Income Inequality: Natural or Artificial?

In the United States, the disposable income of families in the middle of the income distribution shrank by 4 percent between 2000 and 2010, according to the OECD.[1] Over roughly the same period, the income of the top 1 percent increased by 11 percent. In 2012, the average CEO of one of the 350 largest U.S. companies made about $14.07 million, while the average pay for a non-supervisory worker was $51,200.[2] In other words, the average CEO made 273 times more than the average worker. In 1965, CEOs were paid just 20 times more; by 2000, the figure peaked at 383 times. The ratio fell in the wake of the dot-com bubble and then in the financial crisis and its recession, but in 2010 the ratio began to rebound. According to an OECD report, rising incomes of the top 1 percent in the E.U. accounted for the rising income inequality in Europe in 2012, though that level of inequality was “notably less” than the one in the U.S.”[3]  Nevertheless, in both cases the increasing economic gap between the very rich and everyone else was not limited to the E.U. and U.S.; a rather pronounced global phenomenon of increasing economic inequality was clearly in the works by 2013.

Accordingly, much study has gone into discovering the causes and making prognoses both for capitalism and democracy, for extreme economic inequality puts “one person, one vote” at risk of becoming irrelevant at best. One question is particularly enticing—namely, can we distinguish the artificial, or “manmade,” sources of economic inequality from those innate in human nature? Natural differences include those from genetics, such as body type, beauty, and intelligence. Although unfair because no one deserves to be naturally prone to weight-gain, blindness, or a learning disability, no one is culpable in nature’s lot. No one is to be congratulated either, for a person is not born naturally beautiful or intelligent because someone else made it so. This is not to say that artifacts of society, as well as their designers and protectors, cannot or should not be praised or found blameworthy in how they positively or negatively impact whatever nature has deigned to give or withhold. It is the artificial type of inequalities, which exist only once a society has been formed, that can be subject to dispute, both morally and in terms of public policy.
A society's macro economic and political systems, as well as the society itself, can be designed to extenuate or diminish the level of inequalities artificially; it is also true that a design can be neutral, having no impact one way or the other on natural inequalities. How institutions, such as corporations, schools, and hospitals, are designed and run can also give rise to artificial inequalities. In his Theory of Justice, John Rawls argues that to be fair, the design of a macro system or even an institution should benefit the least well off most. Under this rubric, artificial inequalities would tend to diminish existing inequalities. Unfortunately, a society’s existing power dynamics may work against such a trajectory, preferring ever increasing inequality because it is in the financial interests of the most powerful. Is it inevitable, one might ask, that as the human race continues to live in societies the very rich will get richer and richer while “those below” stagnate or get poorer? Jean-Jacques Rousseau (1712-1778) distinguishes natural and artificial (or what he calls “moral”) inequalities with particular acuity and insight. He answers yes, but only until the moral inequalities reach a certain point. Even if his “state of nature” is impractical, we can make more sense of the growing economic inequalities globally but particularly in the U.S. by applying his theory.

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1.Eduardo Porter, “Inequality in America: The Data is Sobering,” The New York Times, July 30, 2013.

2. Mark Gongloff, “CEOs Paid 273 Times More Than Workers in 2012: Study,” The Huffington Post, June 26, 2013.

3. Kaja B. Fredricksen, “Income Inequality in the European Union,” OECD, Economics Department Working Paper No. 952, 2012.

Losing the Middle Class: An Educational-Industrial Policy

Beneath the headlines showing new figures on unemployment (which do not include the unemployed who are no longer looking for work or applying for unemployment compensation) is the story of the changing distribution of jobs in the American economy. That distribution in turn can give rise to cultural or societal changes. When the jobs in the economic middle are disproportionately lost, American society increasingly resembles a tale of two cities—and by this I do not mean Augustine’s heavenly and earthly cities though the realms of the “haves” and “have nots” could admittedly be called as such by materialists.

According to CNBC, a “report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.” The job market turned around since then, but those fields represented only 22 percent of total job growth. “Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again. Lower-wage occupations, with median hourly wages of $7.69 to $13.83, accounted for 21 percent of job losses during the retraction. Since employment started expanding, they have accounted for 58 percent of all job growth. The occupations with the fastest growth were retail sales (at a median wage of $10.97 an hour) and food preparation workers ($9.04 an hour).” By mid 2012, each category had grown by more than 300,000 workers since June 2009.

Essentially, the job expansion in the wake of the 2008 recession proceeded on two fronts—the high and low ends, rather than in the middle. Microsoft, Google, and Facebook represent high-end employers, while McDonalds, Walmart, and Starbucks hire at the lower end. The wealthy increasingly shopped at Whole Foods while the service industry employees bought their food at Walmart. This rendering is of course simplistic, but separation of two distinct cultures based on wealth is clear as gated communities were becoming increasingly popular among the upper middle-class and the rich in the first decade of the twenty-first century.

In terms of education, the wealthy can send their kids to an Ivy League college, while the pro-profit colleges give a training-based inferior education to the service employees. In actuality, those employees are being trained rather than educated. The lack of education can be seen by the reliance on scripts for employees at many retail establishments. The unthinking herd mentality can be observed from the ubiquitous “have a good one!” which is grammatically incorrect and generally vacuous in meaning. A good what? The antecedent is never specified. The sheer reliance on scripts suggests that were the customers to gleam the true condition of the employees, there would be shock and awe, as in, how could we as a society have so failed the younger generation? Put another way, the centralized training of the chains (we are born free but chained to the culture invented by retail) supplants the education (not training!) that every young person should have. The eclipse of the value of education is a salient though invisible feature of the earthly city, while the inhabitants of the heavenly city make sure that their kids are well-educated. In the earthly city, the blind are leading the blind, and nobody believes he or she can be wrong. Yet how different is the actual condition on the ground!

In the post-industrial society, government policy can emphasize education for the masses, such that the higher-end vocations are “filled to the brim” and the lower-end jobs minimized. The United States can and should orient its citizenry to areas of comparative advantage rather than simply relying on the labor market to assign the distribution of jobs. For example, after its import-substitution policy, India stressed “home grown” computer science and engineering vocations in line with the view of G.D. Birla and J.N. Tata that British India needed to replicate British industry rather than be dependent on it (Gandhi opposed this strategy). In the United States of the twenty-first century, expanding excess to college and university education that is not immediately eclipsed by training would ironically enable people entering the workforce for the first time to go into the higher-end professions. In short, America needs an industrial policy that highlights education such that the upper- and middle-income professions expand proportionately at the expense of the lower-end jobs.

Source:

Catherine Rampell, “Majority of New Jobs Pay Low Wages, Study Finds,” The New York Times, August 31, 2012.

The French Socialist Party’s Proposal of a Universal Income Amended: An Economic Floor Providing Economic Security to the Poor

Benoit Hamon, “riding to victory” from political obscurity on a proposal to “pay all adults a monthly basic income,” defeated the recent Prime Minister, Manuel Valls, in a presidential primary runoff election of the Socialist Party in the E.U. state of France.[1] Although “Hamon wasn’t as tainted as Valls by Hollande’s unpopularity” because Hamon had “rebelled and quit the government in 2014,” whereas Valls served more than two years as Hollande’s prime minister in the state legislature, Hamon’s “proposal for a 750 euros ($800) ‘universal income’ that would be gradually granted to all adults also proved a campaign masterstroke. It grabbed headlines and underpinned his surprise success in the primary’s two rounds of voting.”[2] I submit that the proposal, although flawed from the standpoint of economic security, fits well with the industrial world of global capitalism.

Under Hamon’s proposal, the no-strings-attached payments could be made to more than 50 million adults in the state. The “no-strings-attached” aspect is crucial to the provision of economic security, which is itself of significant psychological and financial value to people who are either unemployed or live from paycheck to paycheck. Put another way, the lack of conditionality can give such people a more stable peace of mind that could not but improve the quality of life generally in the daily life of a town or city in interpersonal dynamics. The temptation would be to begin to insist that the money be used for A, B, and C, but not on X, Y, and Z. Even such salubrious conditionality would undercut the stability afforded by the faith that the money would be come every month necessary—come hell or high water. I submit that Western peoples tend to discount the value of financial assurance or stability—essentially the provision of a floor or net that can be relied on—just in terms of the foregone anxiety alone.

The problem is that Hamon meant the payments to go to every adult, irrespective of income and wealth. A wealth person with a good income already has financial security, so adding a floor of 700 euros would be a waste of money from the standpoint of providing economic security. So the cost of the program, which Hamon reckoned to be at least 300 billion euros ($320 billion), can be reckoned as excessive, given the purpose of the program. In other words, taxpayers need not pay so much to make sure that every person has at least an adequate amount of economic security. Lest it be said that the middle- and upper- economic "classes" would then have little self-interest in supporting the proposal, I would simply point to value of the peace-of-mind in knowing that should financial ruin, such as from an economic recession (or depression), injury, or illness hit, economic security would be maintained. Simply knowing this can lighten the step of even a wealthy person, since none of us can say with complete certainty that tomorrow will be like today.


Given the destructive competition that is a part of life in advanced industrial states, the rationale for the claim that every person should be financially secure from hardship is valid. That Hamon proposed a tax on robots to help finance “the measure’s huge costs” points to his rationale for why a modern society cannot simply rely on jobs and even unemployment insurance to provide economic security.[3] Automation has permanently removed many manufacturing jobs, both in the E.U. and U.S. Additionally, the financial incentive of companies to move factories to low-wage, non-developed and newly-developed/industrialized countries like Mexico and China, respectively, means that employment in industrial countries can no longer be relied on to provide economic security to a significant segment of populations, for not everyone is going to go to law- or business-school and graduate—even if education were tuition-free.

Abstractly put, the logic of global capital is not in sync with the fact that in any society, a portion of the adult population is oriented to blue-collar rather than white-collar work. Even if the E.U. were to become a manufacturing utopia, some people, such as the disabled, would still lack economic security, and thus stability, were jobs the exclusive means of providing it. 

In short, the nearly “post” industrial world cannot simply become a world of lawyers, physicians, accountants, and business managers, whereas everyone needs food, shelter, and access to medical care. Providing even a very low floor would pay dividends for everyone as society would be a more civil place, and the cost need not be so much as would be needed to pay 700 euros to every adult, regardless of whether the security is needed. In fact, perhaps 1000 euros would then be an option. Life is too short to sweat the small stuff, yet some people must and their lives are painful for lack of financial security.

Financial worry is like an internal, perpetual war to the poor person, eviscerating life of its pleasure. Quality of life matters, and not just for the poor. How people you interact with are doing in terms of anxiety due to hardship—whether deserved or not—can easily ruin your day, whereas being around calm people can make your day. No man is an island, and in modern society economic interdependence has its drawbacks. Giving other people the psychological security of a financial floor each month can indeed pay dividends to the payers without the floor necessarily being raised so high that the beneficiaries can take advantage of the blessing of security made possible by others.

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1. Associated Press, “Hard-left Candidate wins French Socialists’ Presidential primary,” Foxnews.com. January 29, 2017.

2. Ibid.

3. Ibid.

The Wealth of 8 People and 3.6 Billion People: Utilitarianism Applied

As of the end of 2016, eight people held as much wealth as the 3.6 billion people who make up the world’s poorest half. Just a year earlier, a similar study had “found that the world’s richest 62 people had as much wealth as the bottom half of the population.”[1] Part of the difference in these findings is due to new data gathered by Credit Suisse. Put another way, the richest of the rich were richer than had been thought. In this essay, I want to call attention to the sheer magnitude of the wealth involved, as it pertains to the richest.
Forbes’ 2016 list of billionaires has Bill Gates, the founder of Microsoft, with a net worth of $75 billion, followed by Amancio Gaona, the founder of Inditex, at $67 billion. Warren Buffett came in third with $60.8 billion.[2] I could go on, but these three figures are sufficient to raise the question of how much is enough. By the calculus of greed, which is the love of gain itself—as in more and more ad infinitum—this question can only be extrinsic. In terms of use, however, the question is ripe, for there is indeed a limit to how much a person can realistically consume.
In terms of declining marginal utility, wherein a person does not get as much pleasure out of the fourth or fifth ice-cream cone in a row as from the first, it takes a lot more money added to $67 billion to trigger pleasure than to $100. Add $1,000 to $100 and you have made the guy’s day, but add $1,000 to $67 billion and you might get a yawn. Pareto claimed that no such interpersonal comparisons of pleasure can be made, but I think Bentham was correct in making this point. Whereas Pareto relies on the valid point that pleasure itself is not quantifiable, Jeremy Bentham (whose 18^th century mummified body absent his head sits in an open closet in a university-building’s hallway in London) stressed the declining marginal utility as it pertains to very different quantities of wealth.
Bentham, whose utilitarian ethics gives primacy to the greatest good (i.e., pleasure, which he viewed as happiness) for the greatest number of people. Distribution from the rich to the poor is in line with this ethic, given the fact that a poor person would get more pleasure, or utility, from $1000 than the pain of the rich man who is now without the $1000.

Even just the gigantic sums of accumulated wealth themselves, such as Warren Buffett’s $60.8 billion—holding aside the question of added utility/pleasure from adding more wealth to the base—are not efficient, so to speak, in terms of utility/pleasure. “In my entire lifetime,” Warren Buffett said, “everything that I’ve spent will be quite a bit less than 1 percent of everything I make. The other 99 percent plus will go to others because it has no utility to me. So it’s silly for me to not transfer that utility to people who can use it.”[3] Because other people could use the money to derive more pleasure/utility, there is indeed an opportunity cost in the rich holding such vast sums. In other words, the retention of billions of dollars does represent a harm in that people who could really use it are deprived of it.
Admittedly, Buffett’s invested funds have led to pleasure from added productive enterprise and even innovation. The assumption of added productive uses can be questioned, however, as presumably alternative means of raising capital exist. An enterprise strategically oriented to expanding could go to a bank, for example, were Buffett’s invested funds depleted by voluntary or involuntary redistribution. In fact, banks would presumably have more money to lend to the extent that people receiving the redistributed funds deposit some portion (even the added consumption would go to existing businesses, thus giving them more retained earnings to invest in expansion and innovation). Furthermore, Buffett could have redistributed some wealth to the poor in the form of stocks and bonds, which would give the poor more economic security given the dividends and bond payments are on a base of wealth. In general, such means of increasing productive enterprise and innovation would be more in line with the greatest good for the greatest number of people, given declining marginal utility.
To be sure, Bentham warns that if redistribution crosses a threshold, the rich will not be motivated to create more wealth by work or investing more funds. The total “pie” would thus decrease; other things equal, there would be less pleasure/utility all around. We humans react more to losing $1,000 than to gaining $1,000, Bentham points out. Additionally, a rich person may be emotionally agitated if he or she feels that the redistribution is unfair—even stealing. This is in spite of Buffett’s point that very little utility relative to billions of dollars accrues to a rich person. However, Buffett’s statement suggests that losing a lot of money to redistribution—admittedly voluntary in his case—need not trigger the pain of loss. Even considering such pain to exist and be material, it must surely be less than the pleasure on the other side of the redistribution, given declining marginal utility. In Buffett’s words, other people can get more use out of the funds, and this added pleasure (which was not in Buffett’s holding of the wealth) is more than any pain in losing the wealth (given the pleasure that Buffett would still have from even just 1 percent of his wealth!).
From another perspective, owning tens of billions of dollars can be deemed to be excessive in not being justified in terms of property-rights theory. I have in mind John Locke’s labor theory of wealth. A person gains a natural right of ownership by “mixing” his or her labor with the asset, such as land. If you till the ground and plant the corn, you have earned a property right, or exclusive claim, on that land and its corn. It would be unethical for other people to trespass and consume from the corn.
Applied to founders such as Gates, Gaona, and Buffett, the question is whether having wealth of tens of billions of dollars is proportioned to the labor (and even risk of loss) put into the respective foundings. This question pertains to executive compensation—are CEOs who are also founders paid inordinately because of their power and status in their respective organizations?—and to stock ownership—is there a public interest in limiting the amount of stock-value one person holds in a company?  The public interest, if one exists, would presumably borrow from the Bentham’s point that billions of poor people would get more pleasure, or utility, from the redistributed surpluses than all the pain (if any) inflicted on the richest of the rich from the loss of some of their stock-wealth. Given that only so much wealth can be consumed by any single person, there would presumably be more than enough wealth remaining such that the richest would not suffer.
In conclusion, sound theoretical reasons support the claim that the eight richest people in the world should not have as much wealth as 3.6 billion of the poorest. Just as it is difficult for the human mind to conceive of billions of people, the same applies to billions of monetary units. Accordingly, it is difficult to grasp the sheer vastness of the imbalance. From this basis alone, the inequality can be deemed problematic. As this point is itself in dispute—perhaps in part because some people simply hate government—I have not gone on to prescriptions on how the problem can or should be solved. In other words, just establishing that there is a problem is a task in need of theoretical justification and argumentation. My essay here is a flawed (e.g., too limited) attempt to fortify the position that the massive inequality of wealth is indeed a serious problem, ethically speaking. That is to say, the holding of such huge sums as I’ve cited above is not justified by the efforts expended to “get the ball rolling.”

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[1] Gerry Mullany, “World’s 8 Richest Have as Much Wealth as Bottom Half of Global Population,” The New York Times, January 16, 2017.

[2] Ibid.

[3] Jonathan Stempel, “Gates Charity to Sell 60 Million Berkshire Shares, as Buffett Urged,” Reuters, January 18, 2017.

A Business Surtax on Income Inequality: Target the Proceeds

The medium compensation in 2015 for the 200 highest-paid executives at publicly-held companies in the U.S. was $19.3 million; five years earlier, the figure was $9.6 million.[1] CEO pay compared with the earnings of average workers surged from a multiple of 20 in 1965 to almost 300 in 2013.[2] “Income inequality is real, it is a national problem and the federal government isn’t doing anything about it,” said Charlie Hales, the mayor of Portland, Oregon in 2016 when that city passed a surtax on companies whose CEO’s earn more than 100 times the medium pay of their rank-and-file workers.[3] According to the law, set to take effect in 2017, companies whose ratios are between 100 and 249 would pay an additional 10 percent in taxes; companies with higher ratios would face a 25 percent surtax on the city’s business-license tax. Whether the new law would make a dent in reversing the increasing income-inequality was less than clear.

The most direct route to reversing the trend of growing inequality would be to use the proceeds from the surtax to increase the average incomes of the poor. Cash assistance to city residents below the poverty line, for instance, or increased rent subsidies would qualify. Alternatively, the city council could pass and fund a minimal-income level for local residents. As still another option, the financial assistance could be meted out more specifically to workers in the companies subject to the surtax, or local companies more generally. Unfortunately, the proceeds were set to go into city’s general fund, only part of which increases the incomes of the poor. “City officials in Portland estimated that the new tax would generate $2.5 million to $3.5 million a year for the city’s general fund, which pays for basic public services such as housing and police and firefighter salaries.”[4] If rental assistance is included and expanded, then the inequality of effective income could be impacted locally, though adding more police and firefighters and perhaps even buying more police cars and firetrucks would not affect the ratio.

In short, for the surtax to address the matter of income inequality most directly, the use of the tax revenue would have to be targeted to increasing the effective incomes of the poor (and middle class). Simply increasing the city’s budget dilutes the impact substantially.

On the CEO-pay end, the assumption that the surtax would result in lower CEO compensation figures is also subject to critique. What a board offers a prospective CEO must contend with what that particular labor market will bear. Furthermore, it is not clear that even 25% of a local license tax is enough money to motivate a board to reduce top executive salaries. It is also not clear that $2.5 to $3.5 million would appreciably raise income levels in a city the size of Portland—Oregon’s largest city. Were the city to increase the tax to motivate companies to bring down CEO pay and/or make a dent in the incomes of the city’s poor, companies could simply move; they could even stay in Oregon.

To be sure, Portland’s mayor at the time admitted that the surtax is “an imperfect instrument” with which to tackle the momentous problem of increasing income-inequality in the U.S.[5] A better instrument would be at the State or federal level, with the proceeds going to fund a minimum income for all citizens. Lest such a “Robin Hood” approach be too stark, proceeds could be targeted more closely to the worker-CEO ratio by increasing the incomes or disposable incomes of workers.

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[1] Gretchen Morgenson, “Portland Adopts Surcharge on C.E.O. Pay in Move vs. Income Inequality,” The New York Times, December 7, 2016.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

Analysis of Italy’s 2016 Referendum: Beyond the Euro and the E.U.

The predominate axis of analysis in the wake of the Italian referendum in early December, 2016 centered on the euro, the federal currency of the European Union. 

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.