Friday, September 2, 2016

Income Inequality

All four (yes, four) Presidential candidates have mentioned “Income Inequality” as an important campaign issue.  Some seem to grasp what it means, but few have discussed its causes and none has proposed specific ways to address it.  Here is what Hillary Clinton has to say, here is what Donald Trump has to say, here is what Gary Johnson (Libertarian candidate) has to say and here is what Jill Stein (Green candidate) has to say.  If you read what they wrote on their campaign’s web sites, you will notice that none of them really addresses the issue head-on.  On the other hand, one-time Democratic candidate Bernie Sanders did address the issue head-on.

The Meaning of Inequality

The easiest way to explain Income Inequality is by example.  The average CEO earns 300 or more times as much as the average employee of the same company.  But that factoid is not exactly what inequality means as a political issue today.  The average CEO 30 years ago earned 30 or 40 times what his average worker earned.  The explosive growth over time of the disparity of CEO pay to worker pay is the meaning of Income Inequality as a political and economic issue that concerns us today.  Paul Ryan, the current Speaker of the House – a denier of the ills of inequality – has framed the argument this way: "we don’t want equality of OUTCOMES, we want equality of OPPORTUNITY."  However, no one – not even the Democratic-Socialist Bernie Sanders himself – is asking for equality of outcomes, equality of income, no one.  Maybe Karl Marx, but no one in the USA, not in the last 100 years.  Nevertheless, some politicians would have you believe that the issue is: any degree of inequality vs perfect equality.  But that is not the issue at all!  The real issue is the persistent uptrend of inequality and the subsequent increase of poverty.

Here is a short video (about Inequality of Wealth, but the argument is the same) that should make the issue clearer.

Measuring Inequality

So, if the issue of Income Inequality is really about the degree of inequality – comparing yesterday’s inequality with today’s inequality, comparing American inequality with other industrialized economies' inequality – there must be a way to measure inequality.  And there is.  It is called the Gini Index (or Ratio or Coefficient).  Read about it here and see what a Gini graph looks like, too.  Suffice to say, the Gini Index encapsulates a society’s degree of inequality into a single number.  From one extreme to the other, a Gini of 1.000 means that one member of society has all the income (a Pharaoh and his million slaves), whereas a Gini of 0.000 means that society’s income is distributed absolutely equally among all its members (Utopian Socialism).  There are no ideal or perfect or even good Gini numbers; there are only trends and comparisons.  But we know that the degree of inequality in our society is too great.  We know that because too many of us are in poverty – too many of us are homeless and too many of us are unemployed or underemployed – in this the richest country in human history.  Here (1, 2, 3) is a study of the Gini Index that may be worth your time.

The Causes of Inequality

We live in a global marketplace.  And for decades, American multi-national corporations have “outsourced” tens of millions of middle class jobs to nations whose labor is cheaper than American labor, much cheaper.  This has grown their corporate “bottom line” (net income, which is revenues minus costs), because where the cost of labor is less, net income must be more.  Corporations’ profits are at an all-time high, and they owe a large portion of their success to reducing the cost of their labor by outsourcing it.  At the expense of the American worker.

We also live in a world of huge technological advances.  Computers and automation have made our workers incredibly more “productive” (productivity = output per worker-hour).  Until 1970, workers’ wages kept in step with the growth of productivity.  As technology leveraged worker productivity, those workers who learned how to use the technology to help them produce more were rewarded with higher pay.  And those who created the technology (EDP, DP, MIS, IT departments) were also well rewarded.  But the other side of enhanced productivity (more output per worker-hour) is that the same quantity of output can be accomplished by fewer worker-hours – i.e., job-loss.  Ultimately, technology breaks down the complexity of jobs into simple tasks, another reason for lower pay and fewer workers.  None of this is really new as we have felt the disruptiveness of technology since at least 1811, the time of the Luddites.

Money wants to be efficient.  Other things being equal, money will find its way into the pockets of people who don’t have a high tax rate, as it is inefficient to give money to those who will have to surrender most of it to the taxing authorities.  If a CEO has a 90% marginal tax rate, why would the firm's Board of Directors give him a $1,000,000 raise when he could only keep $100,000 (10%) of it; whereas they could give one hundred middle managers $10,000 raises, and they would each enjoy $7,000 (30% marginal tax rate) of it?  A high tax rate on top earners encourages rewarding those with lower tax rates, those with lower incomes.  On the other hand, a low tax rate on top earners encourages corporations to reward their CEOs.  Recent American economic history is the story of low tax rates on top earners; so, money has found its way into the pockets of the already wealthy, and they have saved and invested it rather than spending it.  This is the reason behind Wall Street booms (what else would a CEO do with his millions but invest it in the stock market?), and it is the reason behind recessions (because folks at the bottom, who would spend every dollar they earn, are not receiving and spending that money).  Low tax rates for top earners causes inequality to grow; low tax rates for top earners causes poverty (homelessness, unemployment, underemployment).  Tax policy matters.

So, to be crystal clear, the mere fact of some Income Inequality is not the problem.  The degree of inequality – today’s inequality compared with yesterday’s inequality, and our inequality compared with other nations’ inequality – is the problem; but ONLY because it is causing unnecessary human suffering because of the increase of poverty (homelessness, unemployment, underemployment).

And, as simple inequality is not the problem, we will waste no more time trying to fix that.

“If only everyone were employed, doing work that they love, that they are well suited for, that provides them with a decent living.”

Ah, yes.  If only.

As long as we tax high earnings at a low-rate, CEO pay will rise at the expense of everyone else.  As long as we outsource jobs, greater domestic unemployment will result.  And as we crawl into the brave new world of the technologic future, we will experience more and more labor being performed by machines, and more and more unemployment.  HOWEVER.   It is possible to craft a tax policy that is more rational and more efficient; we did it for 50 years.  It is possible to minimize outsourcing with policies that reward domestic employment and penalize foreign employment.  And laws can be written to re-direct the rewards of advanced technology and its enhanced productivity to the whole economy, not just to CEOs and major stock holders.  On the other hand, we need to “man up” against the assault on human labor that technology brings.

Some "Solutions" to Inequality

Frankly, I don’t give a fig how unequal we are, what our Gini Index looks like.  But I do care about poverty (homelessness, unemployment, underemployment), I don’t like it and there is no reason for our nation to tolerate it.  I do care that we have a world-class educational system, available to every American.  I do care that we have a world-class health-care system, available to every American.  I do care that our roads, our bridges, our dams, our electric grid, our broadband, indeed our entire so-called “infrastructure” be world-class, and available to every American.  I also care that we pay for what we buy – and that means higher taxes!  I understand that you can’t get blood from a stone, so we can’t tax the poor and even the middle class for these “luxuries.”  But we sure can tax “the people with the money” (Warren Buffett’s immortal phrase), the billionaires and the multi-millionaires, without any real inconvenience to them (they will still be billionaires and multi-millionaires).  So, let’s talk about fixing what’s broke!

Government
  • Tax Policy: As I have hinted above we need to tax "the people with the money."  This means a more progressive (higher tax rates on higher incomes) federal income tax, it means taxing capital gains as regular income, it means the re-establishment of an estate tax on large estates, it may even mean taxing wealth.  For more detail, please see my post on Tax Reform.
  • Minimum Wage: We should have a national Minimum Wage and 50 state-wide Minimum Wages.  The national minimum wage should be an absolute minimum and it should be tied to inflation.  It should be a bare “living wage” for the poorest of states, perhaps $10 or $12 / hour (as of 2016).  Those states that want a higher minimum should put one in place: 50 experiments for us to learn from.  The biggest objection to a minimum wage is the economic theory that many people at the bottom will lose their jobs.  But American economic history does not support that otherwise sensible theory, especially if a minimum wage is phased in over time, to give small businesses a chance to adjust.  Raising the wages of people at the bottom of the economic pyramid energizes an economy: all those folks with more money that they do spend.
  • Illegal Immigration: The problem is not a problem of immigrants, it is a problem of substandard wages competing with decent wages, it creates unemployment among our citizens.  The solution to this problem is a crackdown on employers who pay less than the federal/state minimum wage to illegal immigrants.  Given the choice of paying a minimum wage to an American citizen or an immigrant, an employer will hire the best worker he can find.  If that best worker is Mexican, then it is the American worker’s fault he is not hired.
  • Guaranteed Minimum Income (GMI): This "Socialistic" idea has been proposed by liberals and conservatives alike since the founding of our nation.  If the overall demand for workers outstripped the supply of workers, we would not need such a thing; but as technology takes more and more jobs, the demand for human workers inevitably declines.  The minimum income is a floor to keep any of us from starving.  A guaranteed minimum income would probably eliminate the need for welfare, unemployment insurance and Social Security.
  • Trade Agreements and Tariffs: Raising a tariff on a foreign-made product makes it more expensive here and less likely to sell here; it benefits the domestic manufacturer, and it benefits domestic workers in that industry (because they will have jobs).  But it harms foreign manufacturers trying to sell to us.  Countries whose manufacturers suffer from this tariff typically retaliate with their own protective tariffs on their imports.  This makes it harder for an American manufacturer to compete with their domestic manufacturer.  This is a “Trade War” and you can win and lose in the same breath.  The opposite of a Trade War is Free Trade, a tariff-free agreement.  Both scenarios have winners and losers.  There is no “right mix” of free trade and tariffs.  The only thing that you can say is “free trade benefits consumers and other countries, and protective tariffs benefit domestic corporations and sometimes workers.”  Free Trade is a long-term solution while tariffs are a short-term solution.  The United States has lost tens of millions of manufacturing jobs to recent Free Trade agreements.
  • All of these "solutions" will increase prices, but even more people will be able to afford them.  And money in the hands of more people grows the economy (GDP).
  • Frankly, we need to plan for the future; technology will continue to do more of what it began to do decades ago – undermine the need for human workers.

Business
  • Profit Sharing: In traditional Capitalism, there are owners (Capital), workers (Labor) and consumers.  Owners and workers are natural adversaries: each wants more of what the other has.  As long as they compete with one another as enemies, someone (Labor) must lose.  Profit sharing can blur the line between owners and workers, if it is implemented properly.  And it used to be a quite common perk for white-collar workers nation-wide.
  • Shorter work-hours, shorter work-weeks: As technology continues to advance, the demand for human labor will continue to recede.  We could either employ fewer workers or we could ask them each to work less, an easy way to keep us at full-employment.  This will of course force us to consider a minimum wage as a minimum weekly wage, not as a minimum hourly wage.  Unfortunately, there are many people who do not handle down-time well, as they bathe their lives in alcohol and TV and drugs.  These are real problems, best addressed up front by that miraculous educational system that will make philosophers of us all.  Fewer bars, more Adult Education, more Meetup groups.
  • Collectives, Co-operatives: Sometimes a traditional hierarchical capitalistic corporation just can’t make it.  Sometimes, workers can take over the company and run it themselves for their own collective benefit (democratic capitalism).  People in charge of their own destinies can work wonders.

Individuals
  • Unions: As long as we have too many (Supply greater than Demand) commodity laborers, Unions can play an important role.  A commodity laborer is an easy-to-replace cog in a machine; he needs to fit – not to stand out, not to excel.  Most commodity labor doesn’t require much education or a serious skill-set.  Without unions to represent them, commodity labor will typically face low wages and high unemployment.   Unions can win them better compensation than what Supply and Demand would generate.  The best long-term defense against the need for unions is a shortage of workers for any given job, where the demand for labor outstrips the supply.
  • Education and Training: Little by little, commodity jobs are disappearing.  Education and training are medium- to long-term answers to the loss of a commodity job.  Factors to consider are: the likely demand for such skills in the near and distant future, and your own inclination and aptitude for such work.  If you were a victim of a massive corporate layoff, government should compel your ex-employer to pay for your training.
  • Emigration: If your state doesn’t offer you work that uses your skills and pays well, pack up and move.  Another state.  Another country?  Learn new skills.
  • Children: Given enough time, technology (automation, computers, artificial intelligence, robots) will consume most of the need for human workers.  The planet will need fewer people to work at fewer and fewer jobs.  This is especially so for low-skill commodity-labor.  We all want to be economically prosperous, but the more people there are, the less likely they can all have useful paid work and thrive.  There are a dozen terrible ways to check human population growth: wars without end, famine and starvation, disease, government coercion.  There are a few good ways to reverse the growth of a society's population: first, educate your girls!  And let governments nudge all of us into better behavior by subsidizing small families and eliminating the subsidy for larger families.  Be fruitful and Multiply is over!  The Future will never work unless we can get a grip on human population growth.
Keep in mind: none of these “solutions” were designed to combat inequality, they all were designed to combat poverty (homelessness, unemployment, underemployment).  But, when you fix poverty, you can’t help but “fix” inequality.  And God knows my so-called "solutions" are only a few bare ideas that need lots of thought and detail before we can really judge their merit.