SOLVING THE INCOME INEQUALITY RIDDLE

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What exactly is meant by those who speak of “income inequality” ?

Most people think it means that high incomes are too high. “Yes,” they say, “high incomes are far too high. Rich people own half the world’s wealth. That’s unfair.”

Well, what of it ? Let’s assume that rich people — I’ll define “rich’ as having a net worth of at least $ 5 million and a yearly income of at least $ one million — do own 20 percent of the world’s wealth. They don’t own it because their incomes are too high. They own it because low income people’s incomes are too low.

This is the “income inequality” problem. Low incomes are too low. It has nothing to do with high incomes. Incomes have always been very unequal in market economies. It could hardly be otherwise.

Before I proceed to detail, you may want to read the useful examination of the inequality issue that I’ve linked here : https://www.thebalance.com/income-inequality-in-america-3306190

Have you read the article ? If so, let’s get into the details of the problem.

It’s not the inequality that breeds economic trouble and social unrest, it’s that too many people earn an income inadequate to participate usefully in the discretionary spending economy. An economy does not reach its full potential if of those who live in it, less than all can spend into it. Consumer spending equals about two-thirds (2/3) of the ENTIRE market economy. If 30 percent of those living in an economy can’t afford to buy goods and services on offer — and which these consumers want — the economy’s supply and demand do not match.

Demand for any good or service has a potential market — just as the economy as a whole has its  potential. Any business offering a service or good wants to be able to sell to all potential buyers. It’s hard enough to bring a good or service to market without potential customers being unable to afford them.

Likely there will never be a market in which every potential customer can afford a good or service. Still, the government that regulates our economy can take steps to maximize the number of customers who CAN afford. Those steps can be taken without impacting high incomes. Chiefest of these steps is raising the minimum wage to a level at which full time employees can all afford to buy discretionary products.

Those who object to raising the minimum allowable wage to $ 12/hour, or $ 15/hour — or even $ 21/hour, as it stands in Denmark, for instance — say that it will cost jobs because many small businesses can’t afford to pay such wages. I disagree. Why should higher wages hurt employers ? Presumably if your employee is earning more, and can spend more, she will purchase more of your products. (Or of other business’s products, in which case that business’s workers will buy more of yours.) My friend John Barros, Boston’s Director of Economic Development, likes to say that “if you can’t afford to pay your workers a decent wage, you shouldn’t be in business.” He is right, but the reason he is right isn’t affording, it’s the business model. Higher wages create more spending for every business, and one’s business model should recognize this.

A second step to a more equal economy is to encourage immigration rather than persecuting it. Every immigrant is a customer; and many immigrants become start up businesses. Also : the more immigrants, the younger the demographic, thereby solidifying Social Security, whose solvency depends on there being sufficient workers for the “FICA” tax to fund every retiree’s benefits.

If wages rise substantially, the cost of doing business rises as well. But businesses can raise prices. They don’t have to raise them a lot, either, to cover the added cost of adequate wages. Somewhere I read that every $ 1.00/hour rise in the minimum wage adds 19 cents to a McDonald’s burger. As that burger now costs $ 2 .99, it’s not a very large increase for customers to pay. (If a business can raise prices to account for higher wages, there goes their “can’t afford it” argument.)

Lastly, the money paid to high income people looms large only in its own mirror. Economically, the top one percent of income earners aren’t very important. As has been said, a billionaire isn’t likely to buy 33,000 times as many widgets as a person who earns “thirty k” a year. Very high income people park most of their money. To the extent that they do so, they don’t affect consumer spending — which is the real motor of the actual economy.

Yet if the large sums of money that rich people simply park go economically to waste, we do live in a free society — thank goodness — and rich people are free to not maximize their economic power. They are free to have lazy money. Or does their money only seem lazy because it is not spent ? Much of it is invested, in bonds; in stocks; in real estate; in art. Each of these activities — art, real estate, the stock market, bond issuers and dealers — employs many, many people whose livings derive from commissions earned on sales. Thus even lazy money generates incomes that will be consumer-spent: because money is like that. Once it exists, it affects — cannot help but affect — the general economy.

All that we should ask of money in a market economy — as is ours — is that every family have enough of it to maximize participation.

Some who oppose the new tax reform object that the huge tax cuts it gives to corporations will not generate jobs, as the reform’s supporters like to say it will. I agree. A lower tax rate will not, by itself, induce a corporation to hire more workers. Only increased customer demand can do that. Still, if there are corporations looking to capitally expand, that expansion itself generates new jobs, and the result of that expansion — the ability to produce more — will, presumably,. allow the corporation to meet customer demand. Is this capital expansion likely ? If so, the argument against the tax cut job-creation fails.

But that argument is for another day. My point in this column is simply that income inequality is a bottom-end problem to be solved by bottom-end reform.

—- Mike Freedberg / Here and Sphere

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