I’m with Melinda Gates when she says every life has equal value – at birth. We are all created equal. But in our society as adults, we don’t don’t end up as equals from an income and wealth dispersion standpoint as adults – and that’s a good thing. There was a recent survey [BusinessWeek] in which respondents were asked about their views on income equality (or lack thereof) in the US. While the traditional media outlets highlighted the “shocking” and “galling” outcomes, I take a contrarian view here and say the results should not be unexpected. And while wide or widening income disparity is undesirable, are there societal benefits to income disparity that we’re not giving credit for?
Study: Income Inequality in America
The results were instructive but shouldn’t come as a surprise. The chart below highlights 3 key data sets:
1) Actual Distribution of Wealth
2) Estimated Distribution of Wealth (by Respondents)
3) Ideal Distribution of Wealth (by Respondents)
The Wealth Gap: Real and Perceived
I couldn’t help but notice the adherence to the 80/20 rule here on the actual distribution. If you haven’t heard of this before, the 80/20 rule manifests itself in virtually all facets of life, especially in a capitalistic society. In your company, 80% of your revenues probably comes from just 1/5 of the top-selling products. 80% of your global income probably comes from just 1/5 of the countries you sell in. My blogging traffic and income? About 80% from my top 20% of content. And so on. This isn’t to say the 80/20 rule is “good” or “fair”, but it’s actually what one would expect in a typical data set like this, so it shouldn’t have come as such a shock.
Is Income Inequality Fair?
Well, I guess it depends on how strongly you view risk-taking, investment and meritocracy vs. a society where everyone is equal. It’s tough to ignore that many European countries have much better income equality and their citizens report a higher level of overall satisfaction in life than many Americans. They pay higher taxes such that income disparity is less severe, and they enjoy increased government services. The spread between what a store clerk and a doctor make is much smaller than in the US. But check out what’s going on in France now and how a US Austerity program will look. See, when a government makes promises it can’t keep and the public is so used to living off the public teet, it is very painful to ween the populous off.
In trying to make everyone “equal”, so many people are used to doing the bare minimum and milking the system as opposed to actually going out and working their butts off, creating things, creating jobs, creating wealth.
We already know those who make the most in the US shoulder the majority of the tax burden. And the impending tax increases are going to target solely to top earners. Healthcare Reform is targeting white collar employees. Most of the (failed) bailout efforts diverted funds to middle and lower income Americans. Heck, 47% of Americans pay no federal income taxes, yet they derive the same level of benefits as the people paying the bill, from Defense to various branches of government to federal infrastructure, emergency services and so on. But that’s on the tax side. How about the income side? Is it fair that so few earn so much while so many earn so little?
Income Inequality Promotes What Made America Great
People without money want to earn more money. People who see entrepreneurs making it big want to be business owners themselves. People who want a larger bonus and promotions work harder. People who are content with where they’re at don’t exert the same aggressive actions to better themselves financially. Capitalism, risk, and the prospect of increased rewards is what drives innovation and personal performance. This is what made America great, and yet the media and politicians can’t bash it enough (while they enjoy the benefits). Even though I’m not a top 5% earner, and I probably never will be, I’m glad there was incentive for people to get there, because they’ve enriched my life through innovation, employment, providing a tax base and through other untold benefits.
The problem with income inequality is that when the gap is too wide, class warfare ensues. We’ve seen throughout history where the common-folk with the pitchforks come out en masse against the filthy rich and the ruling elite – and it ends badly. Where that level is in America is tough to say. The rhetoric out of Washington is certainly fueling some hatred of the rich and the business leaders in America. But surely, a little incentive goes a long way.
What Are Your Thoughts on Income Inequality in America?