"Income Inequality" is one of the conservative ideologue's longest four letter words. The words themselves are controversial enough in that they imply that outcomes should be equal regardless of person-to-person differentiators like hard work, intelligence, diligence, innovation and leadership capacity. More frightening yet to many are the implications for how such a problem - to the extent that income inequality is considered a problem - is fixed. Confiscatory tax policy, income redistribution, state-owned and operated ventures and the elimination of basic personal and economic freedoms are what comes to the minds of many who read or who hear the words "income inequality". This feeling of dread is not unfounded as throughout human history, nations have implemented economic systems - communism and extreme socialism - that employed such measures in the failed pursuit of a utopian vision of equality. The poor track records of such engineered societies and economic systems stand in the minds of many as monuments to thinking that should be not merely avoided, but emphatically excoriated. Thus, the reactions of many conservatives that range from outright denial that income inequality actually exists to the assertion that it is actually good. That said, some of us are neither deluded by the fallacy that income inequality does not exist nor so braindead as to believe that income inequality has no significant broad based downside.
Like most things, income inequality is an issue where the sin or virtue of it is a matter of degree. The fundamentals of capitalism provide that those characteristics listed above - intelligence, hard work, diligence, etc. - are rewarded with the wealth that accrues through the creation and growth of an economic asset. While the wealth that accrues through the different but related activity of passing economic assets from one set of hands to another creates little in the way of broad macroeconomic benefit, such secondary capitalistic activities are tolerable to the extent that they provide the essential liquidity needed to reward true innovation. Reasonable people can disagree on how much more the successful, hardworking, value-creating innovator or manager should make relative to the person content with being directed in work activities that many are capable of performing. But it would be wholly dishonest not to recognize that some perhaps significant portion of income inequality is explained some combination of personal characteristics and circumstances. The controversy comes from the question of how much income inequality is actually good and when does it become not so good. Are we in the range of not so good? If so, is there anything to be done about it?
Most of the people denying the existence of income inequality or arguing that such inequality is a good thing are either mentally constipated by ideology, content to live in a state of abject nescience or have a narrow personal interest in their maintaining or maximizing their own fortunes. Interestingly, some of the people who are paid to advise the financially fortunate are themselves taking a look at the issue of income inequality and are reaching some conclusions to which the willfully ignorant should take heed. Specifically, economists at the investment banking firm Morgan Stanley have recently produced a report that not only acknowledges the reality of income inequality, but also recognizes that it can negatively affect the economy as a whole and the financial well-being of their clients.
What the financial crisis did was lay bare the ugliness of a growing income gap by removing the layer of debt accumulation that had been masking its presence. The ensuing run-up in financial wealth in the wake of the crisis further exacerbated the gap ...despite the roughly $25 trillion increase in wealth since the recovery from the financial crisis began, consumer spending remains anemic. Top income earners have benefited from wealth increases but middle and low income consumers continue to face structural liquidity constraints and unimpressive wage growth. To lift all boats, further increases in residential wealth and accelerating wage growth are needed.
The entire report can be found at the webpage linked below:
This isn't some wild-eyed liberal Occupy Wall Street group talking about income inequality, or some econo-pundit sharing his thesis for a liberal crowd at a Tedx talk. This is WALL STREET talking about it. The authors of the report are impeccably educated, highly trained and well-experienced professionals writing under the banner of an employer that sits in the center of capitalism, for the consumption of clients who pay them for their insights. Their judgement is that not only is income inequality a reality, it is enough of a problem that investors would do well to consider it relative to their investment decisions.
The report identifies a number of drivers of income inequality, including:
- The replacement of manufacturing jobs with lower wage service jobs
- The significant growth in the value of financial assets relative to the growth in real estate assets
- Increasingly regressive tax policy
- Increasing difficulty in accessing higher education
Those who ignorantly argue against efforts to mitigate income inequality miss an obvious fundamental issue. What happens to an economy driven primarily by personal consumption when an increasing percentage of Americans lack the financial wherewithal to maintain consumption? Why would a middle income person incur debt for a car, a house or some other big ticket item if they weren't confident that their income would consistently exceed that increased financial burden? Less personal income equals less consumption. Less consumption equals less business growth. The report identifies other drivers of decreased consumption such as the increasing cost of education and the attendant increases in student loan debt that compels recent graduates to defer major purchases such as starter homes and condominiums. Eventually, the investor class will be impacted by what happens to those at whom they look down their noses as there are fewer and fewer people capable of purchasing the goods and services of the companies in which those investors hold positions.
The report concludes optimistically as the authors expect for income and wages to rise among low to moderate income Americans which they expect to drive spending in certain consumer categories. But their acknowledgement of the connection between income inequality and macroeconomic performance couldn't be more clear.