Inequality is Shrinking, Does Anyone Care?

inequality Income and wealth has traditionally waxed and waned along with the economy. The brutal wealth destruction that took place in the last six months means the rich has suffered a larger drop in their wealth compared to the rest of society, both relatively and absolutely.

Since most of the wealthy hold a disproportionately large share of stocks (the wealthiest 1% held more than half of public traded stocks in 2004), it’s no surprise that the current decline in the stock market has lead to a large decline in the wealth of the rich. Even middle-class families owning less than $10,000 in stocks (which is more than 65% of the group) are much less affected by fallen prices. Collapsing assets are also affecting the rich much more, since lower income classes own little, if any.

Perhaps as a way of placating populist anger against a slew of corporate mis-behaviours that’s blamed on the wealthy and powerful during this downturn; numerous news outlets have reported signs of falling wealth gap between the rich and poor. It’s not a bad tranquilizer: the rich are getting poorer at a more rapid rate.

Gimme the numbers

widening-wealth-gap-2009During the last three decades, the dizzying speed of wealth accumulation had led to rising wealth inequality in most societies. Developing countries and previously communist societies in particularly, has seen the largest income disparity. Russia, China, India, and Brazil now top the charts. But even a society as homogenous and egalitarian as Japan has seen a shrinking middle class and an income gap that has risen twice as fast as most other OECD countries.

In the US, the statistics are no less glaring. Numbers show that in 1979, the top 0.1% Americans earned 20 times the income of the bottom 90%. This number climbed to 77 times in 2006. The tide is now turning. During the last three downturns, the share of income held by the richest 1% of Americans obligingly declined. Economists are now predicting that in the next year or two, the share of income by the richest American will fall from an estimated 23% or 24% in 2007, to 18% to 19%.

Different point of contention

Many have argued the rising public anger is over the widening wage gap over the past few years. This is slightly off-base. A study completed with the participation of four think tanks showed that Americans are not so much looking to shrink the wealth gap as they are looking to improve their own economic standing. In other words, this study tells us that the majority of Americans are more concerned over improving their economic mobility compared with improving income inequality.

“We are by definition a country of strivers, people who look ahead, who think that ambition, hard work and individual drive is what defines economic success as opposed to other factors like the state of the economy,” said John Morton, economic policy director for Pew.

“People are saying, ‘We don’t begrudge the wealthy for what they’ve gotten. What we care about is that everyone has an equal chance of making it, and government policy ought to focus on making sure people get to the same starting line, as opposed to tearing down the wealthy.'”

Knowing this, it’s easy to see how much of the discussion over economic disparity and income inequality result in little agreement. During the 08 election, Obama and McCain spat over just exactly how economic progress is achieved. Obama attacked McCain’s trickle-down policy as a continuation of the Bush era, which the poor and lower income families benefitted little from. McCain argued that the widening in wealth gap is the inevitable result of income growth, so ideas on tax increases and more social spending are fruitless in changing the pattern. End of the day, they are debating on two different problems, and it’s hard to declare a winner when the issue at hand differs.

Same playing field, different rules

Some point to the election of Obama as a result in part of mass dissatisfaction of the widening wealth gap. The range of grievances is wide and varied, some are justified and others offspring of populist myths. One vocal objection points to the direction of the corporate fat cats. Already dismayed by their sickening compensation packages and golden parachutes, the public are now confronted with a heads-I-win-tails-you-lose situation.

To the public, greedy financiers have gambled like drunken sailors during the run-up to the credit-crunch. In the process of doing so, they put up money they didn’t have as collateral, and lost it all. The government has since then stepped in with public money to save the day. Through implicit or explicit policies, bailouts have been given out to those supposed champions of capitalism.

The public doesn’t want to hear about systematic risks or the detrimental effects of a frozen credit system (unless they try to get their houses re-mortgage or new car financing). What they see is a government becoming more beholden and more tightly intertwined with the too-big-to-fail banking industry, and the increasing threat this poses to the interests of the public. What they see is hypocrisy at play. While the majority of Americans accept the bargain that a meritocratic, sink-or-swim, and capitalist society means little cushion in economic downturns like this, they see a different set of rules applied to these failed executives. The public is enraged over the selective application of “socialism”.

To be more like you

No matter how pessimistic your outlook might be for the near future, there’s little doubt that sooner or later, the economy will recover. And along with that, so will stock and asset prices – domains of the rich! However indignant it may be over the state of affairs today, when the bullish market returns, the middle class will feel little compunction by throwing their hats in the ring.

Thorstein Veblen coined the term “conspicuous consumption” over a hundred years ago as part of his commentary on the American economy. In his view, human instincts of “emulation, predation, workmanship, parental bent, and idle curiosity” drive the process of ongoing social, as well as economic evolution.

He’s not wrong. One way or another, we are all complicit in this consumerist debacle. And we are spreading it not only to the developing world – Russia, India, China, and Brazil are all developing based on the American model, we are also spreading it the American poor. We should not forget that the subprime crisis originated in the Congress, where the “home ownership for low-income families and minorities” initiative was a social policy push.

The road to hell is paved with good intentions. Not realizing the dangerous implications of their do-goodness, and driven by their own middle-class sensitivities, the Democrats dangled a piece of unattainable and absurdly expensive forbidden fruit named “Emulation” in front of poor families. Clamouring for the appearance of a better life, they dutifully bit. Without the politicians, banks would’ve had little sub-prime mortgages to package and sell as securities.

End of the day, we have to realize that unlike Europe, egalitarianism was never part of the social contract in America. No matter how vocal the populist chant might sound, all will be quiet on the western front again once prosperity returns. American’s biggest fear is any kind of obstruction that blocks their climb up the socio-economic ladder. Their current angst over the issue of equality is more about opportunity, and less about outcome.

End of the day, it’s not socialism Americans want. It’s a better working capitalism.

picture source: ~DJBoraP

Comments on this entry are closed.

  • http://www.LearnFinancialPlanning.com Shaun

    Rather than focus on the fact that there are more rich people than ever before, we should understand that this doesn’t happen like we’re eating some sort of static economic pie. Warren Buffett isn’t rich because he’s made the lower class 40-something billion poorer — he’s rich because he’s made himself 40-something billion richer.

    Economics is certainly not a zero-sum game. It’s not a pie that we should all have generally the same slices of.

    Given that, economic inequality would be fine even if the top 1% owned 75% of the economy — so long as the lower and middle classes inched upwards as well. I simply can’t think of, well, any justification for believing opposite. If we care about income inequality, it should be because we care about the plight of the lower class — inequality is not wrong, in and of itself.

    Anyway, just a few thoughts. This is coming from someone with a middle-class background and (almost assuredly) a middle class future. 😉

  • http://www.LearnFinancialPlanning.com Shaun

    Rather than focus on the fact that there are more rich people than ever before, we should understand that this doesn’t happen like we’re eating some sort of static economic pie. Warren Buffett isn’t rich because he’s made the lower class 40-something billion poorer — he’s rich because he’s made himself 40-something billion richer.

    Economics is certainly not a zero-sum game. It’s not a pie that we should all have generally the same slices of.

    Given that, economic inequality would be fine even if the top 1% owned 75% of the economy — so long as the lower and middle classes inched upwards as well. I simply can’t think of, well, any justification for believing opposite. If we care about income inequality, it should be because we care about the plight of the lower class — inequality is not wrong, in and of itself.

    Anyway, just a few thoughts. This is coming from someone with a middle-class background and (almost assuredly) a middle class future. 😉

  • http://investoralist.com Dana

    Shaun,

    You have just summed up the quintessential American perspective – at least I hope you’re American:), on equality. While Europeans work to attain an equality of outcome, Americans are much more concerned with the equality of opportunity.

  • http://investoralist.com Dana

    Shaun,

    You have just summed up the quintessential American perspective – at least I hope you’re American:), on equality. While Europeans work to attain an equality of outcome, Americans are much more concerned with the equality of opportunity.

  • http://www.LearnFinancialPlanning.com Shaun

    Hehe, yes, I’m very American. ::grins:: Coincidentally, I’m eating a piece of apple pie right now. 😉

  • http://www.LearnFinancialPlanning.com Shaun

    Hehe, yes, I’m very American. ::grins:: Coincidentally, I’m eating a piece of apple pie right now. 😉

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  • http://www.web2carz.com/bad-credit-car-loan Bad Credit Auto Loans

    Well, the fact's are that there are going to be people on the top and the bottom, their is no way around it, at least in our current system. The question is what do you do with the people at the bottom, because they're always going to be there. The system guarantees that.