There is no larger political issue in the US right now than the progress of income inequality. Polls show that most Americans think it is a serious problem, and more importantly that work does not create opportunities for advancement. Concern over this situation falls somewhat along party and generational lines, but when we talk about potential solutions that debate becomes much hotter. Should wealth actively be redistributed by government policy?
Into this debate comes Thomas Piketty, a French economist whose work has culminated so far with “Capital in the 21st Century”. His decades of research in the field is laid out to show that wealth is concentrating, and more to the point naturally will because return on investment outpaces wage growth. That argument has been called into question, but another central point has not – that this generation’s wealthy are not a “leisure class” but a “working rich”. They have a power beyond their own money in that they control corporations and funds – other people’s money. Taken properly, it’s political high explosive.
As discussed here previously, the distribution of income has changed in the US since 1970, or about the time that income inequality started to grow. In that year about half of all income was earned from wages, the other half from income came from investments (routed through corporate profits). Since then it has fallen steadily by year to 42.6% overall by wages, a difference of about $11k per household per year.
That suggests that the basic social agreement about what “work” is has changed. In the postwar period, through the 1960s, a fair day’s labor was supposed to be rewarded by a fair day’s pay. How does that work now? It turns out that Gallup has been polling people about this since 2001, and the trend shows that there is little faith in this basic arrangement of our economic “golden era”. The social agreement has, in fact, broken down.
Income inequality is one of the biggest barriers to sustained growth today. You can’t have a consumer economy without income reasonably well distributed, and such an economy is going to have more sustained, reliable growth. But as we’ve shown before, income inequality has grown since 1968, threatening long term growth.
Here is another way to look at that rising inequality as part of a long-term trend that defined 1968-2000 – the expansion of the workforce and subsequent collapse of that expansion that will solidify when the Baby Boom hits retirement. Economic changes are often demographic at heart, and we are due for some major upheaval that we need to be ready for.
“Since we decided to adopt the leaf as legal tender, we have all of course become immensely rich. But we have run into a small inflation problem owing to high leaf availability. That means the current rate is something like three major deciduous forests buy one ship’s peanut. In order to obviate this problem and revalue the leaf, we’ve decided on an extensive campaign of defoliation and burn down all the forests. I think that’s a sensible move, don’t you?”
– The Management Consultant to Fintlewoodlewix (later called Earth) – “Hitchiker’s Guide to the Galaxy”
It’s good to have a lot of money, assuming that not everyone has a lot. Inequality is apparently bad when it gets too big, but it also makes the whole economy possible in small doses. But how much money is really out there, and where is it going? It turns out that this is more complicated – and hidden – than most thought.