“And as Jesus passed by, he saw a man which was blind from his birth. And his disciples asked him, saying, Master, who did sin, this man, or his parents, that he was born blind? Jesus answered, Neither hath this man sinned, nor his parents: but that the works of God should be made manifest in him.” John 9:1-3
One of the friendly readers of this blog asked why a wealth gap is bad thing. After all isn’t it just the natural byproduct of an open free market economy? In other words, the rich get richer and to poor get poorer. The other implied point is that wealth is how we keep score. Those that work hard and make the sacrifices to accumulate wealth shouldn’t be “punished” for their efforts through higher taxes because others were unwilling to make the same sacrifices. In other words, the only reason the poor are poor is because they aren’t willing to work as hard as the rich.
So let’s take a look at some of these concepts.
It’s good to have a wealth gap because that indicates that the free market economy is working.
When you dig into this from an economic point of view, a wealth gap is not a good thing. Economists talk about “human capital” as a component of every economic model. In theory, free markets will allocate human capital to the best use by placing a premium on the work that the market values most. But that theory assumes equal access. In other words, economies thrive when access to training, education, and opportunities is freely distributed across the “human capital”.
In the real world of our economy, however, there isn’t equal reward or access to opportunity. Women get paid less than men. The tall get paid more than the short. Light-skinned people get paid more than dark-skinned people. The better educated get paid more that the less educated, but even access to education isn’t fairly distributed. The wealthy have access to the best education. The poor get the worst education.
The wider the wealth gap becomes, the wider the opportunity gap becomes, and the less efficient the economy becomes in maximizing the talent in the population.
Wealth is how our economy fairly rewards effort, talent, and skill.
The wealth of half of the richest people in our society is based on inheritance according to Dennis Gilbert in The American Class Structure in an Age of Growing Inequality. In Outliers, Malcolm Gladwell dissects success and by inference self-made wealth. What he discovers is that it is basically being in the right place at the right time with the right skills and resources. The great wealth generated by the PC revolution, for example, is concentrated in a cohort of men born within three years of each other. Those that were older than that were already working for other companies when the window opened for starting the new companies that became the foundation of an industry. Those younger than that ended up working for the foundational companies like Microsoft, Sun, and Apple.
So while it may appear that wealth is an incentive for hard work by our best and brightest, it is in fact the reward for good fortune either through birth or being in the right place at that right time when disruptive events occur. Billionaire Warren Buffett put it succinctly when asked why he opposes eliminating inheritance taxes. Doing so, he said, would be like “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.”
Now let’s look at the other end of the equation.
Poverty is the appropriate punishment for an unwillingness to work hard.
When you look at the statistics, what you discover is that most of the poor are working. In fact they are working harder (if you term the physical effort and hours) than the wealthy. The problem is that the jobs they have are seasonal or part time. The other problem is that their wages, even if they were able to work 52 weeks a year, are not sufficient to raise them out of poverty.
From an economic perspective, the poor are better consumers than the wealthy, only because they spend all of their money buying basic necessities. Providing opportunities for the poor to have better skills and find better jobs provides an immediate boost to the consumer economy.
So, contrary to what the wealthy would say, an expanding wealth gap is evidence of an increasingly inefficient economy.
The bigger problem is that the wealthy have unequal access to power. They use that power to bias the system in their favor. That bias comes in the form of government support at all levels with the intent to preserve and expand their position. The poor don’t have this access, though some could certainly argue that the social safety net programs are an equivalent. The last two decades, however, have seen a significant reduction in aid to the poor and an incredible increase in aid to the wealthy.
You can’t fault the wealthy from using their influence to their own benefit, but the risk to governments increase when wealth and power concentrate in fewer and fewer hands.
History documents that inequitable distribution of wealth and power eventually drive the disadvantaged to revolt either at the ballot box or in the streets. In this country the wealth gap has come at the expense of the middle class which further destabilizes the country by slowing upward economic mobility. If this continues over time, our best and brightest will leave for other economies with lower barriers to advancement. We will begin to experience the same brain drain that has plagued third world countries for centuries. We’re already seeing the flow of foreign students to our universities slowing. The next step will be an increased flow of American citizens looking to Asia for education and opportunity.
From an economic point of view, our country’s best years were during that period of time when the wealth gap was the smallest.
From a moral point of view, there seems to be an opinion not unlike the Jews during Jesus time. The Jews believed that sickness, injury, or any other disabiliity was God’s punishment for some sin. So it was easy to find the sinners, just look around. Similarly those that had the good fortune to be born to rich parents could point to their wealth as evidence of their virtue. In a similar way, there is a conservative point of view that suggests that the rich got that way because they were willing to work harder than everyone else. The thought of taxing them more than others amounts to punishing good behavior and rewarding bad.
As is often the case, reality does not line up with this narrative. The majority of the rich are the benefit of good fortune. That isn’t to say that they aren’t hard working – but hard work in and of itself is not how most of the wealth in this country is acquired. From this point of view, it makes perfect sense to tax the wealthy at a higher rate. First, they can afford it. Second, it is the responsibility of government to make sure that our economy has full access to all of the talent in our population through easy access to things like education, health care, and good jobs. The result is an efficient economy where all have access to opportunity and those few who are fortunate enough to be in the right place at the right time don’t end up dictating the destiny of everyone else.