A Grown-Up Discussion on Income and Wealth Inequality in America

with 7 Comments

Girl with tongue

Previously I wrote on the way in which the terms just, fair or equal are understood differently by liberals and conservatives. Nearly every discussion which contains any of these three words (just, fair or equal) is plagued by an assumption of the liberal (utopian) goal of equality of result being blurred with the conservative (tragic) incentives built into an equality of process. Here is one such online post:

I’m looking to have a grown-up discussion on income and wealth inequality in America.

I would prefer we refrain from liberal/conservative battles and talk about the following:

  1. Does income/net worth/Financial wealth inequality exist in America?
  2. What does Income mean vs Net Worth and Financial Wealth?
  3. What causes inequality if it exists?
  4. How do you fix inequality if it exists?

The answers to these four questions seem ridiculously obvious to those who hold the conservative tragic view. They hardly seem to be “grown-up” questions.

Of course income inequality exists. If I want to be a bad poet you can’t make me take a higher paying job in a cube farm. And if you and I both decide to be poets, one of us will sell more of our work.

Of course net worth and financial wealth inequality exists in America. Even if we were equally bad poets, you might decided to have a cell phone and I might save and invest the equivalent cost instead. I would defer consuming my earnings. The textbook definition of capital is “deferred consumption.” Over our working careers, my saving and investing would generate an extra $1 million dollars in my net worth.  All this simply because I chose to go without a cell phone. Unless you want to confiscate my savings or force me to buy a cell phone there will be net worth inequality.

Most of the causes of income inequality in America stem from our culture. A culture of poverty encourages people within that culture to think a certain way. Usually that way of thinking is an external locus of control and a present hedonism time perspective. On the other hand, a culture of wealth and success has an internal locus of control and a future oriented time perspective. Or put another way, here is a quote from the movie, Margaret Thatcher:

“Watch your thoughts for they become words. Watch your words for they become actions. Watch your actions for they become… habits. Watch your habits, for they become your character. And watch your character, for it becomes your destiny! What we think we become.” – Margaret Thatcher.

The last question is perhaps the silliest: “How do you fix inequality if it exists?”

It is clear that the author is talking about inequality of result. And that is not a problem which requires a solution to “fix” it. And even if you tried to fix it, it would be impossible. If I refuse to work and you insist on abolishing inequality then there is no solution. None of these are just, fair or equal:

  1. If you work twice as hard and give me half of your productivity we have equality of results, but you worked twice as hard as you needed to and I did not work at all.
  2. If neither of us work we are both equally impoverished. But then we both starve to death.

Most work toward equality of results impoverishes everyone.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

7 Responses

  1. Bill

    We all had the same choices available in picking our parents. That is true equality. Some of us chose well, others didn’t. One of the highlights from the recent Pew report: “Those born at the top and bottom of the income ladder are likely to stay there as adults. More than 40 percent of Americans raised in the bottom quintile of the family income ladder remain stuck there as adults, and 70 percent remain below the middle.” (report at http://www.pewstates.org/research/reports/pursuing-the-american-dream-85899403228)

    • rob

      Wow! 60% of American raised in the bottom quintile of the family income ladder improve their lot in life! Only in America!

    • David John Marotta

      Greetings Bill,

      You seem to think you’ve won some debate point stating the obvious: that some children are born with parents who give them better opportunities. Nothing in the tragic (conservative) would ever suggest otherwise. That isn’t even part of the debate. Only the utopian (liberal) view assumes that wins some disagreement.

      Every inequality at the beginning of a story is just an inequality of outcome of some prior story.

      Imagine two sets of parents start out equal. The loving and giving parents sacrifice for their children, scrimp and save and are just better parents in every way. Perhaps the other set of parents are in the bottom quintile. They don’t sacrifice anything monetarily for their children. They don’t work long hours or forgo indulgences.

      This inequality on the part of the parents will certainly have an effect on the next generation. They will be born in different cultures. And most of the causes of income inequality in America stem from our culture. Will you try to overcome the sacrificing parents attempts to give their children an advantage in life? Will you try to make the outcomes going forward more equal by trying to better one group without trying to better the other? Do you think the state can wield its power in order to overcome having just average parents?

      The tragic view is not deaf to helping children. That’s a straw man criticism. But equality is not the proper goal, nor is the force of the state the proper means. With that goal and those means you risk doing more harm than good.

    • Charles R. Anderson

      Progressive elitist favored policies such as zoning and green space requirements, government-run schools, licensing requirements, eminent domain takings, minimum wage laws, lax law enforcement, high food and energy costs, high property taxes, and welfare disincentives to work all tend to make it harder for those born in poor areas and to poor families to become successful and productive workers. We could clearly greatly increase on the 60% who escape the bottom quintile simply be eliminating these many bad government policies.

  2. Richard Steven Gregg

    The whole discussion of inequality of income seems to center around the mistaken notion that “enough money can buy you happiness”. Certainly none of us want to be without enough money to buy food, pay our rent, and pay for our other necesities. But what people really need is a satisfying purpose in life, shelter, food, and good health. I always had great admiration for people who lived a minimalist lifestyle and seemed happy. Our early pioneers were that sort, and from my Catholic upbringing I remember priests, brothers, and nuns, many who took the vow of poverty, who led a rich and rewrding life being teachers and leaders in thier community.
    How to instill that spirit in the human mind, instead of being a mindless hedonist…that is the biggest mystery of all. My father came from the generation of people who just wanted to be good and productive citizens, not rich or materialistic. They never envied the rich, in fact, in most cases. had contempt for them ! We need more people like that !

    • David John Marotta

      Amen! A present hedonist will consume everything he or she produces no matter how large their income. On the other hand, I have clients who never had a large income but saved and invested 20% of their salary and amassed significant wealth.

      Capital is deferred consumption. And if you can’t defer consuming it you can’t build real wealth. As a result of these types of choices, we will never have an equality of net worth.

      But as you suggest, that isn’t even a worthy goal. Only if you put a morality on having wealth it doesn’t deserve would you seek trying to equalize it. You can be materialistic and poor just as you can be frugal and rich.

      Let’s all strive to be good and productive, not rich or materialistic.

  3. Charles R. Anderson

    This is a good discussion.

    The idea that income inequality or wealth inequality is bad simply makes no sense. Individuals are complex and highly differentiated. Of course this has major consequences in how they live their lives and the choices and opportunities that they have. To use the progressive idea of fair, there is nothing fair about the distribution of intelligence, beauty, height, weight, athleticism, emotional steadiness, place of birth, education, or parents. Instead of pushing for equality of income or wealth, one might just as well advocate for equality of any of these other properties, traits, and circumstances. But at some point, one has to simply recognize that we are all individuals and we differ in many ways. This simple fact is the bane of socialism.

    Some people experience their work as though it is every bit as fun as any play and more rewarding because of a greater sense of accomplishment. They would rather work 70 hours than work only 40 and watch 30 hours of TV or videos. Other people just cannot wait to leave work each day and only enjoy the 30 hours they spend watching TV and videos. Others just want to get home to be with their family or to go to the next party. Some people choose a profession they know will not make them much money, while others are like missiles zeroing in on the money. Of course, the financial success one experiences will be a function of these attitudes.

    Yet, it is not clear that choosing to spend more time with your family rather than at work in a high paying career is a bad thing. This is a choice that should be open to individuals in a individual rights respecting society. But, there are also consequences to our choices and we should be prepared to accept those also. If one person chooses to have more family time, this does not give him the right to appropriate the earnings of the person who worked 70 hours at a high-earning job. After all, that high earner does not get to appropriate his extra hours with his family or his extra entertainment before the TV or at parties.

    There are numerous egregious faults of our governments that do make it harder for people raised in some places to have as many opportunities as they ought to have. For instance, we have government-run schools most of which are really poor and can be especially so in some poor neighborhoods of many cities. This is a stunting factor. Minimum wage laws that prevent the undereducated or those young or handicapped people from very low cost of living areas of the country from getting their first jobs hold people back. Licensing laws also close many opportunities. Zoning laws and open spaces requirements raise the cost of housing and keep the poor from opportunities. Eminent domain takings hurt the poor more than the wealthy. Policies that cause energy costs to be high are also especially tough on those of the poor who wish to advance. High food costs due to farm subsidies and ethanol mandates are similarly discriminatory. A society that respects individual rights would not tolerate any of these types of governmental restrictions on opportunities, yet they are commonly favored by those Progressives who decry income inequality. It is so much easier just to advocate a taking and a redistribution of incomes. That is so much more fun and empowering for the progressive elitist.

    The only achievable and desirable equality is the equality of our individual rights to life, liberty, property, the ownership of our own minds, bodies, and labor, and the pursuit of our own happiness.