Income Inequality, Mobility, and America

I am a frequent abuser of metaphors. To a fault, I use them a lot. Some of them work really well, other times they don’t. Frequent readers of this blog clearly have caught on and ribbed me for it.

A lot of discussions I’ve had with friends, colleagues, and strangers about America, our economic system, the free market, and our tax code often boil down to this point:

The gap between the rich and the poor is growing. That is bad and must be fixed.

First off, I am not sure it’s bad. Let’s say that 10 co-workers are at a bar, and 9 of them pool together to buy lotto tickets with 1 refusing to join in. They win hundreds of millions of dollars. In this statistical group, the gap between the one guy who refused to join and the 9 who did jumped significantly. Is this bad? Not at all. I mean, it sucks if you get sued, like some people in my dad’s home town of Piqua did, but not choosing to do something and expecting benefits from it is pretty asinine.

Is this a great metaphor for the “real world?” On a prima facie view, it doesn’t appear like it is. Let’s delve further.

Municipalities often require that your grass be maintained with a certain upkeep and that when it snows, you have to shovel your sidewalks and such. Often times, people will hire children to do this work. Either because their time is too valuable to do this, they don’t want to buy and maintain a lawn mower or snow blower, or for a multitude of other reasons.

Since snow is random and subject to weather and grass is relatively constant (though subject to weather), we’ll first use an example of a neighborhood kid who cuts grass. In this example, he’ll cut your grass once a week for $15, making about just above the minimum wage for a little over an hour’s work. The kid shows up and cuts your grass every week and does an average job. Sometimes he won’t sweep the sidewalk and blades of grass accumulate, and other times he’ll miss a spot.

After a year, he comes back asking for a raise — he now wants $25 a week. But seeing as the price of gas hasn’t risen all that much, and he’s doing the same work, is this raise really warrented?

It’s not. That’s the first point to make here. Inflation, and the rise in price of consumer goods is not the same as getting a raise. If gas costs more, and your price stays the same, you make less. Social Security payments get costs of living adjustments to ensure people can buy the same basket of goods. They’re not a raise. Same goes with employees of the federal government or private sector getting a COLA: It’s not a raise. Either goods are more expensive or the dollar is worth less. So we shouldn’t confuse a COLA with a conscious choice to pay somebody more.

Likewise, if the cost of gas goes down, or new inventions are created that make that job easier, are you willing to pay the same? More? You’re likely to pay less. Some kids spend their money on baseball cards, while others invest in labor saving devices like better lawnmowers or snow throwers. And that is a risk they are taking. Maybe they make a bad decision in buying a device and their burgeoning small business fails. Maybe they make a great choice, decide to skip college and start an actual business. Let me ask this rhetorical question: Would the world be better off if people took less risks and our incomes were closer together? Certainly not.

Now with the kid who shovels your snow, you’re going to approach paying him/her a bit differently. If a kid has a capital investment from his/her parents in a snowblower, you’re not going to always pay that kid the same you might pay a kid with a shovel, especially if you know they’re not paying the amortization costs for the device. If they own it themselves, you might be willing to pay more. It might make more sense to pay the kid hourly who shovels, where as the kid whose parents own a snowblower might get a flat rate. (Growing up, I’d snowblow the whole block for free, as it was the right thing to do, and I appreciated clean sidewalks as a paperboy. Now, our local government had half-tracks that would plow the sidewalks, but they would often destroy our aging sidewalks, which rose when tree roots grew under them.) In essence, if there’s a little snow, you’ll pay them less than in a situation like last year’s snowmageddons.

Both of these examples get down to one point, and it is this: If the cost of transacting stays the same, and the job is done the same, is that worthy of a raise? Now, as older adults, we almost come to expect raises each year. But that might depend on our line of work. But as a homeowner paying kids to do that work, we’re a lot less likely to pay them more for the same work. Why?

Kids who master a skill, be it grass cutting or snow removal, eventually become more efficient at what they do. Now, we won’t pay them more for the same job, but if it takes them less time/effort/money to do that job, it frees up labor and capital resources for them to seek work on other yards.

This is little different when it comes to our employers these days. If we aren’t marginally improving our work output for our employer, why do we deserve a raise? We don’t. Some people may work part time, and others may be salaried. Other workers, improve  their work habits, have greater output, and thus, a greater value to an employer. Often times, they get paid more because of it. If not, they usually leave and seek alternate employment where their compensation is better suited to their skill(s).

Going back to my lottery example. First off, it is flawed because it is not the same as comparing people’s working habits. However, the decision to take a risk is similar. Of course, there will be people who never improve their work habits. Either because they do not care, or do not have the skills/education/intelligence to do so. That is to say, for a variety of reasons, there will always be poor people in America. Always have been. Always will.

But, in the lottery example, the gap between the rich and the poor grew. In this example, because 9 of 10 people who considered pooling lottery tickets did so, and won. They all got richer. In the example I started with that everybody decries, it is no different.

Yes, the gap between the rich and the poor has grown. And why? People are getting richer. That’s a good thing. I did some research on it a few months back, and you can see it here.

My first job in college, and my first job out of college paid the same salary: $25,000 a year. We’ve all been there. Freshly minted degrees, a bunch of debt, and bad habits we need to kick. Structurally, there will always be classes of kids who graduate from college, high school, or don’t even graduate who get a first job. Statistically, unless they studied accounting or something with high-dollar market value, there will always be scores of new job entrants who cannot expect to earn that much money.

Once they find those jobs, the onus is on them to perform and warrant raises and promotions. People who do poor work often receive little sympathy from anyone other than the ones that love them.

Life isn’t a lottery in that respect. Walter Williams puts it this way:

Why do some people earn higher income compared to others? Are they simply “winners in the lottery of life,” as Rep. Richard Gephardt (D-Mo.) puts it? Nothing can be further from the truth. People are different. Among the ways we differ are: ambition, skills, aptitude, perseverance, intelligence and physical strength.

Why do sports and movie stars make more than porn stars? Well, Tiger Woods and Charlie Sheen might have unintentionally blurred this comparison, but, put simply, there is a greater supply of people qualified to meet the demands for the smutty movie industry. Less people can do what Charlie Sheen and Tiger Woods have accomplished, their glaring personal flaws aside. There’s a surplus of pretty blondes who can star in smutty movies, and a shortage of black and asian golfers who can set records at St. Andrews. Simple story.

This isn’t to say that there are good, hard working people who don’t, as Rep. Gephardt put it, get dealt a bad draw “in the lottery.” My grandfather was born in 1910, and his dad died when he was about 14. He had to quit high school and never returned. He worked in factories until the day he died at the ripe young age of 88. Sure, he got promotions, and more pay, but those were based on his hard work and skills.

His children (he had 4) nearly all graduated from college. Three of them earned the highest degrees in their fields, and the one that did not has led a very successful and fulfilling life, as far as I can tell. My dad had to work summers to pay for Catholic high school. He had to take out loans for college and law school. He killed pigs in the summer to pay for it at the local Decker’s meat plant.

Similarly, that work ethic was instilled in me as a child. I worked at the local hockey rink, delivered papers, worked at Eddie Bauer, a local plastics factory, restaurants and such. Later in life, I realize that I my family didn’t need me to work for the money. My parents just preferred that I learn how to work. I believe their parenting has served me well. I graduated from college, have a nice job. Same goes for my sister Betsy. Ali, I presume, will be no different unless she chooses to stay in Scotland and be the wife of a sheep herder. Even then, if she’s happy, I’m fine with that.

I am empathetic to the working poor. I’m happy our economic system affords them both one of the highest standards of living and one of the cheapest ones. But you cannot legislate poverty away just like you cannot legislate homelessness away. People are different. They’re from different backgrounds, gene pools, and they learn different things.

And this is not to say that people don’t move up (or down). They do:

There’s considerable income mobility in our country. According to Internal Revenue Service tax data, 85.8 percent of tax filers in the bottom fifth in 1979 had moved on to a higher quintile, and often to the top quintile, by 1988. Income mobility goes in the other direction as well. Of the people who were in the top 1 percent of income earners in 1979, over half, or 52.7 percent, were gone by 1988.

Of course, we should do all we can to make America a place where anyone can succeed. What America, shouldn’t be, is a place where we try and force everyone to succeed. Life just doesn’t work that way. President Obama referred to that in his State of the Union address. It’s true. America is a place like that. Most Americans aren’t opposed to helping people, either. But they do draw the line eventually. In the end, people will have to do what it takes to succeed. Success is rarely given to anyone, except maybe Bristol Palin or Jack Buck. Even then, they still had to work hard to be successful, given that American’s don’t typically like people succeeding without merit. (Except maybe some political familiy legacies that I won’t name.) At the end of the day, it’s not the job of the government to cure income inequality. And even if you wanted to, how could you?

FURTHER READING:

Thomas Sowell – Is “Income Stagnation” an Economic Myth?

Sowell: Perennial economic fallacies

Williams: Results versus process

Reynolds: Inequality of what? when?

Cafe Hayek: The Reality and Relevance of Income ‘Inequality’

Cafe Hayek: Why inequality is a red herring

Boudreaux: Bill Gates Has As Much Control Over My Life As I Have Over His

(Reader Submitted) Gary North: Thomas Sowell and Walter Williams: Still Out of Step After All These Years

(Reader Submitted) Haskins: Getting Ahead in America

Haskins: The Rise of the Bottom Fifth

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