Wealth Inequality in America

I came across this video about Wealth Inequality in America. At this point, it had 5,687,605 views, 55,594 likes and 2,787 dislikes. There are several responses to it. The way I got to the original was from this Learnliberty.org debate that was sparked by it. The 2 minutes intro to it was watched 54,754 times but the debate itself was only watched ~11,000 times. That is 0.2 % of the viewers of the propaganda video. The debate was tellingly titled:  “What Wasn't Said in "Wealth Inequality in America" The point of this post should be to actually answer this question because the debate definitely did not. Let’s start with a quick summary so that you do not have to suffer through the debate if you do not wish. The video is based on a research done in 2004 about income inequality in the USA. The premise of the research is flawed; the methodology is interesting but the results are tendentious. The video further distorts the data, but it presents it in a very persuasive manner. It is well done propaganda. It does not really say anything, but like any good propaganda, it is full of emotionally charged insinuations. The overall message is that income/wealth inequality is bad, it is much worse than any of us would think, it is unfair and immoral and WE SHOULD DO SOMETHING ABOUT IT! The question of what exactly that should be is left open, but there are plenty of gentle hints pointing toward some sort of socialist income and wealth equalization.

~~~~~~

The main problem with the debate is that yet again the left is framing it and the libertarian opposition to the idea is fundamentally defensive. Steve Horwitz would not say outright that inequality is not and should not be an issue. The practical problem with the debate was the points that were left out or not confronted properly. Here are

The points that were made:

No coercion, no problem

How wealth is acquired should matter more than the inequality itself. As long as the living standards are growing for everybody, we should not worry about either income or wealth differences. As long as the state of affairs is the result of voluntary free market interactions, we should not be concerned.

Skewed statistics

The statistics are badly skewed to make the result look worse (not accounting for benefits, before and after tax income, etc)

Missing mobility

The statistics are skewed because they are looking at a static picture completely disregarding time as a factor i.e.: there are very active movements over time for individual people between the different quadrants of the distribution. That’s about it for the arguments in the debate from the libertarian perspective. I cannot get into the arguments of the neo-com side because they are really all over the place, but I will start my own list with a rebuttal to a point made by Prof. Reiman.

The missing arguments

Imbalance of Democracy?

Reiman pointed out that income inequality creates an imbalance in democracy as the people with money can better afford influencing the political system. I think it can also be argued that “democratic inequality” is skewed the other way. No matter how much money the rich have, it is the very point of the presentation that there are few of them. Their higher wealth is balanced by the much larger number of people on the other side. How does this work exactly, what the real effect are, could and should be the subject of another discussion but it is undeniable that there are two ways to look at the problem. On the one side there is money, on the other there are people. Recent experience seems to indicate that the number of people matter more to the final outcome than the amount of money in the process. The rich Romney lost to the community organizer Obama.

Wealth & income

The difference between wealth and income was not emphasized enough. This is information from a comment on the video:

• The Politizane video is inspired by a paper written by Norton and Ariely entitled "Building a Better America—One Wealth Quintile at a Time". The data for wealth distribution in the paper was produced by Edward Wolff in a May 2004 paper entitled "Changes in Household Wealth in the 1980s and 1990s in the U.S." The relevant data is presented in Table 2. The Wolff paper uses two definitions of wealth - net worth and financial wealth. Financial wealth is net worth minus the value of owner occupied housing. The value of wealth used in the Politizane video is financial wealth. Wolff gives valid reasons for this definition having to do with wealth liquidity, however, it is a gross distortion when used in the Politizane video. One other point of bias in the video is that although the asset value of owner occupied housing is not counted as an asset in financial wealth, the mortgage on that asset is counted as a liability.

Even if we disregard the blatant dishonesty exposed in this comment, the fact still remains that we are dealing with two completely different arguments that should be approached in different ways. One of the discussions should be about the relative value of work, the other about the value of savings, investment and wealth accumulation. The two have different causes and are calling for different actions if we want to do anything about them.

Savings and investment

Nobody in the debate or the answers and reviews I saw touched upon basic economic questions about the creation of wealth, about the roles of consumption vs savings and investment. Any economist would tell us that the only true source of increasing wealth is the increase of productivity which can only be achieved through innovation, savings and investment. Our entire political class is at war with the very ideas that could make real growth possible. The focus on job creation through government action, excessive regulation that kills productivity, keeping interest rates artificially low to encourage spending and discourage savings and investment, distorting markets (such as housing) with politically motivated interference, the list is endless. Wealth can only come from savings and investment, never from spending which is the twisted suggestion of politicians from most parties. Remember George W. telling the American people after 9/11 that they can prove their patriotism by going shopping. By doing the opposite of what their instincts were telling them. Consumption does not create wealth, only savings and investment does. Maybe the disparity would not be that bad if the political class would advocate this instead of spending, stimulus and loose fiscal policy.

The underclass

The political argument was also missing, pointing out how a permanent underclass created by the government and its leftist enablers is trapped in poverty by the very people advocating for more policies predictably creating more of the same. What is missing is the argument that this is not simply stupidity, the inability to understand the consequences of certain policies. It is in the interest of the political classes to increase the size of the dependent classes as a political base that will support and justify their very existence. Inequality per se may not be the best friend of big governments, but dependence, permanent poverty most definitely is. The state has vested interest in keeping the poor dependent on its helping hand. Trapping an ever increasing percentage of the population in poverty has a significant role in the income inequality we are witnessing.

The upper class

Another ridiculously simple fallacy was also not pointed out: Increasing income affects wealth very differently in different income groups. People in the lower ranges of the income distribution have a higher percentage of their income spent on their living expenses. The important difference at any level is savings and investment, but is gaining even more importance as we go up in the income level ladder. Above a certain level of wealth, savings and investment takes on a life of its own, independent of the lifestyle and expenses of the rich. What makes it move up or down are the state of the economy in general and individual investment decisions in particular.

Globalization

The globalization aspect is also completely missing from the discussion. National income and wealth statistics may not reflect the problem accurately. Whereas a hundred years ago it was enough to be the leader in an industry at a national level, today the true leaders are working in a Global market. The very scope of being rich has changed with the change of the scope of doing business. While most elements of the inequality picture are local, the very top is almost certainly global.

What is money?

The most important argument I was missing from the debate is this: Most people picture money as the commodity to acquire the good life with. The extra hamburger, the caviar, the Dom Perignon, the skido, the sailboat and the Lear jet, but beyond a certain point, money is just a proxy. According to some, it is a proxy for political power; I’d say it is a proxy for decision making power in general and economic decisions in particular. It does not matter how extravagantly luxurious one’s lifestyle is, there is a limit to how much can be spent on luxuries. There is a limit to how much caviar you can eat. Most of the money the truly rich have is invested. If it is invested, it is generating wealth for the whole economy. The “privilege” the rich enjoys is making important economic decisions. The true drive behind the propaganda akin to this ‘Wealth Inequality in America” video is the softening up public opinion for taking away this power from those who hold it. It is designed to appeal to our lowest impulses of greed and envy so that the mob will even applaud when the state will dispossess them. Jeffrey Reiman says it quite plainly (@23:05). He does not see anything wrong with that. When we look at income inequality, the only question we should be asking is who is better qualified to make decisions about our economy. The people who were smart enough to make the money in the first place, or the politicians who only know how to spend it? The discussion should be about the role of the political classes in not only robbing, but also manipulating, influencing and controlling the decision making ability of the productive class.

The real questions

The victory of the framing is that nobody, not in this debate nor in any of the many articles about the propaganda video actually discusses the possible reasons. It is implicitly accepted that the reason is the free market and runaway capitalism and assumed that there is a consensus about this understanding. The subject of course can raise a number of fascinating questions. Why is it happening now? What happened in the past fifty years that moved us into this direction? Could it have something to do with globalization? Increased trade and the competition with emerging economies? Technology? The change from an economy based on manufacturing to a service economy? Why is it more pronounced in the US than in the rest of the world? Is it? What are the real numbers and what is the composition of the money on the top (earned vs investment income)? What is the effect of politics? What is the role of crony capitalism in the evolution of these differences? What is the real picture when we separate income and wealth? …. and we could go on with many more interesting questions. The primitive Marxists ‘explanation’ that the video insinuates; the socialist response offering Robin Hood solutions and the mob support that these insinuations and responses receive are truly scary. The real question is: how can we explain its appeal? (With the risk of appearing paranoid, I would also like to question the motivation behind the video. Who is ‘Politizane’, the one video youtube channel with the pseudonym? Why is he hiding his identity? This is a professional propaganda video. Why can’t we know who is behind it? Who financed and produced it? Who is the puppet master? Who could benefit from its unspoken policy suggestions of “social justice”? )

The real debate

I would like to say that the framing of the debate is flawed but I cannot. It is framed perfectly by Marxists to serve their interests, to project a Marxist world view where anybody’s gain must come at the expense of someone else. The question we should discuss is why do the defenders of freedom always fall into the trap of fighting from a defensive position. If the framing of a question is wrong, it is the frame itself that should be attacked, not the conclusions that were drawn from its false premises. Propaganda is dangerous. Maybe, learning how to deal with it effectively is what should be the subject of our discussion.