Sunday, June 1, 2008

Income inequality rising, and the bullshit that ensues.

I've been a devoted follower and cynic of the Progressive Intelligence and Opinion blog for many months now. There are many things that we disagree on, and a few things that agree on. This post is about one of the things we disagree on. Really disagree on. His new post, "Mindblowing inequality isn't just unfair but inefficient!"

(Never mind the fact that "mindblowing" isn't one word)

From what I've read about him he was born in the U.S., grew up in Germany, and moved back here, fully indoctrinated with that good ol' European socialist attitude.

He's had many-a post about the travesty of income inequality. With this blog, I'll show that not only are most claims of income inequality and wealth distribution grossly overstated, but that rich people being rich doesn't cause poor people to be poor.
Imagine that.

Here are some income distribution facts from the U.S. Census Bureau.

Household Income Group % of Total Income Income Range
Lowest 20%------3.4%------$0-18,500
Second 20%------8.7%------$18,500-34,738
Third 20%--------14.7%-----$34,738-55,331
Fourth 20%------23.2%-----$55,331-88,030
Highest 20%-----50.1%-----$88,030 and up

The top 20% has roughly 14 times the total share of money than the bottom 20%. For a comparison, in 1971, the top 20% had only 11 times the share of total money than the bottom 20%.

But why is this? Is the same old saying "The rich get richer and the poor get poorer" true? Well, while a rich person has more money to invest (more on savings amounts later), and thus more of an opportunity to invest and earn more interest than someone at the bottom, income inequality has not risen by that much over the course of the 33 years in question.

The overstating of income inequality in our country is due in large part to two factors:

1. Measurements of inequality don't take into account in-kind transfers (medical assistance, food stamps, etc.).

2. The inequality expressed was taken from one point in time.

There are other things that come into play, such as immigrants and mindsets.

The steady increase in income inequality in recent decades is due largely to increased immigration. Between 1970 and 2000, foreign-born population in our great country increased from 9.6 million to 31.1 million. The percentage of the U.S. population that is foreign-born increased from 4.7% in 1970 to 11.1% in 2000.

Immigrants' median annual income is about 15% lower than native-born Americans. This is why the gap between the top and bottom groups has increased.

However, income is even more equally distributed after taking out taxes and in-kind (food stamps, medical assistance, etc.) transfer payments. The current measure of inequality is skewed by this lack of inclusion.

Higher incomes pay a higher percentage of their income in federal taxes, but in-kind transfers are received disproportionately by lower income households.

Another way that inequality is overstated is that the distribution of money income expressed above overstates the actual degree of income inequality by focusing on income distribution at one point in time.

A large chunk of the people in the lowest 20% of households are young people at the start of their careers. Most of these young people will move into higher income groups as their careers progress and they develop more human capital (developed ability that increases a person's productivity).

If career incomes were compared or if incomes were compared for households at the same career stage the gap between the highest and lowest would be much smaller.

Wealth distribution is also overstated. This is caused by the measure of wealth distribution comparing different people at different career stages. Comparing the wealth of a 60-year-old to the wealth of a 25-year-old overstates the inequality.

Wealth distribution is also overstated because human capital is NOT included in measuring wealth. For most people, their human capital is the most valuable asset owned. An example would be a 25-year-old recent Harvard Law School grad may have very little accumulated wealth in terms of physical assets, but the Harvard Law degree is very valuable human capital.

These are the causes of the continuing income inequality, which people might find interesting.

1. Natural ability: Some people are born with skills in math, music, or athletics. A person with a high level of marketable natural ability may earn a higher income than a person with a lower level of natural ability.

2. Human capital: Mean earning increase as education levels rise, but, again, a degree in chemical engineering and a degree in elementary education will have different earning potential in the marketplace.

3. Work and leisure choices: Contrary to popular belief rich people don't just sit back and make money off the backs of hardworking proletarians. Most people who've accumulated much wealth and have high earning potential have worked incredibly hard for it.

4. Risk taking: People differ in their willingness to take risks. An example would be that self-employed entrepreneurs make up a disproportionately large share of society's millionaires, but they also make up a disproportionately large share of those filling for bankruptcy.

5. Employment discrimination: This occurs when employees make hiring, promotion, and pay decisions based on factors unrelated to employee productivity.

6. Luck: A person can have good luck (winning the lottery) or bad luck (suffering a debilitating illness). Most people experience a mix of good and bad luck.

There will always be poverty, because honestly a lot of it has to do with how impoverished people think. They don't seek out wealth, but rather they tend to think that wealth shows up on its own. Wealth doesn't just come up and bite you on the butt, contrary to popular belief it seems.

Wealthy people aren't born trust fund babies 100% of the time; in fact it's quite the contrary. 90% of all millionaires in the U.S. are first generation, which means they left the cave, killed it, and brought it home. Their thought processes are different from people living in perpetual poverty. If you wants some more information about what the typical millionaire is really like check out Thomas J. Stanley's books The Millionaire Next Door and The Millionaire Mind.

Poverty isn't the fault of government and it's certainly not the fault of rich people. The majority of the problem rests with the people. The government and the already-wealthy are just easy targets.

The wealthy also differ in their savings rate. The average millionaire focuses on saving, investing, and building wealth, and not on spending their money on frivolous items. It is much easier for the wealthy to save money, as they need only save a small percentage of income rather than the larger chunk that must be saved by people with lesser incomes.

So again, don't buy into the fact that millionaires are automatically evil. Most are self-made, first generation, good-hearted people who live in modest houses, drive used cars, and take the time to learn about wise investing.

I'll leave you with this: Making rich people poorer doesn't make poor people richer.

So take your God damned socialism back to the Old World, buddy.