Good and Bad Inequality

August 14, 2017

Inequality can be either good or bad, depending.

Assuming behavior is ethical and legal, it is good for extra reward to go to those who work harder, are more creative, or take greater risks than the rest of us. The opportunity to earn extraordinary rewards is healthy and something we do not want to quash with taxes so high as to destroy the motivation to take risks.

It’s perfectly acceptable that there are people at every economic level. Every citizen can strive to achieve the high rewards if prepared to “pay the price,” which often involves very hard work and significant risks to sleep, health, relationships, and more.

It’s important for Liberals like me to endorse this kind of “good inequality,” because Conservatives often seem to think we only want socialism–everyone exactly at same income and wealth, with no motivation to try for more.

Please understand–we don’t want that.

In my view, bad inequality occurs in four major ways. First, if the behavior leading to greater income and wealth includes any of the following, it results in bad inequality: Corruption, immoral, unethical, or illegal behavior; using power to take advantage of laborers, purposefully capturing “rents” which are rightly deserved for labor, not for capital. How this is to be judged is not the purpose of this post, but it is often obvious.

Second, if the amount of high remuneration is not correctly correlated to performance and contribution, it results in bad inequality. Just because a compensation committee of the board of directors decides the CEO’s salary, bonus, and stock options doesn’t mean it is correlated with the CEO’s actual contribution. It’s usually not right, in this writer’s opinion, if the CEO earns 331 times that of the average employee. Surveys show the public thinks CEO’s are vastly overpaid.. This writer thinks 100 times would be a good target for policy intervention, and that’s way above the level of the 1960s.

Third, it is bad for significant wealth to be obtained through inheritance. The kids didn’t earn it, didn’t take the risk. Inherited wealth promulgates bad inequality. There should be a modest limit to what can be transferred, and a high tax on the remainder. This means a wide variety of transfer mechanisms need to be removed.

And fourth, if the share of income and wealth attributed to the top percentiles of the populations is very high and the share for those in the bottom percentiles very low, inadequate to live a decent life, inequality has risen to a level which is dangerous to the society as a whole. This is bad, regardless of whether the wealth is earned fairly.

The US has all these characteristics at this time–much good inequality, but all the forms of bad inequality. The combined effect results in creating the fourth condition, with the highest inequality among highly developed countries. The negative effects of high inequality have been elaborated in previous posts.

This high level of inequality is not the result of the natural and inevitable progress of healthy capitalism. The march of technology and globalization has contributed to the growth of inequality. But of equal or greater impact has been the steady advance of conservative economic policies designed to benefit business and capital at the expense of workers. We have tools to moderate the impact of all these influences.

The Federal Reserve has an objective to manage inflation (which also affects inequality) within upper and lower limits. Similarly, there is a lower and an upper limit to healthy inequality. Inequality is an issue which requires management and needs moderation.

We should have a government objective to keep inequality within a moderate range.

 

 

Then and Now–So Different!

August 12, 2017, Da Lat, Vietnam

My childhood family in High Point, North Carolina was poor. My parents were high school grads who found their way from farms 20 miles south, to this small textile and furniture town, and both got jobs at the most prominent textile factory, Adams Millis. All four kids worked on our small truck farm at the North end of town, and for neighbors–mowing lawns, harvesting tobacco, washing cars, stacking produce at the local grocery store, whatever we could find. Starting wage for me was $.15 per hour at age 12. When I entered college on a scholarship, my wages were $.75 per hour in the reference library.

My parents were never able to save. Even with the harvest of crops on our small farm, their combined wages were barely enough to keep us in a used pickup and a beat up car, plus clothing and essentials.

This may seem really rough, but that wasn’t how it felt in those days. We were poor, but clearly far from the poorest in town. There were many like us. We always had transportation, decent clothes, school supplies, and plenty of good food. Dad raised pigs and chickens for meat and mother canned a lot of the summer crops to last us through the winter. We felt happy and secure. We had “enough.”

To supplement his wages, my father sold produce off the back of his pickup truck, sometimes in the African American neighborhood of High Point–and there, we could see real poverty.

There are three important differences between then and now:

  1.  We had advantages
  2.  Times have changed
  3.  Inequality has risen sharply

First, as children of the 50s and 60s in the US, my family was white and we were WASPS. Our hard working parents went to church, didn’t drink, and didn’t use drugs. We had support from friends and relatives in a crime free environment. We had decent public schools. But the makeup of our nation today doesn’t look like High Point in the 60s and 70s. What about the millions today who are not white, not WASPS, may not have solid parents, live in real poverty far worse than we experienced, and may be surrounded by criminals, drugs, and little in the way of support?

Second, times have changed. Although we were poor, the reality is that we had little doubt about opportunity at that time in the US. When I graduated, I knew there would be many jobs available to me, and only worried about how to choose the best one. IBM offered me a job and Citibank another. I took banking. My brother took Southern Bell. My sister took Sears Roebuck, and the youngest took the Trammel Crow real estate firm in Texas. We all had the possibility of long term employment. We all had benefits including health insurance.

Our careers spanned a rapidly changing jobs era in America. These days, even if you have a college degree, it’s not that easy to find a good job, or to keep it. With the cost of education outpacing wages by a wide margin since the 70s, many more cannot afford college. Good luck if you can’t get through college today! The triple forces of Conservative economic policies since Reagan, globalization, and technology have eviserated manufacturing jobs, which Trump tries in vain to restore. There was opportunity and mobility then.

Third, as I argue in previous posts, inequality matters. Inequality has skyrocketed while mobility has simultaneously declined. Even in those days. we were painfully aware that there were social classes to which we were not privileged in our small town. You might ask, so what, everyone has someone above them in income and class, right? Yes, right, and we Liberals have no interest in completely eliminating inequality–only in significantly moderating it.  While inequality/status was a mild depressant then, it is now colored in bold terms all around us. In previous posts, I cite studies which show the damaging effects of high levels of inequality. Those include physical and mental health, life expectancy, crime, drugs, and slowed economic growth, plus the obvious misery of those at the bottom.

If only the US of today was committed to everyone “having enough” as a social contract. That’s not adequate, as I have argued above, but we don’t even have that. We have something like a philosophy of responsibility for yourself. Translation: If you are out of work, it is probably your own fault and we only help (a little) those who demonstrate that they try hard. They can only demonstrate trying hard by actually finding work. Thus the earned income tax credit–you can’t get support if you don’t have income.

Isn’t it obvious that we need a re-vitalized and active government (you can choose Federal, State or Local, it’s all government) to address the future of work, community, shared prosperity, and inequality? Is there an alternative?

How Americans Lose Faith in Government–an Example

July 31, 2017, Da Lat, Vietnam

This post illustrates why so many have lost confidence in government, using the example of a happenstance disclosure of  what I found to be disturbing information, with no justification available from the government.

Only as a result of the escalating feud between Congress and Russia, caused by Russian hacking and interference in our election, have we learned the size of the US Embassy and Consulate staff in Russia. Apparently the number is 1,119. Putin now retaliates against additional sanctions by requiring a 744 reduction to a new level of 455.

I’m shocked to see how many people we keep in just one country, just for the Embassy and Consulate. I can’t imagine how/why it is necessary for us to have this huge contingent of employees there. I’m sure there are also other government agencies represented there. And, that doesn’t count the many employees of  the State Department in the US who are devoted entirely to Russian relations.

A search on the internet provides little in the way of justification, nothing in the way of expense. I only find we have four offices there, and there are departments involved with business, education and culture, visas and US citizen services. I am pondering the annual cost of maintaining our properties there, plus the employment costs of 1,210 staff, the cost of expatriate salaries, health care,  housing and support, after recognizing that a number of employees are local hires. I would venture a guess that the cost of the  US Embassy and Consulates in Russia exceeds $100 million annually. I wouldn’t be surprised it it is more, and I wouldn’t be satisfied if it is half that, still a huge annual expense.

To me, this revelation is the kind of thing that causes so many Americans to lose total faith in government to use our tax money effectively and efficiently. It causes me to wonder how many other Embassies and Consulates in how many other countries may be overstaffed and/or inefficiently spending our tax dollars.

Maybe we really need all these services in Russia and all these employees and this huge expense. But I’d like to see the justification.  How many Americans would be comfortable that we really need more than 1,000 people and attendant expense to provide these services in just one nation? What if the NY Times or CNN brought this to the attention of the voters? President Trump could have provided such justification for his proposed cuts in the State Department, which were far less than that required now by Putin, as it relates to Russia only. If that was available, maybe I wouldn’t have such heartburn over seeing these numbers, almost by accident.

I recommend an annual analysis of every government program which can be isolated to a given purpose or country (e.g., State Department, Russia), if the annual expenditure exceeds a certain level. This should include costs along with performance and efficiency analysis.  Since so many programs are large, we could start with a hurdle of $100 million, and then lower it gradually in future years. I would recommend the information be provided to the public by the CBO, and renewal of such expenditures be required of Congress annually. I can’t imagine a business which wouldn’t conduct such an examination and justification annually.

I have been a consistent advocate for fixing government, not starving it. I believe our country needs strong institutions to assure our survival and advancement. I will continue to argue for that. But contrary to the depiction many Conservatives want to paint of us Liberals, I do not condone inefficiency and waste.

We need a better managed government, well managed and transparent to citizens–better than under Barack Obama, and definitely better than so far under Donald Trump.

Postscript Aug 12: Now President Trump praises Putin for reducing Embassy staff in Russia! If this kind of reduction properly right sizes the staff, why didn’t Trump do it?