Economics, Politics

Why Assumptions About ‘Rising Inequality’ Are Wrong

The past year has seen a spate of books worrying about the decline of Western liberal democracy. One of the lazy and unexamined assumptions in these books is the idea that “rising inequality” is a causal factor for the current wave of so-called populism witnessed in Europe and America. This cliché is trotted out by writers across the political spectrum. For example, in Why Liberalism Failed, the conservative Patrick J. Deneen points to “a growing gap … between wealthy haves and left-behind have-nots.” In How Democracy Ends, the centre-leftish David Runicman writes, “a driver of populism [is] rising inequality.” Similarly, Edward Luce in The Retreat of Western Liberalism reports in glib and journalistic prose that we live in “times of stark and growing inequality.” The problem with these platitudes is that they bear virtually no relationship to the lived reality of millions of people in the West. I will explain why.

Recent Inequality

In Great Britain, with changes in the type of work people do, and as capital has been reallocated from manufacturing to services, real household income has increased across every wage bracket. According to the Survey of Personal Incomes, families in the 90th percentile were paid 32 percent more in 2017 than they were in 1994. During this period, the bottom 20 percent experienced average annual real growth of between one percent and two percent, figures not matched by most of the rest of the income distribution range, so how can that old canard that “the poor keep getting poorer” possibly be true?

And according to the Institute for Fiscal Studies (IFS), the percentage of the population who are in the absolute low-income bracket reduced from 88 percent in 1961 to 12 percent in 2016, and just under 20 percent after adjusting for housing costs. (Sources for following graphs from IFS here and here). This reflects global trends in which extreme poverty has been reduced across the world and in rich nations.

Long Term Inequality

In discussions about inequality, many seem to consistently forget one of Adam Smith’s greatest insights, which is that wealth is not a measure of the total amount of money one possesses, but a measure of the goods and services to which one has access. As Matt Ridley has shown, the true measure of prosperity is the increase in the amount of goods and services you can earn with the same amount of work. We can see this with a vital human resource such as artificial light as per the table below:

Year Technology Output Cost in Average Wages
1750BC Sesame Oil Lamp 24 lumen-hours 50 hours
1800 Tallow Candle 186 lumen-hours 6 hours
1880 Kerosene Lamp 4,400 lumen-hours 15 Ends minutes
1950 Incandescent Lightbulb 531,000 lumen-hours 8 seconds
2010 Compact Fluorescent Lightbulb 8.4 million lumen-hours 0.5 seconds

(Source: Ridley, The Rational Optimist, based on this study).

Between 1800 and 2010, people living in the United Kingdom saw a 43,500-fold improvement in the amount of time it takes to pay for an hour of light on average wages. This is prosperity. Similarly, a 361-mile stage coach journey in 1800 would take 24 hours to travel and one month on average wages to earn, whereas today the same journey in a car would take six hours travel time and four hours and 45 minutes on average wages (£13.94 per hour, assuming it costs around £62 to fill up a tank of petrol). In 1950, it took the average worker around 30 minutes to earn enough to pay for a McDonald’s cheeseburger, today it takes the average worker around three minutes. Taking together these time savings afforded by technologies, which were developed by the free enterprise of individuals working in cooperation through trade, the standard of living in 2018 is many times greater than in 1800 — this fact is not necessarily reflected in income or productivity statistics.

Median income has increased by 80 percent since 1960. The wage of an average full-time worker in 1960 was around £700, adjusted for inflation that is around £15,000 today. The wage of the average full-time worker in the UK today is around £27,000. The average loaf of bread in 1960 was around 99p (in 2018 pounds, adjusted for inflation) while today one can buy a loaf of bread for 55p in any branch of Tesco or Sainsbury’s. Even without calculating the prosperity gained through the myriad time savings afforded by technology between 1960 and 2018 discussed above, the purchasing power of the median worker is still 66 percent higher today than in 1960. Considering that the workforce has almost doubled since 1960 with women entering employment in large numbers, this is somewhat remarkable.

These are not just statistics but real people’s lives. To take my own anecdotal example, my grandfather — who I never met — was a Welsh coal miner. I work at a university. My current wage is at least a 270 percent increase on what he would have earned in a year adjusting for inflation. How many people currently in professional, white collar jobs can share similar stories? Polls suggest it must be millions. The share of the population who work in managerial, administrative, clerical, supervisory and professional jobs has increased from less than 25 percent in the late 1960s to more than 50 percent in the 2010s, while the share in manual jobs and unskilled work has decreased from 65 percent to less than half. The grandchildren of coal miners and factory workers, statistically speaking, are more likely to be working in the city for the likes of IBM, Microsoft or Google, or else, like me, in one of the traditional professions.

Devastating as the evidence seems to be to the narrative that we are experiencing “rising inequality,” the mantra keeps being repeated mindlessly. Why? As I argued in an earlier piece for Quillette, it seems likely to me that managerial elites must continuously supply a narrative of “rising inequality,” despite evidence, to create a demand for grievance. More insidiously, their very livelihoods as well as the ultimate source of their power and influence depends on this, regardless of whether the individuals involved in perpetuating these myths are conscious of it. In a recent song, Kanye West rapped: “See that’s the problem with this damn nation; All Blacks gotta be Democrats, man; We ain’t made it off the plantation.” In the UK context, one could just as easily substitute “Blacks” for “Welsh People”, and “Democrats” for “Labour.” Although, in both cases, the opposition parties also supply grievance narratives and subsidies in exchange for votes (an obvious case in America would be farmers who have long received subsidies from the Republicans and, in the UK, as Ms. May soon found out, the elderly who receive innumerable perks from the Conservatives).

Given that politicians of all stripes regularly talk about the “burning injustice” of “rising inequality,” and given how regularly this is repeated by supposedly leading intellectuals, one would think that people would have an acute sense of how money is distributed. It should be surprising then that only 29 percent of over 55,000 respondents from 40 countries can accurately point to the income distribution of their national economies when faced with the choices below as this study found, which is only marginally better than random.

In the UK only 13 percent were able correctly to identify pre-tax and transfer income levels of inequality, and in the US respondents fared even worse at 12 percent. Respondents in the US, UK, Germany, Canada, and Australia all had a margin of error higher than 36 percent. That respondents estimated figures well below both average and median wages demonstrates the extent to which habitual talk of “haves and have nots” fueled by the media is perception.

But even beyond all of this, does data about income distribution tell us anything significant? Percentage brackets of income are ultimately meaningless because they assume that people are static and live out their whole lives in one bracket, whereas most people move between percentile groups with age (see Thomas Sowell’s Applied Economics).

To take myself as an example: in 2006, when I was 24 years old, I would have been in the 80th percentile, now at 35, I am in the 10th percentile. When I retire I’ll go back to being in the bottom 80th percentile, despite the fact I’ll likely have greatly more wealth at the age of 75 than I had at the age of 24. Kevin Williamson notes that in the US, 73 percent of people will find themselves in the top 20 percent at some point in their lives, and 39 percent of people in the top five percent for at least a year. Around 12 percent will find themselves in the top one percent for a year. Here you can see the median weekly wages broken down by age courtesy of the Office of National Statistics.

(Source: ONS)

 

It’s obvious that someone with 20 years of experience will earn more than a rookie. So talk about inequality ignores this basic fact. But what about other important social outcomes such as crime, mental health and obesity? Crime is associated less with income inequality as a gross calculation, and more with overt displays of conspicuous consumption in particular areas. In other words, as common sense should tell you, if you flaunt your £400 smart phone in a rough area while wearing a pair of Gucci shoes, you increase your likelihood of getting mugged. In perhaps the most rigorous statistical analysis of US Crime Data to date, Sangman Kang concludes that “there is little evidence of a significant empirical link between overall inequality and crime when county and time-fixed effects are controlled for.” Christopher Snowden has analyzed attempts to link income inequality with physical and mental health, obesity, smoking, homicide rates, happiness, and even the propensity for charitable acts, and found that not a single one of these claims can withstand sustained scrutiny. As this report suggests, it is not relative income, but “absolute income [that] plays a large role in determining subjective well-being.”

Studies in cognitive development have shown that human beings are not naturally egalitarian but rather competitive and prone to seek status relative to others. For example, one study found that five-year-olds will often reject equal pay-outs of two prize tokens for themselves and two prize tokens for another child, and choose instead only one token for themselves, if that means that the other child will get none. We do have an innate sense of fairness, but this is a fairness of proportionality rather than equality, that is, we seek reciprocity and just desserts, not equalization.

Is it fair that Adele’s net worth is $135 million while mine is at least 270 times less than that? How many people want to watch Adele in concert and how many want to see me in concert? Her net productivity because of this demand, and her net contribution to the economy, is therefore many times greater than mine — and so it is entirely fair that she should earn that much more. This is not to mention how many hundreds of people — managers, marketing executives, roadies, theatre managers and so on — are employed because of the demand for Adele’s singing talents, whereas the total number of people directly employed because of me is considerably less.

Most agree with the idea that Adele should be paid more than me intuitively, so why is “inequality” a problem? The average investment banker or CEO also makes a net contribution to the economy greater than mine, and again it is fair that this should be the case. The financial sector contributes £119 billion to the UK’s annual GDP, whereas higher education contributes £21.5 billion. So, it stands to reason that the average banker should earn at least five and a half times the average lecturer. By my calculations that should put the average investment banker on around £275,000, and, if this angry Daily Mail headline is anything to go by, they are actually being paid slightly under what they are worth to the economy as a whole — either that or lecturers are slightly over-valued. But to politicians, journalists and intellectuals, such details do not matter, because people like Adele and want to go to her concerts, so they cannot get a lot of mileage from attacking her. In contrast, people generally do not like investment bankers or Goldman Sachs, so politicians and newspapers can get a lot of mileage from attacking them. This is especially underhanded when one considers that it was the politicians and bureaucrats working for the US government — pushing the Community Reinvestment Act (championed by none other than Hillary Clinton) and regulating it through the Department of Housing and Urban Development (HUD) — who chiefly caused the 2008 financial crisis.

“Rising inequality” has become a catch-all explanation with which politicians, journalists and intellectuals can wave away the actual concerns of “populists,” with abstract talk about the “underlying economic causes” — few if any of which stand up to scrutiny.

 

Neema Parvini is senior lecturer in English at the University of Surrey. He also presents a podcast series called Shakespeare and Contemporary Theory.

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70 Comments

  1. dirk says

    That improvement of productivity and equality is not a worldwide issue,of course, but only a Western one, limited by national borders and laws. In Venezuela, a busdriver has to work 1 full month to buy a kilo of beef for 15 million bolivar (a peasant in Venezuela, now and 100 yrs ago, 1 day or less, if you change beef for goat or pork). Harari notes thay many African peasants and Indonesian workers now return home after a days hard work with less food than their ancestors 500 yrs ago.

    • dirk says

      (One of the few remaining selfreliant Venezuelan peasants I mean of course, not earning a wage, but producing per labourday worked by him and family on the farm, e.g. 1 day generally means 5-10 kilo of rice or maize)

      • dirk says

        No, I won’t take a look, because have been all over the world, and know that humanity is not only the West (now about 15% of the planet, but soon much less than that)

  2. E. Olson says

    Wow, Leftist politicians and the media have taught me that all wealth comes from stealing the money and labors of the poor, so how can I possibly believe Parvini’s claim that lots of rich people are rich because they actually produce products and services that lots of people desire and eagerly pay money for, or that poor people have never had it so good. I have to believe this essay is the product of brainwashing by Parvini’s Tory voting department colleagues at U. Surrey – either that or he was forced to write this nonsense to get tenure.

    Next thing you know some other crazy professor from gender studies is going to say that socialism doesn’t work by ignoring all the successes from the USSR, North Korea, Cuba, and Venezuela, or that all injustices in life are not caused by evil white patriarchy by citing some nonsense statistics about the high incomes of Asian-Americans or the 60% of university degrees granted to women (who somehow persist in their education despite rampant rape-culture across all university campuses). Such dangerous viewpoints need to be stopped.

  3. Aylwin says

    “[Adele’s] net productivity because of [the demand to see her in concert], and her net contribution to the economy, is therefore many times greater than mine — and so it is entirely fair that she should earn that much more [and have a net worth of is $135 million]”. No! The reasoning to allow a disproportionate income (and wealth) is to utilise the all too human self interest for the common good. It is not “entirely fair” that such wealth is concentrated in the hands of one individual. She is immensely lucky. Lucky to have the talent. Lucky to have the motivation. Lucky to have the creativity. Lucky to have the health. Lucky to be living at a time and place that can nurture (and exploit) her talent. Luck to be living in a society with the rule of law and the structures that facilitate her progress. Lucky to not be living in a culture that doesn’t expect her place in society to be different.

    It’s a deterministic universe (plus, if you want to insist on the accuracy and include quantum effects, some randomness). We should recognise that a reason we tolerate or welcome disparities in wealth is that it is (by far) the best way we’ve yet come up with to create a world in which we’re, in some sense, working for outcomes that can benefit everyone (if you include welfare safety nets and mechanisms for wealth redistribution). (And, no, there’s no contradiction in a deterministic universe and working towards a better world – it’s counterintuitive, yes, but the argument is … not for here).

    Also, this article seems to want to conflate poverty and wealth disparity. But I hope someone else might comment on that.

    • “Allow” a disproportionate income (and wealth)?

      Who is doing the allowing? How could you disallow it, and why might that be desirable?

    • @Aylwin
      Not buying it at all. There are many people who have equal talent to Adele who will never have the success (& wealth) she has. She indeed may be lucky to some degree, but she also had to hustle, work her talent, foster relationships with those who can help her, and persevere through the good and the bad to achieve her status. How is that remotely deterministic?

      Someone with talent equal to Adele who is lazy and ornery, without the will to climb the ladder of success – and risk the fall – is going to be significantly lower on the wealth scale. Within the confines of her place and time she operates in a meritocracy, and rightly those with talent (by the luck of the draw) and the will are going reap the rewards. Adele and any number of ridiculously paid athletes and movie stars etc etc and not coercing anyone – people are freely giving them money. I don’t see the tie to a deterministic world.

    • Peter from Oz says

      Good to see textbook example of the zero sum fallacy. It makes me realise that there is hope that we can make things better with an easy fix, i.e. explaining to well meaning but I’ll-informed people like you the fact that wealth wasn’t given to Adele, she created it. If she hadn’t existed that wealth may not have been created at all. Instead people may have purchased more prosaic items, saved their money or used it to go on holiday. It is completely wrong to that without her, it would be possible to distribute an amount equal to hear wealth to the poor.

      • “wealth wasn’t given to Adele, she created it”

        No. You are right that the economy is not zero-sum, however the OP does not make that fallacy.

        Adele creates entertainment. In a loose definition of the word, you can say she creates “cultural wealth”, but not an economic one. She takes in other people’s wealth (the wheat they harvested, the machines they produced, the massages they have given, the patients they have operated on, etc) and then sings to them in return. Her singing does not create more wheat, machines, massages or surgeries.

        (If she hadn’t existed, you’d spent that money on a movie. Movies don’t create wealth either. If that was the case, the economic prescription to developing world would be to shoot more movies and sing more songs).

        So the question becomes: Is it a desirable society, where an entertainer (athletes, singers, movie starts) can siphon off that much wealth, while the actual wealth generators such as national infrastructure or basic science projects are chronically underfunded?

        If you leave this *entirely* to free market (to my choices) I will always choose to pay Adele, from whom I benefit directly. I will not choose to fund a necessary but distant, convoluted project, whose benefits are not directly experienced by me. My emotional, short-term needs will always trump the rational, long-term needs. Classical liberals thought the sum of all such short-sighted actions rooted in self-interest would be positive for the overall system, but we are at a point where that’s not true anymore.

  4. Kronos says

    The finance industry may generate 5 times the money as education but that dopes not mean they produce 5 times as much. Many would argue that the finance industry is extracting rent from the economy. And all those finance workers had to be educated somewhere. So in effect, school teachers are part of the finance industry. Does some mediocre lackey for Goldman deserve 5 times as much as his 2nd grade teacher who taught him how to add and subtract so that he can do his job?

    And while Adele may generate much demand and I don’t does not mean she deserves the same income proportionate to her demand. Not one person wants to see me sing. That I agree. But millions want to see her. So she should get an infinite amount more than me in income? She is not producing anything. If she disappeared plenty of other singers would take her place and we would not be infinitely less well off. We would only be slightly less well off.

    Proportionality is the key. The vast majority agree that there should be inequality. It is a straw man to suggest people are arguing for strict equality. The complaint is that we have tilted way too far toward a disproportionate system. And this is skewing decisions that affects our overall well being. Would-be doctors are being sucked into a rent-extracting finance industry. Trump university did not add value to the world, it destroyed value.

    • E. Olson says

      You tell em Kronos. It certainly isn’t fair Goldman lackeys get the extra good 2nd grade teachers who give them all the tools for making big money in high finance, while the rest of us get talentless hacks who can’t add 2+2 and put us on the road to mediocrity. And you are absolutely right that Adele attracts way too many ticket buying fans and that someone should force them to divert their support to less talented singers so the mediocre can make a good living from concerts instead of waiting tables. All we need to do for a fair society is give some honest and fair people the power to tell the rest of us how to spend our money in an equitable manner, direct us to the vocation that will best serve society, and confiscate the disproportionate proportion of wealth from those blessed with too much talent and motivation.

    • @Kronos
      That doesn’t even make sense. In one statement you are praising teachers over bond traders because they taught the bond traders how add numbers. On the other hand the ‘teachers’ at Trump U added no value to the future success of it’s students??? You can’t have it both ways.

      And like hell Adele is not producing anything. Music is a balm for the soul – it is a huge part of the lives of millions. You have no idea what the value of her music is in the lives of her fans. Are you the one who decides what proportion of the wealth she deserves? The money she receives is given to her by the free will of her fans.

    • @ Kronos

      “If she disappeared plenty of other singers would take her place”

      You’ve missed the point. And if you apply this logic to all of them, then none left.

      “Does some mediocre lackey for Goldman deserve 5 times as much as his 2nd grade teacher”

      Again you miss the point. The bankers who earn at that level are lesser in number and harder to train and closer to generating money and that is why they are paid more. There are more teachers but have a bigger pot to share among them, but still end up being paid less.

      It has got nothing to with comparing “worth” of bankers to teachers.

      If you tried to pay them the same the whole system will collapse.

      “Proportionality is the key.”

      Yes. But who gets to decide how to fix the system? No one has yet to find a really good answer. And some of the best brains have tried and failed. A loosely commerce based system has emerged from the chaos and it sort of does work.

    • If you use government coercion (tyranny of the majority) to achieve your goal rather than protect a victim, you are a tyrant. Nothing is fully proportional, and if so, you’d have perfect beauty per philosophies, a utopia not based on reality or that individual may indeed have different tastes.
      Like, I’ve never given any money to Adele. That doesn’t mean Adele is good or bad, deserving or not. Free markets with free people work well.

  5. Nick says

    “The financial sector contributes £119 billion to the UK’s annual GDP, whereas higher education contributes £21.5 billion. So, it stands to reason that the average banker should earn at least five and a half times the average lecturer.”

    Surely this depends on the number of people employed by each sector?

  6. That’s a pretty torqued polemic. I hope readers are taking the cherry-picked statistics with a grain of salt.

    For starters, yes, household incomes increased from 1961 to today. Which happens to be a period when we went from one income households to two income households being the norm. 40 years ago it wasn’t hard to raise a middle-class family on a single income. Almost impossible to do that in a major city today.

    Speaking of major cities, they’re the only places showing economic growth these days, and are the source of most new jobs. However, the cost of property in those cities has been rising far faster than the rise in incomes. So the choice is to stay in an economically stagnant regions with few decent jobs but cheap housing, or more to cities with vibrant economies but eye-wateringly expensive housing.

    The article also doesn’t address the concentration of wealth at the very top. You don’t have to be a dyed-in-the-wool Marxist to be concerned when 1 per cent of people own more than half the wealth in the world, and the proportion that 1 per cent owns is rising relentlessly. Anyone interested in a thorough statistical analysis of this trend should give Thomas Picketty a read.

    Lastly, it doesn’t touch on the decline in social mobility. Today’s top 25 are almost all born to parents who were themselves in the top 25 per cent. The same is true of the bottom 25 per cent. The affluent and educated can secure such advantages for their children that we’re seeing a hardening class system in North America that we used to associate with old and sclerotic Europe. Check out Dream Hoarders by Richard Reeves for an account of how the new aristocracy secures privilege for themselves and their children. Or read this article in the Atlantic: https://www.theatlantic.com/magazine/archive/2018/06/the-birth-of-a-new-american-aristocracy/559130/

    • Carlton says

      The article discusses median incomes not household income.

      Piketty was roundly debunked many times over. A cursory google search should show you.

    • E. Olson says

      You tell em Rob. In fact, I would encourage you to set an example for the rest of us by making sure your children move to a lower socio-economic strata so that a space can be made at the top for the deserving children at the bottom. Make sure there are no books in the house and make sure your kids watch plenty of mindless TV, move to a neighborhood that will ensure your kids get to attend poor public schools and have opportunities to join street gangs, definitely deny them any science camps or SAT prep course of other educational “privilege”, and if they must attend college – make sure it is a mediocre one and they choose a major with limited career opportunities, which will help them enter a low paying field with few opportunities for advancement, and if they are lucky, frequent bouts of unemployment. If you don’t have kids yet, you might try impregnating several women so they can enjoy the old fashioned virtue of a single income household and life in a lower income strata, because you are absolutely right – we have way too much meritocracy and it is time for the talented, smart, wealthy, and hard-working to check their privilege.

    • Damian O'Connor says

      None of your concerns matter. I live far better than I did in the 1960s. I don’t mind that people live better than I or have greater wealth. What matters to me is that I have enough and capitalism provides that for me while socialism doesn’t.

  7. Nicholas Conrad says

    Rising standards of living among the working class isn’t a refutation of rising inequity. The intuitiveness that Adele should earn more than you do isn’t the same as being intuitively obvious that she should make tens of thousands of times more (inflation adjusted) than Lena Horne was making half a century ago, maybe around the time your grandfather was in the coal mines.

    And despite all of that, you’ve also managed to completely miss the biggest problem with the narrative of rising inequity: the narrative only focusses on the inequity gap at the top, and ignores completely the rapidly closing inequity at the bottom. Over the last 50 years the engine of global capitalism has halved the number of people living in extreme poverty, and by 2020 half of the world’s population will be in the global middle class. Compared to that accomplishment, who cares how many yachts Jeff Bezos can buy?

    • E. Olson says

      Nicholas, what the heck are you talking about? Of course we should care how many yachts the Bezos owns, because it just isn’t fair. Just because he was lucky to a young adult when the Internet took off, started a business, lost money for years, and finally made a huge success at Amazon doesn’t mean he deserves more yachts than the second grade teacher who taught him to read books. Furthermore, don’t you care about the environmental damage caused by those yachts, not too mention the damage caused by all those formerly poor people that capitalism has turned into billions of middle-class consumers who insist on having electricity, air-conditioning, big screen tvs, jet propelled vacations, and Adele concert tickets? Capitalism must be stopped before it kills the planet.

      • ga gamba says

        I want Jeff Bezos to buy as many yachts as he desires, if that’s how he enjoys spending his money. Each one built employs many in a small business sector usually located in the West, hiring and training people who are paid good wages and benefits and keeping seaside communities economically afloat. I presume Bezos himself isn’t maintaining these, so he has to hire a crew, pay ports, etc. I hope he buys many personal jets too.

        Spend it all, Jeff.

      • Yassir (@gumbawaif) says

        “Capitalism must be stopped before it kills the planet”

        Ha! Your sarcasm is well deployed. Hear hear! Capitalism ruins the environment! Better to go Communist. I hear the USSR did a fabulous job of looking after their ecosystem, Chernobyl being just the most famous example.

        Or how about the curated natural paradise that is Venezuela these days? I’ve seen some pictures of how they have repurposed their streets as landfills to protect natural spaces. They have allowed the oilfields to go back to their glorious natural state as asphalt tarpits, too.

        • E. Olson says

          Yassir – I hope you understand that all attempts to-date at implementing true socialism/communism have been imperfect – once true socialism is realized the rise in the oceans will begin to slow and the planet will begin to heal.

  8. “The article also doesn’t address the concentration of wealth at the very top. You don’t have to be a dyed-in-the-wool Marxist to be concerned when 1 per cent of people own more than half the wealth in the world, and the proportion that 1 per cent owns is rising relentlessly.”

    A comment which completely ignores the fact that this “concentration” is what enables the top 1 percent to manage the use of productive capital. The “wealth” under consideration here is not billions of silver dollars stored up in Scrooge McDuck’s money bin, readily available for the purchase of silk suits, rare whiskeys and whores; its billions of dollars worth of potentially productive material assets: trains, metal lathes, robots, warehouses, mines, agricultural land, computers, etc etc etc. People who complain about “concentration of wealth” seem never to have understood the difference between a production hierarchy and a consumption hierarchy.

    • ga gamba says

      Yet, if Scrooge McDuck did spend his money on silk suits, rare whiskeys, and whores his silver dollars are circulating through the economy to pay tailors’ taxes, distillers’ dinners, and prostitutes’ pap smears. What we find is that the left, Puritanical busybodies they are, attach morals to certain types of spending. Spend £10 on a so-so claret is OK, but £1000 spent on a vintage grand cru is an outrage. The left has some very strong opinions about how you spend your money earned through your labour. Could they be more any more offensively intrusive? Yet, in our high-income countries value-added items need to be created and produced to employ those who will never buy yachts and super cars. The Indians and Chinese have the comparative advantage in worsted wool textile priced at £2 per yard; the Yorkshire mills produce much higher quality worsted wool in smaller runs at £70+ per yard. It is this differentiation that allows each of the many niches of the market to be covered. We ought to be grateful for this.

  9. ga gamba says

    A good read, Dr Parvini. Puts things into perspective.

    According to Urban-Brookings Tax Policy Centre 56.7% of Americans pay income tax. Of the remaining 43.3% who don’t pay income tax, about 85% of them pay payroll tax, a payment by employees and employers to fund Social Security and Medicare. Of the tax visible to these employees, i.e. their contribution, it is 6.2% of income for Social Security and 1.45% for Medicare. Employees also pay unemployment tax, which varies by both income and one’s state of residence. For 2018, the estimated average unemployment tax rate is 1.10%. Tax rates range from a low of 0.13% to a high of 5.72%. We can presume that the majority of working people pay about 8.75% of their income in payroll tax.

    Mediabiasfactcheck.com reports: In review, the Tax Policy Center uses minimal loaded emotional wording in their research and is minimally biased. All research is factually sourced to credible sources of information. The TPC also has a blog that has a left leaning bias in story selection and wording. The blog is also properly sourced and there isn’t evidence of any failed fact checks. Overall, we rate the Tax Policy Center least biased in research and left-center biased as a whole, based on a blog that favors left leaning policy issues. This source is also high in factual reporting.

    I mention this to show it is the centre-left providing the data and not a libertarian think tank.

    So, though America’s working poor, and even the lower middle-class, “pay tax”, the payroll tax they pay doesn’t provide for police and fire, defence (of wealthy Europe, Japan, Korea, and the Persian Gulf emirates), foreign diplomacy and aid, physical infrastructure, education, sewers and hygiene, food safety, endowments to the arts, weather forecasting, disaster relief, exploration of space, subsidies to businesses and farmers (really agribusiness since most family farms are long gone), rubbish collection, building inspections, and anything else. But not a “nightlife tsar” hired for us by our enlightened mayor Sadiq Khan at £35,000 per annum… for 2.5 nights of work per week where our tsar, technically it’s our tsarina, goes clubbing. The real value to the taxpayer comes from that half night. And you think that’s bizarre, wait’ll you see what’s gifted to Liz and Phil. Beat that, Yanks!

    If they drive they pay a petrol tax which goes to roads – 51.73 cents per gallon is the average of US federal and state/local taxes and fees. Sadly, petrol tax revenue is falling because cars become ever more efficient whilst electric vehicles become more common. They may pay sales tax. What does that cover? Depends where one lives. The Orange County Register of Orange County, California reports that of every one dollar in sales tax collected: The stage grabs the lion’s share of it – six cents on every dollar. Then the Sheriff and District Attorney get a half-cent. Cities/counties get three-quarters of a cent. Road maintenance funds get one-quarter of a cent. Health and welfare programs get a half-cent. State optional funds get one-quarter of a cent. The Orange County Transportation Authority gets a half-cent.

    Have you kept a tally on your ledgers? That’s 8.75 cents of every dollar going to the common good. And the remainder? It pays the debt; specifically repaying the 1996 Recovery bonds, which enabled the County of Orange to escape from bankruptcy so that it lives on to borrow again.

    Our “victims” of income/wealth inequality are nonetheless beneficiaries of a mostly well functioning society of safety, enjoyment, convenience, and relative prosperity largely paid for by others. A sharing of wealth, so to speak. It’s not money they can put in the bank, but it is the tools and the rules, the systems and processes that give people an opportunity to take a crack at their dreams. This is why so many want to emigrate to your lands of inequality. It’s a tragedy so many citizens fail to see and seize the opportunities before their very eyes. Too busy eyeballing that lovely lathe to seize instead, I suppose.

  10. E. Olson says

    Ga Gamba, It almost sounds like you think the bottom half should be expected to pay something towards the roads, schools, police, national defense, etc. that they enjoy but currently pay virtually nothing for. It also sounds like you are blaming the victim, because they get all this “free” stuff and then don’t “seize the opportunity”, but you seem to conveniently forget about the legacies and continuing effects of slavery, Mexican-American War, Jim Crow, micro-aggression, hands-up-don’t shoot, rape culture, etc. that keep people of color (except Asians) and women down. I hope I am mistaken, but I also sense that just because they currently pay for almost all government services, welfare, and defense, you don’t think the rich should pay their fair share. How can we ever have social justice if we don’t do more to check the privileges of those at the top, by taxing all excess earnings and trusting the hard working and underpaid public servants to deliver the bounty to the deserving poor.

    • Bill says

      Continuing effects of…oh please! Would that be the continuing effects of slavery that affect all black males regardless of whether they are recent immigrants or related 3 generations back to slaves? That’s where all this “continuation effect” falls on its face. It is racist stereotyping. You see dark skin and assume “descendant of slave!” when the reality may be far different. President Obama wasn’t the descendant of a slave. My neighbor wasn’t either (Jamaican). A work college wasn’t either (2nd generation immigrant from Africa). A couple members in my PhD cohort had families 3-4 generations worth out of Germany and England…but hey, dark skinned, must be former slaves! Your (except Asian) remark proves the point even further.

      Check the privileges…aka, “i’m envious so it must be some magical deck of cards and not hard work that gave you advantages.”

      If you want to discuss some of the actual things like economic mobility, great, let’s do that. All that other stuff is hogwash. The legacy of slavery isn’t what made so many inner cities hell-pits of low-income, crime ridden neighborhoods. It is the legacy of “just give them money because they’re too stupid” that did. If you want to talk Jim Crow — that belief by the Left and many in Gov’t that feel they have to give money to the poor black folks suffering from the legacy of slavery which ended 150+ years ago — that is Jim Crow! That’s blatant racism and pandering for votes.

    • ga gamba says

      How can we ever have social justice…

      I don’t care about social justice. I care about justice.

      When we look at taxes we need to evaluate where the money goes. Taxes to support first responders and sewers are for shared goods and services. I accept that cost, even when many users of the same goods and services aren’t paying for them. Then there is the idea of using tax (or seizing the means of production) to redistribute wealth. Social justice is about this redistribution, which is compelled extraction. Money is the representation of your labour, so when it is seized to be redistributed in effect your labour is seized. You have been forced to work in the support of others. This is a kindler, gentler version of colonial Spain’s encomienda system that compelled labour for a period of time, often 40 days per annum in the Philippines’ case; a victim of this could buy his way out. Ideally, I think everyone should pay some income tax, even a minimal one, because everyone ought to have skin in the game; those who pay no tax develop a distorted idea of the economy and the role of government to shake the wallets of some to give to others. (This distorted view and the resulting behaviour will also be the reason for the downfall of UBI as enough recipients squander their incomes and leave their children unfed. Sad to say it, but there is a large group of adults who are wards of the state who are allowed to procreate, ensuring another generation of wards of the state.)

      The appropriate means for redistribution of wealth is for a person to provide a good or service wanted by the public. If it’s desired, they will distribute their money from their wallets to yours. If it’s not desired, a rethink is in order. Some, like Mr Bezos, are very successful because he offers a service that scales not only nationally but globally, therefore he sells more and earns more than a local brick-and-mortar retail shop that also has an e-commerce web presence. Bezos didn’t invent e-commerce. He did it better than others and he convinced enough investors to buy – literally buy – his vision.

      • E. Olson says

        Dear Bill and Ga Gamba – I seem to have replicated the results of Lindsay, Pluckrose, and Boghossian in getting serious replies to my very tongue in cheek comments (i.e. my response to Ga Gamba’s comment). It really is easy to fake this grievance study stuff.

        • ga gamba says

          A key difference, though. The responders to Lindsay, Pluckrose, and Boghossian agreed with and even commended their nonsensical concoctions.

          The perversity you parroted is standard grievance guff within some disciplines and activist groups.

        • D-rex says

          Dear E.Olson, it took me a while (I’m still not quite sure) to realise that you were using satire and not a leftist troll. If true then I have to say you are very good. I also admit that I’m not as smart as most people who comment here.

  11. Farris says

    Inequality of income is only an issue, if wealth creation is a zero sum game.

  12. V 2.0 says

    Why is inequality by itself such a problem? If my friend and I both start out with $100 and my friend then somehow acquires another $100 I am no worse off than I was before. Nothing was taken away from me. Now, if my friend acquired his extra $100 and at the same time prevented me by force from doing the same, well, that’s a different story and the actual problem that should be addressed.

    • E. Olson says

      V 2.0 – you just don’t understand. You see if your friend gets an extra $100 it is likely because he has privilege that you don’t. Perhaps your friend was born white and male with higher intelligence, or a better singing voice, or a more conscientious and open personality, and had attentive parents that provided him with a stable home and good education. Suppose he then used all his unearned advantages to sell his music and therefore “unfairly” earn that extra money that wasn’t available to you because you were born with less privilege. Thus it is only fair that he give you half that extra $100 to compensate you for your lack of privilege – or alternatively he might give the $100 extra to Juanita who has just crossed the Rio Grande without a penny to her name, and with added disadvantages of being an Hispanic low IQ female, with a neurotic and low conscientious personality born in a poor country to abusive parents. In fact, social justice won’t really be served until you and your friend both give Juanita some of your original $100 as reparations for unfair US foreign policies with regards to Mexico and Latin America since the Mexican American War. I hope this provides you with some understanding of why inequality is such a problem.

  13. airless says

    Thank you for the news flash that overall society is somewhat better off than three generations ago (you know, in the light bulb department).

    I agree people generally don’t think that total equality of income is realistic or desirable. They can still find it outrageous that income and wealth skew astronomically toward the already wealthy and super-wealthy while at the same time their retirement and health care prospects grow progressively more skeletal with each passing year.

  14. Yelo says

    Georgism/Geo-Libertarianism – read up on it.

    We need to get away from the trite dichotomy between capitalism and socialism.

  15. Porphyrogenitus says

    This article is, IMHO, an example of how you can almost always prove any point you want to prove with statistics, providing you slice the data the right way.

    Focusing on the very poor (bottom 20%) and on income rather than wealth, the statistics do come out the way the author of this article demonstrates.

    But that’s mostly because the inequality is between the top 20% and the bottom 80%. Not between the top 80% and the bottom 20% – if you split it that way, you’re averaging out the GIANT gains of the top 20% with the small losses of the middle 60%.This makes any improvement at the bottom look magnified.

    For another take on some of this data, see https://whorulesamerica.ucsc.edu/power/wealth.html

    • Carlton says

      Did you not notice that the article spends most of the time talking about the median worker? That means exactly the person in the middle, so your comment is odd.

  16. A C. says

    Here’s the comments section again with more of these little Koch-Foundation worshippiers bellowing out their Milton Freidman mantra, brought to you courtesy of the free market via Edward Bernays. Do you like when billions of free market money goes into PR, Dark money, and plotted smear campaigns by the likes of Media Matters by guys like Sidney Blumenthal and David Brock? Nope. Get all butthurt over it when that happens- and that’s orchestrated leaks, PR, and smear tactics through media freely controlled by guys like Jeff Bezos- the NY Times and Washington Post, for example. All this ‘controversy’ in the universities with social justice, and the new ‘progressive left’ was pretty much planned- there was a lot of brainstorming going into galvanizing it after the (second) Clinton loss. This is the free market being used to control itself- just as the libertarians (koch brothers) do when they try to highjack the court system and turn us into a fascist theocracy with their lunatic megachurches and radical self-blaming free will- all to make you ideological and obedient. Little echo chambers of politically charged buzz words- freedom definitely being one of them. And if you don’t think economic inequality is an issue, fine, but besides just looking at income you may look at other factors, like the human development index (HDI), for example, which takes income inequality, avg lifespan, education, GDP per capita- giving a multivaried analysis on what people are pissed or content with- since they clearly are pissed here whether you like it or not- right or left. And btw, globally, in the HDI, the US doesnt even rank in the top ten. I suppose we can compare ourselves to indonesia all day, where many people are basically slaves and barely alive, but if you keep lowering the bar, and dont hold those in power responsible just as you must in your own work, the bar will get lowered, and you get corporate welfare. The valuable rights and privileges that exist in the west are there because people struggled for them, not because they buckled to the church, or to the king, or to banks, for that matter, because things were ‘good enough’ and their leaders were so god-like beyond their capacities.

    • Carlton says

      Classic top-down conspiratorial thinking. How about envy as the reason for the baseless anger of the world’s richest people? The pooreresr person in the USA is still in the top 2% of the world. Get over yourself.

  17. Just Me says

    I am generally in agreement with the comments criticizing the article, with one caveat.

    The issue imo is not inequality, privilege, the unfairness of capitalism, etc., and arguments based on those ideas are counterproductive.

    There is, however, a social problem in the US related to a large number of people istuck in disadvantageous circumstances in a system that, unlike in other developed countries, makes little effort to help them out, and as a result the US has a degree of social problems other societies do not.

    Other developed countries offer their most disadvantaged citizens at least free or cheap healthcare, and other economic and social services that help smooth out the extreme social inequality found in the US. And of course do not have the problems related to illegal border crossings like large numbers of people who do not speak the language and have little education.

    One can be in favour of taking active steps to remedy the problems of disadvantaged people without being anticapitalist and accusing the majority population of having “white privilege”. That is what other countries have done.

  18. Dennis says

    Material poverty and inequality are two different things.

    In fact, poverty can be declining while inequality is rising. Not a contradiction at all.

    You very convincingly lay out how poverty has declined, but you fail to deliver an argument why “assumptions about rising inequality are wrong”.

    To see if inequality is rising or falling, it’s wrong to look at overall national income.

    Instead you ask: What SHARE of the total national income goes, say, to the top 1%?
    How much was that share 20, 30, 40, or 100 years ago?

    But you’re doing nothing of that sort in the article.

  19. dirk says

    Inequality (in wages and capital formation) is a function of the social stability and balance in a nation. Long periods of peace and absence of war or other disasters boosts inequality to beyond any proportion, if not stopped by policy and government. Disasters and severe crises are not only negative, but have also their good sides!

  20. Bartoldome says

    The referenced model: https://ergodicityeconomics.com/2017/08/14/wealth-redistribution-and-interest-rates/ shows that wealth re-allocation in the US has been negative since the beginning of the 80s, which means that wealth has gone from poor to rich, with the help of the institutionalized status quo and without any sign of stabilization. It obviously contradicts the headline of this article as implies that with the current state of affairs, there is a real risk that wealth concentration may get such extreme levels, that capitalism may become a new kind of feudalism.

  21. Honesty Is Rare says

    The article makes the important point that income inequality has no direct relationship with absolute well-being, barring the effects of politically manipulated envy.

    That said, Parvi overlooks the distribution of most inflation into bubbles and pockets. The real inflation rate far exceeds the CPI (which tracks income better than prices these days), and most of it has gone into medical costs, education, housing, and the stock market. Compare a week’s stay in the hospital or our ridiculous university costs to prices in the 1950’s. As Rob mentioned, job opportunities have become concentrated in the cities as rural and small-town opportunities have dried up, yet city housing is exorbitantly expensive, and suburban housing around major population centers has followed it. Even in the food category, a loaf of bread may be cheaper today than in 1950 since grain is so abundant, but meat for instance is becoming more expensive. What used to be the fast food dollar menu not long ago is now the $2 menu.

    Moreover, we should not assume extreme concentration of wealth is the only possible consequence of a market economy properly organizing to meet economic needs; this may be more the consequence of our specific monetary/fiscal/regulatory setup. Arguing why is outside the scope of this post, but at the very least I should point out that the stock market is a mechanism by which the masses can indirectly invest in capital goods, such that the aforementioned lathes and trains do not require a singularly wealthy tycoon to own them to be properly managed by a singularly competent business executive.

    I am not writing this to endorse any of the left’s proposed solutions. On the contrary, I am convinced that our economic problems primarily originate from debasing a fiat currency to support unrestrained federal spending, that they are exacerbated by an enormous and ever-growing regulatory ecosystem, and that they are shaped by policies including government contracts, mandated HMO’s (making moral hazard the ubiquitous default in healthcare, causing runaway prices necessitating everyone’s increased participation), subsidized student loans for economically worthless majors on unnecessarily beautified campuses, etc.

    Instead, I write only to say that we should not dismiss worrying signs that the middle class has long been retreating, or that real unemployment has been looking grim for a decade after including those more than six months jobless. The left is not marketing their redistributive ideology in a vacuum, and most young socialists aren’t really that passionate about demanding “free shit.” Calling every human necessity a “right” is not so much a spontaneous intellectual conviction as a rationalization for their emotional panic in a world where their prospects look bleak. Want a degree to have a career? You’d better get a good one to stay ahead of the loan payments…and most people are intimidated by the requirements for a good one. Want to skip that degree, because you have no math/science aptitude? You’re considered unemployable for most office jobs as unspecialized as a receptionist, because subsidization and over-credentialization has inflated requirements just to absurd levels just to weed out applicants in a world where the regulatory environment has created so much un/underemployment. You could join a trade…which is fine for men who have been taught “earn or starve” their whole lives, but how many verbally talented young women want to get their hands dirty? The kids are low on options, scared, and latching on to the easiest-sounding alternative they see. Looking at Tumblr, these are kids whose life dream is simply to be able to have a safe job and comfortably afford a small city apartment (or less often for a generation that undervalues ownership, a small suburban house) without parental assistance, a crippling student debt burden, or the fear of financially ruinous medical bills. They may be out of touch with the historical reality of a cruel world, but their desires are hardly extravagent in the context of western culture and norms of the past century.

    Employment has been improving throughout Trump’s administration, which is a hopeful sign…but will it last? Trump is hardly an economic genius, and in any case we’re on the verge of complete fiscal and monetary collapse in our lifetimes. It behooves us to recognize the problems our opponents are imperfectly warning about and find the real solutions, rather than let the comfortable among us rationalize them out of existence…until we’re surprised when the extreme left wins over the youth by default.

    • Neema Parvini says

      Thanks for comment. There was not really space in this piece to go into the problems of expansionary credit, inflation, and issues caused by central banking — but I know where you’re coming from on this and agree with you.

  22. Honesty Is Rare says

    I left the real stakes out of that last sentence:

    It behooves us to recognize the problems our opponents are imperfectly warning about and find the real solutions, rather than let the comfortable among us rationalize them out of existence…until we’re surprised when the extreme left wins over the youth by default, and utterly destroys the foundations of a free and prosperous society.

  23. Anthony B Cohen says

    Does the author have an opinion about why Adele and investment bankers might receive different levels of approbrium for their wealth. Quick, can you name the external benefit of Adele, how about the investment banker? Do you feel recent evidence has shown that the rise to wealth of the financial sector is due to the rising superiority of allocating resources for investment, or evidence of their regulatory capture?

    • Neema Parvini says

      Since you asked, let me ask you a question before I answer: what function do you think investment banks play in an economy?

      Why do they exist? What market need do they fulfill?

      What would happen to the economy if there were zero investment banks?

      Once you answer these questions, I’ll be happy to answer yours.

      • ga gamba says

        Appears Mr Cohen is not checking in or has checked out.

        I’ll give it a crack. The chief role of investment banks is to bring together companies in need of money with investors with the need to put their money to use to at least earn a return greater than the rate of inflation. For private companies this is done by initial public offerings (IPOs) where a portion of the company is sold to investors at the stock market. Companies already listed on the market also need to raise capital from time to time, and investment banks perform the underwriting service the bring forth the exchange of capital and asset. Investment banks facilitate this exchange and they also help determine the initial price of the IPO; the investment bank guarantees to the company the shares will be sold. If there is not enough demand for the shares the bank will buy the unsold shares at the face value. These banks also perform the same service with bonds and derivatives.

        If there were zero investment banks companies would have to find investors or lenders on their own, which likely means the pool of potential investors would be much smaller. A very small pool shifts the advantage to the buyer/lender who may demand more ownership or a higher interest rate than justified.

  24. Honesty Is Rare says

    Oops…I miswrote Parvini’s name as Parvi above. Sorry about that.

  25. PrometheanFire says

    While I generally agree with the premise and the points made in the article the comparison between the financial and education sector and the math the author does with the figures is embarassingly weak. Yes, the financial may contributing four times as much but since you did not take into consideration the amount of people working in these segment your argument is extremely flawed. Following your logic if we would have 10,000 bankers and 40,000 teachers, bankers would earn sixteen times as much as teachers. Your argument can only be made if we have the exactly equal amount of people working in both segments which I highly doubt.

    I really cannot understand how something like this could have slipped through and it is a bummer because this kind of sloppy generalization and oversimplification is exactly what critics will jump on and in that wake dismiss the whole article as nonsense.

  26. Clicked on this expecting an article about how inequality is not actually rising, rather than a generic complaint about how the poor don’t realize how much better they have it. Ah welll. I’ll set expectations low next time.

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  29. Quentin says

    Which survey of personal incomes in the second paragraph was this? You provide cites for much else but not this key claim.

  30. ccscientist says

    When comparing high vs low income, the bottom is always zero (no job). Thus any increase in wealth leads to rising inequality by definition but that is meaningless. What is more informative is upward mobility.
    The same applies to the median income of the “middle class”. Since this group is defined by a fixed bottom and top ($100,000 household income), the median always stays the same. What is informative is that the % of the pop in the upper group (upper class, above $100,000) is now 29% up from like 9% 30 yrs ago.

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  32. nick l says

    w.r.t :
    “””
    This is especially underhanded when one considers that it was the politicians and bureaucrats working for the US government — pushing the Community Reinvestment Act (championed by none other than Hillary Clinton) and regulating it through the Department of Housing and Urban Development (HUD) — who chiefly caused the 2008 financial crisis.
    “””

    from wikipedia on the CRA :
    “””
    Other economists have examined the issue and concluded that the CRA did not contribute to the financial crisis, notably The New York Times columnist and Nobel laureate Paul Krugman,[107] Tim Westrich of the Center for American Progress,[108] Robert Gordon of the American Prospect,[109] Ellen Seidman of the New America Foundation,[110] Daniel Gross of Slate,[111] Dean Baker of The Center For Economic and Policy Research,[112] and Aaron Pressman from BusinessWeek.[113] Law professor Michael S. Barr, a Treasury Department official under President Clinton,[58][114] stated that approximately 50% of subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made “perhaps one in four” sub-prime loans, and that “the worst and most widespread abuses occurred in the institutions with the least federal oversight”.[115]
    “””

    I came to Quillette to have an even-handed representation of events; this is not. And it may be a snipe, but it is the penultimate statement in the piece, which adds extra weight and relevance it should be scrutinized more closely.

  33. Standards of living may be rising across the board, but that doesn’t mean there isn’t rising inequality in wealth. This can be a problem because for any vital commodity in limited supply, those with the most wealth can outbid everyone else. The bigger the wealth gap, the more effortlessly the wealthy can outbid the non-wealthy for limited commodities. The limited commodity that rules over all others is power. It’s not supposed to be for sale, but of course it often is, even in countries like the United States.

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