcement spiral where financial services jobs (a) make tons of money--even for the (objectively underpaid) workers who aren't at the top and (b) makes the firms themselves expand as aggressively and riskily as possible (see: banks returning to their 2007 super-leveraged states of play). Not only are the people at the top of the FS pyramid paid in denominations of millions of dollars but the sector is larger than ever before.
The Omnivore thinks that this is all kind of related (except the Fast-Food thing, which is just kind of a side-effect). It appears to work like this:

  1. Technological progress means that (a) the capability to do things like outsource, mechanize, and run just-in-time part-time job schedules (which are efficient for the company--but horrible for workers) results in (b) the increasing value of education vs. blue-collar jobs and thus (c) the weakening of unions.
  2. The same general technology that allows for the above also provides for the electronic transfer of funds which enables the financial services sector to both grow and increase the velocity and magnitude of its transactions (high leverage, near-instant transfers, super-complex, hugely profitable, and dangerously volatile financial instruments). While this, in theory, benefits everyone in practice it benefits (a) the financial services sector and (b) the people most heavily invested in financial instruments (also called: The Rich).
  3. When you run this equation over a few decades, the people who are more invested in the stock market start to pull away with capital gains and dividends acting sort of like compound interest on steroids and the FS sector not only expanding explosively but making money on each transaction and benefiting from a super-high velocity of money that the technology provides.
  4. The end state is that everyone in the bottom 80% of the income bracket has to either eat at or work at McDonald's and the CEO pays himself as much as the desk-calculator he got from AARP will allow. This turns out to be about 800x what the guy in the second window of the drive thru makes.
What Do You DO About It?
Well, as noted above, the easy answer is to tax the rich into oblivion--or at least into one decent McMansion with a single 50-foot yacht. While that's maybe appealing from the 50-thousand-foot level for, well, ninety-nine people out of a hundred, (a) politically it'll go over like Ninety-Nine Red Balloons (the 1983 Nena song about nuclear war for people who didn't get it) and it's also (b) not clear what that bill would do in terms of side-effects if you did somehow pass it.

The problem with the Financial Services model in the above framework is that the underlying problem is technology and not specifically greed (well, okay, yes greed--but the engine is incentives that are created by technological progress--not malicious behavior--which is where the root of evil comes into play. Everyone is greedy).

So long as outsourcing and mechanization are possible--so long as there's a pool of unemployed and low-skill labor--so long as students are (rightly) encouraged to get college-level educations and enter the job-seeking arms-race--there will still be incentives for inequality that simply didn't exist in 1979.

Addressing this in a way that wouldn't turn Wall Street into a fireball would take both careful and comprehensive planning (bipartisanship, unicorns) and, well, an awful lot of risk. No solution--no set of policies that limit rent-seeking behavior, circumscribe off-shoring, discourage mechanization of jobs, and improve collective bargaining will be without risks of massive unintended side-effects.

Of course towering income inequality already has its own "side effects"--do we really want a Devil-We-Do-Know world?

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