Income Inequality: What’s the fuss?

In 2006, Stanford linguist professor Arnold Zwicky described the Baader-Meinhof syndrome as an instance in which an issue you discovered recently crops up everywhere. It seems the Baader-Meinhof issue of our time is income inequality. Despite the gap between the poor and rich snowballing over the past three decades, the public is finally economically woke.

For the first time in forty years, voters consider income inequality a top priority. Last year economist Thomas Piketty’s 800-page book on the topic was so popular Amazon had to halt orders because they couldn’t keep up with demand. 80% of the topics covered in last week’s World Economic Forum centered around the rising wage disparity between the rich and poor.

Despite the recent attention this topic has received, the problem of income inequality in America has worsened. The top 1% of Americans now own 40% of the nation’s wealth, the top 10% of Americans earners own 81% of all stocks and mutual funds, and since 2009 nearly 90% of financial gains have gone to the top 1%. Even more alarming, Oxfam released a report claiming the eight richest human beings in the world have as much wealth as the bottom half of the world’s population.

Yet, there seems to be very little momentum in the public demanding real solutions to this problem. What explains this cognitive paradox? Social Economist Walter Scheidel argues that individuals are alarmed but unemotionally attached to the topic of inequality. Ironically, much of the fault lies on supply and demand nerds like Mr. Schneidel. Income inequality is often communicated quantitatively, with charts, and often lacking a personal narrative.

This is a mistake. Financial inequality is a pressing issue and should be discussed in a way individuals understand the main drivers of unequal wealth distribution, the impact it has on communities, and possible solutions to curb income inequality. Here’s my attempt to do so.

The main catalysts of income inequality: Economists largely attribute the rise of income inequality to three factors; technology replacing workers, non-college-educated men being displaced by globalization, and poor government planning. A variable often ignored, when discussing this issue, is America’s shifting attitude on income distribution.

Before Ronald Reagan’s “greed is good” speech, most Americans denounced unfair income allocation and excessive CEO pay. When the CEO (Dan Price) of Gravity Payments, a credit card processing company, flattened out wages to $75,000 he received enormous criticism. Mr. Price got his idea of an equal wage from studying 200 companies. The problem was, 198 out of the 200 companies he reviewed, made those changes well before 1980.

Two things have become true over the past three decades. Americans are more aware of the growing wage disparity, but are less empathetic to their peer’s financial stability. A 2014 Gallup Poll showed 72% of workers are okay with making more than someone doing the same job and 85% are indifferent to excessive CEO pay. Contrast these figures to 1978, when Gallup numbers show that 88% Americans said it was unfair to make more than their peers and 82% believed that CEO pay should be no more than three times their salary.

Why the change in belief? When an incredibly popular President touts the idea that excessive wealth should be the norm and not the exception, you create a society where people strive to accumulate an abundance of capital even if it’s at the expense of their fellow citizen’s well-being.

How it impacts you: Professor Ed Glaesar, an urban development economist, argues cities flourish with a strong labor force, economic opportunity for all, and a thriving culture. A wealth imbalance strikes a blow to all three pillars of a stable community. When low income Americans wages stagnate (as they’ve done in the past 30 years), many migrate to metropolitan areas. Smaller cities, in turn, have a smaller skilled labor force that disinterests businesses from investing. Larger cities, unable to accommodate a larger population, struggle to provide social services and affordable housing.

San Francisco is a prime example. The combination of the economic collapse of 2008 and a tech resurgence has led to a population spike in the 415. As a result, public services are now underfunded, public transportation is inefficient, and 80% of the cities inhabitants are unable to secure affordable housing. All of this makes it harder for SF residents to spend on non-discretionary goods. This ultimately hurts those at the bottom of the economic food chain. When residents can’t invest in their community it is the bartenders, waiters, small business owners, and local artists that suffer.

The social fabric of a city also dies. San Francisco once consisted of a bustling Jazz scene, a vibrant Italian community, and a glorious art scene. Now the city is largely monolithic with very little ethnic or intellectual diversity.

Opportunities where individuals can act: While the growing evidence of income inequality is alarming, there are things individuals can do. For starters, Americans must demand serious policy solutions and examine existing policies that were intended to address rising wage disparity.

To their credit, several politicians from Senator Bernie Sanders to Congressman Paul Ryan have put forth plans to tackle this issue. Yet, most of these plans don’t address the root cause of the problem.

Proposals such as raising the minimum wage and eliminating cumbersome licensing programs are solid public policy, but neither lay the foundation to curb income inequality. Secondly, policies like rent control and income subsidies are politically popular, but have been proven to be widely ineffective.

So, what makes sense?

If you’re trying to figure out what policy solution to demand refer to the three root causes of income inequality. Ask yourself if any policy proposed allows Americans to adapt to a more digital world, gives workers opportunities to re-train for new skills, or creates a government program that has specific goals with sound metrics.

Comprehensive government policy must be demanded, but it would be naive to think there is a municipal silver bullet that solves this problem. Individuals must do their own part to survive in this economy.

After the collapse of the auto industry, a large swath of Detroit citizens retrained to be nurses, accountants, and coders. We should follow the lead of our 8-Mile brothers and take ownership on continually upgrading our skills.

Finally, Americans must rethink their idea of financial prosperity. If one thinks that bloated CEO pay, uneven wage growth, and nativism are the foundation of a healthy economy they are a mistaken. All stable societies have some level of inequality. Some individuals will be left behind in a globally competitive environment. But if we simply pay lip service to the topic of income inequality and ignore its long-term consequences, many more will suffer.