A Non-Political Look at Income Inequality and the Wealth Gap

Frequently we look for political solutions to income inequality and the wealth gap. While the issues can be improved slightly from political action, there are two additional ways to close the wealth gap and level income that are more effective.

Politics is the messiest way to fix these problems and history offers ample warning for those who seek answers from this source. One need not look further than Mao’s China or Stalin’s Russia to see how abysmal political leveling can be. North Korea is a modern example of how not to level the playing field. 

Let’s turn our attention to the second way income inequality can be reduced. Walter Scheidel in his book The Great Leveler explains what he calls the “Four Horsemen” of leveling: war, revolution, collapse and plague. Historically these four horsemen have been the leading cause of leveling of income and wealth throughout history. 

Once again this is not a comforting thought. You can read Scheidel’s work for an in-depth review of his research. The record is clear, however; it takes great dislocation, pain, suffering and death for income and wealth to level naturally.

The first two methods of leveling the playing field are not valid choices if you enjoy freedom and like living a comfortable life. These first two methods of leveling are accomplished by bringing the top down rather than the bottom up. Which leads to an interesting thought experiment on how much we really want income equality and a narrower wealth gap.

 

Defining What We Really Want

Before we continue to the third and most viable way to level income and wealth we need to define what it is we really want and what we are trying to accomplish.

Leveling the playing field is actually very easy if you are willing to destroy massive amounts of wealth. Scheidel’s work and the 20th Century are amply examples of fixing the problem the wrong way.

Political solutions eventually lean toward solutions that are relatively effective which means forcing the top down and violence. The four horsemen do the same thing with the crude hammer of god. 

When most people speak of equality they mean they want to bring the bottom up, otherwise they are no better off than before while the upper classes are rent destitute. Normal people are not so dark in their thinking.

Therefore, we really should not care what other people have as long as we are enjoying affluence. Complaining you have one less apple as you relax in paradise is way too diva for this writer; it also shows a remarkable lack of emotional maturity.

In the Western world affluence is high, but there are still people stuck in poverty. The 1% have taken a larger and larger piece of the pie which means the middle class is getting squeezed with smaller gains and the poor are outright losing ground. (See embedded video.)

 

 

From the middle class on up the Western world enjoys massive affluence the rest of the world aspires to. A nice home with two SUVs in the garage are common. Travel is an affordable luxury. Food and clothing ample.

But there is something that grinds on our conscious when one person is paid less than another for the same exact task at the same exact skill level. This requires effort to fix.

While it is easier to ask someone else to make the change, each of us have within ourselves the ability to force equality. 

As a business owner we can take great measures to ensure employees are treated fairly and equitably. But what about large employers? How can we force change across our society?

And before these actions take hold, what can we personally do to narrow the wealth gap in our own life? Can we narrow income inequality in our own life regardless what business or government does?

This brings us to the third way to level the playing field.

 

 

The Numbers Don’t Lie

In 1995 James M. Poterba of MIT and Andrew A. Samwick of Dartmouth College published a damning report on household wealth in America. 

The above chart shows the household savings rate in America for the last 60 years. In the 1970s the savings rate began a precipitous decline. At the same time income inequality began to grow. Could there be a correlation?

Poterba and Samwick discuss historical stock ownership in America in their report. Their most interesting comment is telling: All corporate stock is ultimately owned by individuals. They allow for foreign ownership of U.S. equities which was around 5% at the time they published.

While stock ownership eventually is owned by individuals, the real question revolves around which individuals own these investments.

According to the report household ownership of stocks was nearly 90% in the 1950s and has declined to less than 50% by the 1990s. Since the report it is fair to say stock ownership has continued declining.

The third way to level income and smooth wealth can only be accomplished on the personal level. If most people refuse to engage the exercise they will suffer greater inequality and there is nothing the government or any politician can do about it!

Traditionally the arguments surrounding income inequality involves wages. There is truth behind the inequality in wages over the last 30 or so years. The richest are getting the largest share.

But this ignores every other source of income! In the 1950s virtually all households held some stock. These households had a fractional share of ownership in these corporations. Dividends went to the household, almost all of them.

Now fewer than half of households own stocks which means these households have zero income from this source. The wealthiest by default ended up owning nearly all America’s wealth. People complained, but refused the one solution nobody could stop them from exercising.

And capital gains and dividends are taxed at a lower rate than ordinary income, like wages. Even with this massive incentive for individuals to own stocks the average person took a pass. And so income inequality grew. 

All the gains in America’s growth hence went to the remaining owners of America’s engine of economic wealth. There was no other possible outcome. The people who held stocks (owned a piece of American businesses) ended up with all the gains and the gains were spread to a narrower and narrower group with each passing year.

 

Get Your Share

At first glance you might think something as simple as having more people own shares in American businesses would not solve the whole problem. That thinking is wrong.

Owning a piece of America’s value creating machine means you get a slice of the profits in the form of dividends. Many middle class taxpayers pay a very low or no taxes on these dividends. 

Something else happens when more people own a piece of corporate America. Your fractional ownership slightly levels the wealth gap because you now own something tangible like the wealthy do. Your share might be small, but there is power in numbers. 

When nearly 90% of households held U.S. stocks, dividends were more widely distributed. It also meant nearly every household had a small say in how companies operated! (Remember, you are a part owner when you hold stock.)

As fewer people held stock there was no one to slow down the enormous gains in CEO salaries. The CEOs rewarded the remaining few shareholders and employees were left out of the discussion because they didn’t own a piece of the enterprise.

Of course, owning a few shares in McDonald’s doesn’t give you the ability to dictate policy at the firm. But if many people owned stock in the company they could gather enough influence to change corporate behavior!

It might sound strange, but what would happen if every employee of McDonald’s owned 100 shares and worked together to change wage policy at the firm? I know, I know. People working at McDonald’s can’t afford to own stock in the firm. Yet I argue you can’t afford not to own a piece of the company if you ever want to change corporate policy!

Income inequality and the wealth gap are the same exact problem! As the wealth gap widens the lower end of the economic scale has less and less say. Of course the people on top want more and they get it because nobody that owns the company says different. 

 

The Gift That Keeps Giving

When my kids were growing up they received a share of stock as a gift for Christmas every year. One year they got a share of Wrigley, another year a share of Disney. 

Part of the gifting process was to examine each company they had stock in along with a few other possibilities.

The family came to the conclusion Wrigley was a winner for a variety of reasons. Wrigley gave every shareholder a case of gum each Christmas which my kids found incredible valuable. Stock ownership had real benefits! 

The financial reports also looked promising. Earning grew and so did dividends. Dividends were reinvested while excess cash was funneled into more shares. The growth was impressive.

Then Warren Buffett came along and funded Mars Corporation’s cash buyout of Wrigley. (Damn you, Warren!) Every member of the Accountant household got a big, fat juicy (Wriggly makes Juicy Fruit gum) check for their ownership in Wriggly. It was a bittersweet moment, however.

Yes, a big, fat juicy check is always welcome, but the regular income of dividends ended! And worse, no more gum in the mailbox in mid-December! It was as close to a crisis as I ever saw it!

While many people use index funds, there is something lost when we give authority to a mutual fund to vote our shares. That is why I still own individual shares in companies.

Your influence is minor when you own a few shares in a company. But even without a majority of ownership a large number of shareholders can make life very unpleasant for management tone deaf to owner/employees. 

Regardless your minor control of the companies you hold stock in, you have an unseverable right to your share of profits. This by default shrinks the wealth gap and income inequality for you.

 

Fixing the Wealth Gap and Income Inequality One Person at a Time

It is tempting to blame government and politicians for the wealth gap and income inequality problems. But as we saw above, the problem is not a political one and politics can’t solve it regardless what politicians promise!

Natural levelers are down-right brutal. We don’t need a catastrophe to level the field to an acceptable level. Complete equality is a terrible goal as the 20th Century has shown. However, the current environment is way too lopsided to be good for society in the long run either.

Businesses are the engine of value creation and growth; labor builds the goods and provides the services that make that value creation and growth possible. It is fair to say labor should have a reasonable slice of that pie.

Looking to the government for solutions is only a minor stopgap. Social services (the safety net) can be increased (and improved), but this is unproductive after a point. While more can be done in this area, it will not solve income inequality if individuals refuse to own a piece of the means of production! Nor make even a dent in the wealth gap!

Unexpected plague, war, revolution or collapse can temporarily level the field, it does so by bring the top down, leaving the middle and bottom no better off than before and probably worse. To fix income inequality issues and narrow the wealth gap, we want to focus on improving the most amount of lives as possible, not destroy everything until we are all level digging in the dirt for sustenance.

I know the world preaches index funds; so do I. Before Jack Bogle passed away recently he warned of the issues I brought up above. If mutual funds/index funds/ETFs control all the stocks they will vote the rules in corporate guidance. 

If you respect and value freedom you will demand a voice and your voice is purchased with ownership. It doesn’t take much. A few shares of three good companies can do wonders for your economic status. You can still hold index funds with the bulk of your money. (They pay dividends too, you know.)

Even without direct ownership (ownership through index funds) you still personally shrink the wealth gap. The increasing dividends added to your wage income narrows income inequality ever so slightly.

It took 40 years for the problem to grow this wide; it will take more than a few years to fix, even in your personal life. 

Or we could do what we’ve been doing all along and hope it changes magically all on its own.

Or demand a government bailout. (But then you’re just like corporate America.)

 

 

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