The distribution of income is frequently cited as a measure of a country’s welfare. Recent increases in income inequity in the United States (especially prominent since the 1970s) have caused the media and politicians to attack a variety of policies implemented over the last forty years.
While these policies make convenient scapegoats, the story of income inequity is more simple and more fundamental than politicians want to admin. Unfortunately, we cannot solve the issue unless we understand it.
The first mistake in public discourse is to view income inequity on a national basis. To understand why, consider a simple example with two neighboring towns:
- Richtown – This town of 20,000 includes mostly doctors and professionals whose income is between $70,000 and $120,000
- Poorville – This town of 80,000 includes a variety of low and middle class workers with incomes ranging from $20,000 to $70,000
When the story starts, the income inequity in the two towns is relatively low. The range of income in both towns is only $50,000. Over the next 40 years, let’s assume that jobs and salaries stay exactly the same. However, let’s assume that people move from town to town. After 40 years,
- Richtown now includes 10,000 doctors and businessmen (earning $70k to $120k) and 10,000 low and middle class workers (earning $20k to $70k)
- Poorville now includes 10,000 doctors and businessmen (earning $70k to $120k) and 70,000 low and middle class workers (earning $20k to $70k) Now the range of income in both communities have “exploded”, doubling from $50,000 to $100,000.
However, the income of each individual is unchanged. Looking at income inequity on a national basis is like looking at the income inequity in Richtown. Global trade has caused jobs to move across global boundaries like the citizens in our example. Global inequity, in fact, peaked in the 1970s (Wikipedia).
The “miracle” of US income equality was really the density of “haves” seen in Richtown in our first example. This phenomena can be seen visually in Hans Rosling’s fantastic TED Talk (fast forward to time 7:15 and especially around 7:55 when he shows us 1970). I’ve captured the two graphs here:
Global equity has actually improved in the last 40 years so the globe’s been doing something right. What is that force and why is the US getting hurt?
The explanation is simple and important. Unless you believe that the US has a racial or cultural advantage, it is inevitable that the top third of US income will eventually mirror the top third of the world, the middle third the middle, and the bottom third the bottom. Since the OECD is that blue area on the right (meaning wealthy) and the United States is disproportionately wealthy even within that bubble, the US has a lot of ground to lose. In many ways, an increasing income inequity on a national scale is inevitable.
The force behind the trend is, ironically enough, the amazing things that globalization has done for global equality. The standard of living in China and India continue to rise and only the most selfish would hope to end that trend. So the question becomes what, if anything, can we do about it?
Factors of Wealth
The answer to the question begins with an understanding of what contributes to incomes. (coming soon)