April 18, 2014

Income Inequality Is Merely a Symptom of a Bigger Cause

This weekend, I traveled several hundred miles to visit one of my grandmothers, who hosted a family dinner.  On the drive, we went through some extremely poor communities; places where a family of four or five might live in a $22,000 house.  This caused me to think about poverty for the past couple of days.  Specifically, it made me think about income inequality.

We’ve talked about income inequality in the past.  We’ve talked about how income inequality is probably arbitrarily overstated as a result of the large increase in single parent households among the poor.  We’ve also looked at the reason income inequality will always exist.  However, one of the big lessons that I have tried to teach you over the years is not to confuse cause and the effect.  Otherwise, you can draw faulty conclusions that are counter-productive to your end goal.

Income Inequality

Income inequality used to be because of large differences in net worth as the so-called capitalist class sat back and acquired more of the productive means of a nation.  Today, a significant portion of income inequality is the result of a knowledge and education gap that allows those who create, produce, and generate content or ideas to reap nearly all of the rewards in a winner-take-all payout system made possible by technological scalability.  Perhaps the image of Mr. Monopoly should be replaced with the picture of a doctor from John Hopkins or a young technology startup in a garage. 

The most visible example of this mistake in the media today is the current discussion of income inequality.  Too many people are still seeing the world as it was structured, not how it is structured. 

Income inequality is a symptom.  To the extent that it really is increasing (and it is), the cause is mostly a by-product of the conflagration of the Information Revolution, globalization, and increased personal freedom (the latter of which requires its own post), which are burning the foundations of the Industrial Revolution to the ground and replacing it with a new world economic order.  Add to that the ramifications of perfectly natural assortative mating in a world of easy travel and mobile populations, and you have a real recipe for discontinent among the proletariat.  

An Example of How Winner-Take-All Models Are Now Inextricable From the Economy, Leading to Greater Income Inequality

In generations past, if I wrote a mega besteller fiction book that sold 1 million copies at $30 retail per copy in current dollars, I would be lucky to see pre-tax royalties of $3,000,000.  The other $27,000,000 would have gone to local bookstores throughout the United States, retail workers, literary agents, editors, publishers, the stockholders in all of those firms, the timber workers who cut down the trees, printers who ran the printing presses, drivers who shipped boxes from state to state, gas companies that fueled those trucks, and finally, to me, the author.  Everyone along the supply chain, each little stop, got a bite at the apple; a cut of the cash my idea generated.  Roughly 10¢ of every dollar would have found its way into my pockets.

Today, if I wrote the same book and self-published it through Kindle or iTunes, I would keep between $19,500,000 and $21,000,000 of the earnings pre-tax with the other $7,000,000 going to the content distributor (Amazon or Apple).  Roughly 65¢ to 70¢ of every dollar now finds its way into my pockets.  There are no local bookstores.  There is no timber to be cut.  There are no drivers to ship finished books.  There are no janitors cleaning the floors of the retail shop.  It’s all electronic.  

As President Obama pointed out in his State of the Union address, all of the jobs that used to be the foundation of the poor and middle classes are now replaced by technology.  The money flows, instead, to the handful of people that come up with the ideas.  That dynamic is going to expand as technology accelerates.  Those who are excellent at management or another skill will be able to oversee larger and larger domains, resulting in less opportunities and pay for those who don’t have their talents.  The world is going to be increasingly run by a handful of intellectual elites who build space stations, program complex software systems, and generate new entertainment mediums.  There is no way around this winner-take-all system that I can see.  There will be very good, incredibly high paying opportunities and there will be menial task work that pays so poorly it will be impossible to raise a family.  As much as I hate it, it turns out that Consumer Hourglass Theory is probably correct.

It isn’t anything new.  The Luddite social movement of England in the 19th century destroyed mechanical looms for fear of destroying their livelihood.  It did, but their children found work in other industries.  The same thing happened when we switched from whale fat, to kerosene, to oil as a primary energy source.  

We Shouldn’t Just Accept Income Inequality, Though It Should Not Be Our Primary Concern

What I care about more than income inequality is the absolute standard of living of the poorest Americans who are willing and able to work.  Can they heat their homes?  Can they afford food?  Do they have clean water?  Is there access to quality education?  If I could end hunger in America overnight for poor children, I’d gladly triple the gap between the rich and the poor, but that is because I care about absolute bottom-line results.  My goal is not for everyone to feel equal, but for the poorest to live better than they already do so they have more opportunity.

The challenge of such an approach is that it would likely cause significant loss in social cohesion.  Too many people are irrational.  Here in the United States, we classify a married couple with two children at home, who earn $45,000 per year, as below the poverty line despite that same economic unit ranking in the top 1.72% of global income!  It is envy-driven insanity.  

I Don’t Have a Solution to Income Inequality

None of this is new.  We’ve talked about it all before but it is still on my mind because I am trying to answer the one, basic question: How do we fix it?  

The only way I know is investing in high quality education that identifies the best and brightest early in life regardless of the socio-economic status of their parents, and prepares them for the knowledge-based economy.  The trouble is, throwing money at schools doesn’t do any good.  Look at the Kansas City district.  A lawsuit resulted in it becoming one of the richest school districts in the world and it still produces some of the worst student competency rates.

Poverty in the United States

I don’t think we will return to the poverty of the 1930′s, but I do think we risk a society of has and have nots, mostly coming from differences in cognitive ability as a result of the knowledge economy.  It will be a lot easier, in my opinion, for the children or someone who is successful to fall into poverty if they lack the same abilities.

That still leaves the bottom 50% to 80% of civilization.  I don’t know how we change society enough to turn an alcoholic, chain-smoking high school drop-out with low cognitive ability, living in a trailer park and drowning in credit card debt, into a productive adult who can take pride in his work and have a sense of purpose in life.  The factory jobs that once gave that type of person meaning, not to mention quality pay and health care benefits, are gone.  They are never coming back because they can be automated with technology.  On the other hand, I could never support transfer payments from the smart, hardworking people like doctors, lawyers, accountants, and engineers on moral and ethical grounds; to do so would show a complete lack of empathy for the years of dedication, struggle, and effort they put into medical school, law school, internships, training, and coursework.

Very few problems in life stump me.  As we drove through the countryside, looking at the shoddily constructed fiberboard homes with pickup trucks in the driveway and broken plastic toys in the brown-dirt patch lawns, I felt perplexed.  I don’t know how to fix it.  I don’t see how to save most of the people in this demographic group from the hurricane of global economic changes that cannot be reversed.  

Why should it bother me?  I wish it didn’t, but it does.  I write because I want to help people.  If a few thousand go from poverty to significant wealth because of my work, I will consider it worth the payoff.  It’s just a drop in the ocean, though.  It makes me feel like the kid and the starfish.  

  • Konstantin

    Good post, Joshua. Thank you for sharing.
    However, I can’t see a solution either. To me, some things is life a fundamentally immortal and irreversible. By “immortal and irreversible” I mean their persistent existence throughout our history as humankind. I don’t know any nation or time in history (primeval societies are the only exception, perhaps) whose minority (or majority) didn’t live without “beyond the poverty” level (when someone can not even expect to have BASIC goods of civilization and human rights). There is just no way to make everyone happy, rich and successful. Some can not adapt to novelties of life, some people are just unwilling to adjust to new reality, while some need just a little push from the government or other individuals. But, in a long run, there is nothing we, as a civilization, can do about certain level of extreme poverty. Unfortunately, this is the price we have to pay as we move forward as a civilization (if you believe in Adam Ferguson’s definition and concepts of civilized society). 

    P.S. Pardon my English, as it is not my native language ;-)

  • Kyle Koller

    There is no easy solution. The solution is to create more low-cognitive jobs in the U.S. which would require even more U.S. manufacturing. Of course, that would increase the price of goods and most American’s look for the cheapest items that are typically made overseas. Then again, these same people who demand more domestic manufacturing don’t vote with their dollars. 

    I think this is the only solution. We aren’t going to suddenly have a nation of high-cognitive workers and there’s no way we can create one. There needs to be a massive consumer cultural shift in the way money is spent.

  • Jack

    A little self-serving here, but I wrote a blog post (three, actually) starting with this topic.

    The upshot is that the income disparity is a natural consequence of a growing economy.  It is the owners who put the capital into equipment and processes that increase productivity, so the owners get the lion’s share of the increased revenues.  Workers usually get easier work, and lower REAL cost of goods — that being measured by how long one has to work to buy something.

  • Millie

    Hi Josh. I wonder if you’ve considered a land value tax where everyone gets to keep the benefits earned by their own labour but the value of naturally occurring things such as land, the radio spectrum etc are shared equally between everyone. Would be interesting to hear your thoughts.

  • Ian Francis

    Any government solution to this problem via creating low-cognitive jobs where there is no demand is essentially a subsidy for such jobs. If machines do a more efficient, cheaper job, building a business on manual labor requires government funds to offset the higher cost of labor, otherwise no one will buy the inferior, more expensive products. This subsidy would be paid for by those working jobs that are not subsidized (or at least output more wealth than a subsidy puts in) meaning the middle and upper classes would pay an increasingly larger percentage of the subsidy. For better or for worse, this would be a method of wealth relocation to those working low-cog jobs. It’s probably a better solution than simple welfare, but one that we should try to minimize. It would be far better for the economy and for the people to be working jobs that did not require a subsidy, so investment in education and emerging industries is more efficient, but not always possible.
    The information economy is really tailor-made for a declining population. Most modern economies are already there, in-line with the realities of a modern economy, however, increasing population in developing countries is offsetting this population decline. Working hard to modernize the economies of the developing world by investing abroad, while seeming counterintuitive, will actually help the economy here in the long-term. For there to be enough jobs in an economy that requires less workers-per-dollar value, either the population needs to decline, or the economy needs to grow. We are seeing the struggles of growing the economy fast enough to keep up now. There is really no quick fix. I’d say work to modernize developing economies now to curb population growth, and invest heavily in education to get the educational system in-line with the realities of today’s economy. A change in the psyche of the public is also going to be needed, though I am less sure how one would do that. Otherwise, a continued policy of subsidizing unneeded jobs only makes the problem harder to deal with and defers it to future generations.

  • Jack

    Millie, the value of land is NOT naturally occurring. It is the result of improvements made to the land — clearing trees, plowing, fertilization, irrigation, etc. Similarly, naturally-occurring radio waves have no value, either — they carry no signal. Nevertheless, the right to broadcast in a particular wavelength is auctioned off by the government. Of course, you do not get your share — the government knows much better than you do what to do with your money.

  • TheLonelyHumanist

    Human diversity has been understated for fear of embracing the dark truth of the 20th century: some humans are more valuable than others and no system has been devised to compensate for it, let alone address it. The inequality is natural and out of our hands–and yet it is totally unfair. Has some greedy telecommunications oligarch contributed BILLIONS of times more to humanity than some other human? No. Jesus, Muhammad, Marx, Hitler

  • TheLonelyHumanist

    Human diversity has been understated for fear of embracing the dark truth of the 20th century: some humans are more valuable than others and no system has been devised to compensate for it, let alone address it. The inequality is natural and out of our hands–and yet virtually everyone expresses a sense that it is totally unfair. Has some greedy telecommunications oligarch contributed BILLIONS of times more to humanity than some other human? Who will say, “yes,” from their heart? Jesus, Muhammad, Marx, Hitler… it’s hard to find a deep resonating commentary on human history that did not demonize the results of the financial system. After all, “Money is the root of all evil.” And yet all the great societies have been built against their own belief systems. How many Christians DO “take thought for the morrow,” and DO “lay up treasure?” The Middle East is run by folks with no hesitation to accept interest on loans and unearned gains. Finance is one of the clearest examples of an emergent human cultural adaptation that outstrips human biological adaptations. We lack the cognitive moral machinery to assess fairness in a financial system. Two moral imperatives are constantly at war: the imperative to share and aid fellows and the imperative to own personal effects. Depending on how we frame the argument, the oligarch may be a victim of those who will not respect his ownership (John Galt) or may be failing to aid and share with his needy fellows (Rich man and Lazarus). Given that we evolved in an environment without currency, it is not difficult to understand why we cannot forge a consensus on the issue the way we all can agree that it is wrong to kill one’s mother in cold blood–no matter how you frame it.
    We have four basic options, of which we know the usual three: free markets, an extreme form of Rawlsian justice, or the mixed economy. So far pretty much everyone has ended up in the third camp. But there is a fourth monkey: make the genomes and the markets match. This can be done in one of two equally unpopular (and often interrelated ways): neutering civilization of “incompatible” pursuits (if finance creates inequality we will get rid of finance) or controlling the genomes (eugenics, genetic engineering). As the emergent properties of civilization’s progress spiral away from the ancestral human environment, more and more people will find themselves organically outstripped by society’s demands. It’s no wonder so many people are lobbying to turn back the clock. Was the world really better 60 years ago? I don’t think so. But it was simpler and people seem to have been happier with it. At least in the region Iive in, sometime in the last several decades, we crossed the threshold into a reality in which we have material abundance but are hopeless of making accurate and peacable sense of the world we live in. People are clinging all the harder to religions and ideologies.
    None of the answers will please everyone. We lack the innate machinery to call this one… But sooner or later, we will have to reckon with it square on. The twentieth century is over and it has been made abundantly clear that education and social engineering cannot level the field and create equality. We humans love equality but are born unequal. It hurts. But what can we do?

  • http://www.playersbay.com Peter_Jan

    This is indeed how I think it will work out. It will be extremely easy to acquire the capital to become self-sufficient, mainly because you won’t need to be in a big city anymore to enjoy the latest technology.

    People without financial assets will go work for a tech company (all companies will be tech companies by that time) and due to shortage, will get paid insane amounts of money just for accepting a traineeship. Example: In the web 1.0 boom, compensation was minimum wage + stock options. In the current boom it’s $100K + options/equity.

    Because labor will no longer be needed to build a house and grow your own food, people will be able to buy financial independence for the price of a high end luxury car today, say $50K-80K. A few acres of land, plenty of food, with a house for the cost of the materials. For those who want to travel, they’ll buy shares of an Airbnb REIT and car sharing index fund so they own their share of the collaborative consumption economy.

    Sure, income inequality will increase because those that create the Airbnb’s of this world get to keep much more of the value created than ever before in history, because there is no need to work with intermediaries. Than again, this also means the people owning those intermediaries lose out. Plenty of families go from rich to poor again. Gifted people like Joshua often worry about rising income inequality because they overestimate the rationality of the descendants of wealthy people, or put another way, underestimate genetic reversion to the mean.

    In conclusion, there will be fewer moats but they will be worth much more. Great time to be alive!