One of the latest “squirrels” being pointed to by the left to distract Americans from the complete fustercluck that is Obamacare is “income inequality.” The idea, as framed by the left, is that corporate profits are at record highs, but wages have stagnated over the last several decades. The answer, according to the economically illiterate on the left (but I repeat myself) is either to hike the minimum wage, tie it to inflation, or institute a “living wage,” whatever that means.
Frequent readers of this weekly column probably know that my position on the minimum wage is the same as the New York Times‘ position: the right minimum wage should be $0. No, that does not mean that I want to repeal the 13th Amendment, folks. All it means is that I do not want the government to dictate what someone should pay another individual for work. I prefer the market and those individuals to set the rate. If nobody will perform the work for “too low” a wage, it stands to reason that the employer will have to offer more of a wage in order to have someone perform the work. Repealing the minimum wage will not send children to work in the spice mines of Kessel, despite the fears of the left. In fact, the groups which stand to lose the most from a minimum wage repeal likely are unions. More on this to come in a subsequent post.
Here are some of my thoughts regarding income “inequality” in America and my response to the left’s foolish approach to this issue.
Income inequality is a good thing.
At the threshold, the concept of income inequality is absolute and utter nonsense. Why should incomes be equal? Does everyone in America do the same type of work, at the same level of intensity and with the same performance outcomes? Is the janitor supposed to make the same as the brain surgeon? Is the bad brain surgeon supposed to make the same as the good brain surgeon? Profit is the absolute best motivator for conduct, particularly economic-type of conduct, such as working at a job or doing something more entrepreneurial. If the two brain surgeons were guaranteed to earn the same amount of money no matter how hard they worked or how well they performed their job, what is the incentive for one to outperform the other?
Earnings should be based on hard work and results. If you take away that upside, you wind up with workers who have no desire to perform at any level other than at the minimum level which they need to in order to avoid being fired. Of course, this rule applies to the private sector, as well as government-mandated minimum wage jobs.
John Tammy at Forbes agrees:
When income and wealth inequality are growing, unease in our lives is shrinking. Republicans, as the alleged Party of entrepreneurial capitalism, should understand this well, and stop acting as though success is something to politicize. Wealth inequality is one of the surest signs of economic advancement. It’s time for today’s Republicans to act like adults, and embrace the very inequality that has improved the lives of so many.
Income inequality is a motivator.
The left is famous for attempting to short circuit the established process when they want to achieve certain results and cannot do so in mainstream or traditional channels. One example many will point to is gay marriage. In states where the left cannot get same-sex marriage passed in the legislature, they will resort to the courts to get a Judge to rule “their way.” Of course, this sets a dangerous precedent because a Judge could rule against the left at some point in the future as well.
Instead of trying to short-circuit the free market, it would be best for those on the right to understand what a motivator income “inequality” can be. I am old enough to remember an America where people looked at the rich as something to aspire to be–not as a boogeyman that the government is supposed to penalize in the name of “fairness.”
The minimum wage worker should not seek more money for the work that they do as a minimum wage worker, but they should seek to move up in the company (or in another job). Like PFoL editor Amy Otto eloquently put in a post recently, minimum wage jobs are an opportunity–not a living. They certainly should be. Many of us (myself included) started making minimum wage and then moved up because of performance, hard work, and a bit of luck at the right opportunity. Indeed, many McDonald’s franchisees and executives started off as burger flippers and now own entire restaurants. Isn’t that what we all want?
Those earning larger incomes don’t do so at the expense of the poor.
One of the most absurd theories that the left espouse is that the folks earning large incomes are doing so at the expense of the poor. This has no basis in reality. Companies pay their executives commensurate with their performance and experience. If they don’t pay them enough, they likely move on. If they pay them too much, the company suffers when it comes to their corporate earnings. A bank teller does not generate revenue for a bank. The mortgage lender or proprietary trader does. Their pay rates are disparate for that exact reason. Once again, profit is they key motivator, on both sides of the equation.
Frankly, the amount of money that a company pays its executives is none of my business except in two situations: (1) If I am a shareholder, then it matters to me; or (2) If the company is a recipient of federal funds (read–bailouts), then there should be a limit to compensation until the bailout is paid back. Other than that, I don’t suffer because Jamie Dimon made $20 or $30 million last year.
Wealth inequality is a bigger problem than income inequality
One of the bigger problems, in my opinion, is wealth inequality. By this, I mean the amount of assets which folks own. Part of this problem is the epidemic that we have in this country of people living “paycheck to paycheck,” with no savings, no real assets (LCD TVs and iPads don’t count), and no investments to grow their wealth.
Granted, it is difficult for people to set aside money if their wages are low. I did, however, demonstrate that with enough time and diligent savings, even middle class wage earners can save millions over time. It is more tempting for people of all levels of income to live outside of their means. Indeed, if someone earns $300,000 a year, but spends $310,000 on nonsense, I posit that they are worse off than someone who earns $50,000 but only spends $35,000 of it and can save $15,000 a year. Society would call the former person “rich” or a “one-percenter” and the latter “middle class.” In time, the middle class earner, due to his or her saving habits, will be richer than the “one-percenter” who spends more than he or she earns every year. It comes down to personal responsibility.
Inflation, even at “tame” levels, hurts the lower earners most.
The Federal Reserve often talks about stoking a certain level of inflation in order to stimulate the economy. Unfortunately, this hurts the lowest earners in society the most. A minimum wage earner today (assuming $8.00, which is New York’s minimum wage) will earn roughly $16,640 per year (before tax rebates or other subsidies). This is the equivalent of less than $6,000 in 1980 dollars. If you look at this issue from the other direction, the minimum wage in 1980 was $3.10 which means that a minimum wage worker would earn $6,448 per year. This translates into $18,229. My oversimplified hypothetical demonstrates the reduction in “real wages,” or the amount of goods that dollars can purchase when we compare wages over time and factor in inflation.
Of course, the Fed keeps pushing inflation on us. Things get more expensive and wages lag behind. Wouldn’t it be nice if the Fed tried not to inflate all the things?
In sum, income “inequality” should motivate us to strive for more. In doing so, more personal responsibility can assist in alleviating the “wealth” inequality and put us in better positions financially. We may not be able to control the wage we are paid, but we can control where we work and how much we save. Focusing on the personal responsibility aspect, rather than blaming “the rich guy,” is a good start to conquering income “inequality.”
As always, free markets are better markets.
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Expect earnings from retailers to be market-movers, as well as the Federal Reserve meeting wrapping up on Wednesday. Will the Fed continue tapering, or will they hold off? Also potentially market-moving economic announcements include GDP (projected to be at about 3% last quarter), GDP price index (consensus at 1.2%), and initial jobless claims (consensus at 327k).
Have a great week!