Income inequality

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.

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 provides what he calls the “Four Horsemen” of leveling: war, revolution, collapse and plague. Historically these four horsemen have been the leading cause of leveling income and wealth. 

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.

Economic growth is pushing towards 10 years as of this writing. The 2008-09 recession was deep and slow in recovery. Fewer jobs at lower wages coupled with the long time frame unemployed people had to wait to even get a job at any wage caused tempers to flare. The minimum wage was raised in 2007, 2008 and 2009 to the current federal rate we have today.

Jobs available as the recession eased were not the same quality as jobs lost. More workers were among the working poor, earning minimum wage or close to it. Eventually a vocal crowd demanded a $15 an hour minimum wage. It all sounded good. And fair to workers making less. Business owners also made powerful points. In the end nothing of consequence came of the movement. The expanding economy lifted more wages, nullifying the demands of the activists. Better jobs with higher wages started appearing, too. People used to a higher income had greater opportunity to explore a pay increase at a new employer if the current employer didn’t increase wages.

The minimum wage has come off the front page recently as the economy expands and other matters of national interest steal column inches from the headlines. The issues haven’t gone away. The minimum wage is sure to rear its ugly head again.

In the past the argument revolved around how much to raise the minimum wage if at all. Forcing wages higher can cause job losses, accelerate automation or cause businesses to close due to the additional overhead. On the other hand, working full-time at minimum wage is getting near impossible to survive on. There has to be a better way.

In 2015 Warren Buffett wrote an op-ed piece for The Wall Street Journal saying a carefully crafted expansion of the Earned Income Credit could solve the problem. The title of this post is from that op-ed piece.