Pros and Cons of Income Inequality


Income inequality is a good thing but, as is proverbial, one can have too much.

We like having more and because working makes that possible, we’re motivated to work.  That’s a good thing because, although having more won’t necessarily make us happy, the way our society works requires us to work.

When there’s too much income inequality, however, when a tiny minority has most of the money, the others can’t keep buying enough and consumption drops.  Businesses start shedding workers, and money that would have been invested in production moves to secondary assets like stocks whose prices increase because of the new demand.

But enterprises underlying those secondary assets depend on the economy and because that is shrinking, those assets become increasingly over-valued.  When the discrepancy is recognized, the speculative bubble bursts.  Then all but the very rich are in trouble.

That happened in the Great Depression 80-odd years ago and, starting 8-ish years ago, it is happening again.  Our government contained the collapse more effectively this time although its effects continue, but we are now also experiencing a worsening systemic problem.

Our society depends on jobs to supply income, but jobs are disappearing.

What revived our economy from the Great Depression were economic policies that redistributed some of the wealth from the top.  Restoring buying power restored consumption, that restored investing in production, and that created more jobs — a virtuous spiral.   Those policies included Social Security, Medicare, high minimum wages, high marginal tax rates, and strong enforcement of financial regulations.  Eisenhower and Nixon supported and even extended parts of the system Roosevelt initiated that kept investment and consumption in balance.

Then economic policy reversed direction in the 1970s following dramatic cuts in the supply and corresponding increases in the price of oil.  The economy was wounded, according to the new theory, because there was not enough investment and too much consumption.  The indicated new policies included cutting the real value of the minimum wage, cutting welfare spending, cutting taxes on the wealthy, and deregulating the financial sector.  Inequality began to rise again.

That new policy direction was and still is embraced by both Democrats and Republican.  The political shift is detailed in this post but my aim here is to point not to a political but a fundamental change.

I included the leftmost chart below in my 2013 Economic Consequences of Inequality post.  We must also consider the one beside it from the World Wealth and Income Database.  Today’s income inequality and under-employment was brought to us by leaders of both political parties, none of which see that we are experiencing a second industrial revolution as momentous as the first.

Extreme Inequality

change-in-top-1-income-share-us-presidentsWhat has already happened is jobs previously done in America went where wages are lower.  What is happening at an increasing rate now is jobs done by humans are going to machines.

Economics researchers studying US Census Bureau data say half of current jobs (47%) can soon be done by machines and this study suggests 81% in the next few decades.  The schedule is arguable but the future of routine jobs is clear — they’re going away.

Routine vs Non-routine jobs

RobotsResearchers employing the quadrant chart tool I wrote about here assure us that non-routine jobs will remain beyond the reach of machines.

Watching our washing machine being repaired just now, I thought: “That’s something no machine could do. “  But the problem was diagnosed by phone, the part to be replaced was mailed here and washers could be designed to be serviced by robots.  In Japan where many are old enough to need assisted living, much of the care is already provided by smart machines.  Our physical, cognitive and emotional health care needs will increasingly be served by machines.  Robot waiters will attend us and security guards will protect us.  And so on.

Robots could even replace the guys on the freezing mud flats outside my window harvesting clams but it will probably not be worth the investment.  And there will always be jobs for thinking folks like us, right?  In fact, our lives will become ever easier as machines take over all our routine and physical tasks.

Work Sphere

Er… why do we imagine we can continue to out-think robots?   Could we not have told sagacious horses looking forward to similar benefits from the first industrial revolution that they never would learn to drive tractors?

Before that revolution 90% of Americans’ jobs were in agriculture, 3% now.  It didn’t happen suddenly.  Engines were used the same way as horses for fifty years before methods of farming changed at an increasing pace to exploit the new potential of engines.

We’re now in the second half of the second industrial revolution.  Computers began to be used for routine tasks more than seventy years ago and I was managing development of a communications grid based on the same technology as the Internet 45 years ago.  The great majority of jobs presently done by humans will again disappear.

What will happen when there are only jobs for a very few?  There must be a new foundation for the economy if there are too few new jobs for humans.  There will be no choice but to redistribute part of the profits from owners of machines to others so they can pay for the machines’ products and services.  There would otherwise be no profits.

Inevitable as it may be in the longer term, redistribution like that would, with good reason, be feared by the wealthy.  It could go too far.  The interim step, if the system dominated by “too big to fail” financial enterprises continues to collapse, will likely be a repeat of the Great Depression work programs.

We may at long last restore our transportation and other infrastructure on the way to an economic future whose structure we cannot yet discern.

Capitalism, the General Welfare and Education

I’m blessed to have friends whose beliefs I do not share.  They make it so much easier to see that if I believe this, I cannot also believe that.

My ideas were well tested in a discussion of this New York Times article about income inequality analyzed in the context of US economic expansions by Ms. Tcherneva, an economist at Bard College.

In the 1940s, ’50s and ’60s, most income gains from the bottom of one recession to the start of the next went to most people, i.e., the bottom 90% got a majority of the increase.  But in each expansion they got a smaller share while the top 10% got increasingly more.

From 2001 to 2007, an extraordinary 98% of income gains went to the top 10% of earners.

In the first three years of the current expansion, the incomes of the bottom 90% actually fell, which meant the top 10% got a seemingly impossible 116% of all income gains.

Inequality Increased with Expansions

The top 10% now gets almost half of all income.  Just the top 3% got almost a third (31%) in 2013 and the next 7% got 17%.  The remaining half (52%) is shared by the bottom 90%.

Making life harder for the bottom 20%, they got only 36% of federal transfer payments in 2010, down from 54% in 1979.

The short term result of rising inequality is weak economic demand.  The longer term impact is lack of progress in education.

The USA is the only high-income country whose 25-34 year olds are no better educated than its 55-64 year olds.  College graduation rates for the poorest increased only 4% from those born in the early 1960s to the early 1980s while the rate for the wealthiest increased by almost 20%.

Upward mobility is very limited without a college degree so high inequality in education results in children of prosperous families tending to stay well-off while children of poor families remain poor.

Ms. Tcherneva focuses on the short term issue, weak demand, and observes that our fiscal policy – lower interest rates to increase demand to create jobs – is not working.  She suggests the Federal government focus directly on employment:  “The manpower of the poor and the unemployed can be mobilized for the public purpose irrespective of their skill level, which in turn will be upgraded by the very work experience and educational programs that the program would offer.”

When the discussion began, a different version of the income distribution chart by Robert Reich was dismissed as “bull crap.”  By the end, we agreed that income distribution really is highly unequal in the US and is growing more so.  We further agreed that the trend is unsustainable.  We came close to a consensus that if it continues too long, there will be civil strife. 

And we ended up agreeing that our economy is undergoing structural change.  Off-shoring and automation are eliminating many lower paid jobs.  AI software is also replacing many higher paid jobs.  Perhaps there simply will not be enough jobs humans can do better/cheaper than intelligent machines and we will in the longer term need a new economic paradigm.

When we discussed solutions for today, we disagreed about whether government should try to alter income distribution, directly create jobs, or do more to govern behavior in markets e.g., with stricter bank regulations.  We disagreed about whether government should ever try to influence society in any way e.g., by tax incentives. 

And we disagreed if education should be primarily private or public. 

Seeking a philosophical basis for our beliefs, we discussed the Constitution’s: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, … promote the general Welfare …”, and its section 8, which gives the legislative branch the power “… To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the the common Defence and general Welfare of the United States.” 

What, we debated, is the Federal government’s responsibility for “the general welfare” in a capitalist society?

Characteristics of all forms of capitalism include capital accumulation, competitive markets and wage labor.  Piketty’s research suggests the rate of return on capital is inevitably higher than the rate of growth of wages.  What government action does that suggest?  To what extent should government constrain behavior in competitive markets?  And is the freedom that comes with wage labor sufficient?

What preceded capitalism was slavery where slaves could not seek a better owner, and feudalism which also kept those at the bottom in place.  Capitalism has no such iron-clad constraints.  In pursuit of higher wages, a better boss, more interesting or safer work, we can try to get any job at all, anywhere. 

Furthermore, capitalism requires property rights and other laws while in slave-owning and feudal societies, laws are the whim of the slave-owner or land-holder. 

We did not dispute the ideas in the preamble to the Constitution; that central government must enable us to live in peace under the protection of the law.  Hamilton in the Federalist Papers was emphatic about “a more perfect union” and “common defense”.  States must not have armies, he wrote, because they would go to war with each other if they did.  The nation as a whole must defend itself. 

Where we disagreed was on Section 8, about the meaning of “the general welfare” and the Federal government responsibilities it implies. 

My thoughts were clarified by the discussion.  I believe the central government of any nation is responsible for establishing the infrastructure, broadly defined, that is necessary for the general welfare.

Infrastructure means basic facilities, services, and installations necessary for a society to function, e.g., transportation and communications systems, water and power lines.  Infrastructure also includes public institutions such as schools, post offices, and prisons. And it includes protection of “the commons”, things we all need that nobody owns such as the air.

Different combinations of public and private involvement can create and maintain infrastructure, but the central government is always responsible for ensuring that current and future generations will have an infrastructure that enables the nation to remain competitive and viable.

I have long thought, for example, that our central government should lead us from dependency on Middle East (or other) oil by establishing a suitable electricity grid.  What struck me in this discussion is that I think a well educated and healthy work force is also part of our infrastructure. 

And I want nobody to be prevented from fulfilling their potential by the circumstances into which they are born.

That led me to two conclusions about education.  First, it must be funded from the center because if it is not, welfare cannot be general.  Some will be privileged by accident of birth while others who may have high intellect and/or other gifts will not get an education that enables them to fulfill their potential.  Second, the curriculum must be set at the center because if it is not, our workforce will not have a dependable base of skills.

I do not mean specific work-related skills, almost all of which now have a short shelf-life because technology is advancing so fast.  I mean the ability to seek out and recognize facts, to reason from facts to conclusions, and to communicate effectively with people whose ideas are different. 

We are not born knowing how to do any of those things or how to act as members of society, just as we are not born knowing how to read or do arithmetic, and that’s important because we can’t have an effective democracy if voters can’t recognize facts or reason from them. 

In fact, we do not have an effective democracy, and I want that to change!

My views, taken as a whole, seem to fit no label.   I believe, among other things, that:

  • Markets should operate as the engine of creative destruction (i.e., I’m a capitalist)
  • Which means, for example, that too-big-to-fail financial institutions must be broken into smaller entities that can go bankrupt
  • And (almost?) all tax incentives should be eliminated
  • Individuals should be held accountable for their actions
  • Which means we must strengthen regulation and enforcement of individuals’ behavior in markets (i.e. prosecute criminal behavior)
  • Everyone should have a reasonably good opportunity to fulfill their potential (i.e., I’m a progressive)
  • Which means we need a progressive income tax code and high inheritance taxes
  • And Federally funded education with a uniform national curriculum
  • A reasonable amount of health care and etc should be available to all (i.e., I’m a socialist)
  • Which means we need a universal single-payer health system
  • Infrastructure investment by the central government is necessary and can be funded by borrowing (i.e., I’m not a fiscal hawk)
  • But spending programs should be funded with current revenue, i.e., taxes (so maybe I am a fiscal hawk)
  • Our misguided spending on wars should be invested productively, e.g., on an electricity grid that helps us overcome our dependency on oil and coal (i.e., I’m a peacenik) 

My education left me unable to accept an entire package of ideas from anyone else, but it’s hard to avoid cognitive dissonance when you assemble your own set.  It’s almost impossible to spot every inconsistency.  This is why I’m so grateful to my diverse friends for helping me see more clearly.

The Practice of Transformation

First, some background to the epiphany (an experience of sudden and striking realization).  Twenty-odd years ago I joined Dun and Bradstreet’s advanced services division as Director of Program Management.  I was not the only one unfamiliar with what that job might be.  When my business cards came, they identified me as Director of Program Manglement.

There is no better way in such a situation than Steve Jobs’ approach: “When you don’t know where to start, start somewhere.”  I did what needed doing for a complex new service that was being developed in New York and tested and rolled out in country-specific variants all across Europe, then used that experience to establish a methodical software development process.

The first step in the process is a Vision Statement.  Its purpose is to imagine and articulate “how great it will be when.”  Because our mission was to develop and deploy “advanced services”, we had to imagine new ways our customers could do their work to get better results.

Vision Statements imagined people using radically new software to do business in new ways with far more effective results.  We illustrated how pieces of the software might look and got feedback from innovative customers to identify the best ideas.

Then came the Scope Statement.  That’s where, based on our image of “how great it will be when,” we defined what the first software version would and would not do.  Scope transformed an ultimate vision into something we could actually do.  That became the basis for the Project Plan.

So, the Vision Statement harnesses intuition: the Scope Statement employs the intellect.  The Vision Statement is expansive: the Scope Statement is restrictive — that’s where you discipline yourself to say, “No, we don’t have to do that piece yet.”

By the time I took over as General Manager of that division then went on to establish D&B’s global “Technology Strategy, Architecture and Frameworks” I’d realized the same method of harnessing intuition disciplined by intellect was applicable to transformational business strategy.

No transformation is possible if you have no vision of “how great it will be.”  At best you will find only quicker, cheaper ways of doing the same things you always did.

Now the epiphany:  a couple of days ago, I realized Tibetan Buddhism is built on the same foundation.

In a long traditional set of rituals I practice every morning, supplemented by study and reflection later in the day, I imagine becoming deities that flawlessly manifest behavior I want to perfect.  The only difference from business Visions is instead of imagining freedom from business limitations, I imagine freedom from emotional and conceptual habits.

In the same way as Vision Statements include illustrative stories, Tibetan Buddhist texts include tales about exemplary beings.

But unlike the process for product and business transformation, Tibetan Buddhism requires no Scope Statement.  New products and services or business strategies take substantial time and investment which makes rigorous scope management of a stepwise transition essential.

Tibetan Buddhist practice is more like bug-fixing.  All features exist, they’re just buggy.  Because they’re so buggy, it’s hard to imagine all the defects gone, so we visualize deities that reveal in purified form what we cannot see even though it is already there.

How to proceed when there are so many bugs?  The proven method in the business world is “continuous improvement.”  One of its early leaders, W. Edwards Deming, was instrumental in Japan’s mastery of manufacturing.  They summarize his teaching that errors are opportunities for learning to generate improvements as “every defect a treasure”.

Continuous improvement is an unremitting process of noticing defects, rigorously identifying their root causes, and incrementally eliminating those factors.

Tibetan Buddhism is a continuous improvement practice.  My teacher says two to four hours of formal practice every day is necessary for transformation.  Some change seems to be taking place since I upped my own practice to two hours.  But it’s the same as in business, my aim must be to stay alert throughout the day, notice every defect, identify why it happened, and steadfastly uproot its cause.

I was lucky in my business life to get transformative teachings at Harvard Business School and elsewhere.  I am lucky now to get transformative Tibetan Buddhist teachings.  And I’m blessed above all by my parents’ teaching, “I don’t know, let’s work to find out.”

Epiphanies result, if at all, from long hard work whose aim may not even seem to be discovery.  They are surprising because arriving at the realization is unexpected.  The realization itself, however, is immediately recognized to be obvious truth.

It’s not surprising that both transformational Tibetan Buddhism and transformational business strategy use envisioning integrated with continuous improvement.  My surprised feeling was because I hadn’t noticed that before.  It’s lucky that what I learned in business was such good preparation for what I’m doing now.

Who am I With?

As we enjoy our fine breakfasts of potato curry, my Korean-American friend tells me Korean is better for people because the usage changes depending on their relationship.  It’s not just the greeting, the suffix of many words also changes.  Interactions are not effective if the wrong form of language is used.

What this means is when Korean people meet, they must immediately work out how they are related.  “I must pay close attention to you.  I can’t just start blah, blah, blah as I would to an American.  The language forces me to be more sensitive to other people.”  I knew Japanese was like this and associated it with a stilted, hierarchical culture.  Koreans, my friend says, are very different.  “We are fiery people, always yelling at each other.  But because of our language we do it respectfully.” 

Westerners also assess relative relationships.  Think of a business gathering, think of a social gathering, think of any gathering.  We treat people differently depending on what role we imagine for them, and we can imagine simultaneous different roles for the same person.   Chokyi Nyima Rinpoche, the head of a big Tibetan monastery here in Boudha, who travels extensively to give teachings, said with a big smile one day last year: “It’s very strange.  Sometimes people treat me like a great teacher.  They say, “oh, you are such a great lama’ and they bow to me.  Other times they treat me like a baby who cannot do anything for himself.”

How does communication actually work?   Do we need concepts about others to interact effectively?  Does facial expression, for example, tell us more?  Recent research provides a surprising answer.

A researcher with photographs of faces of people who had won or lost a tennis match asked folks to say who had won and who lost.  Then he showed photographs of the whole body of the winners and losers.  Lastly, he showed  losers’ faces photo-shopped onto winners’ bodies  and vice versa.  Shown faces only, people were wrong as often as they were right.  With entire bodies they usually guessed correctly.  We imagine faces reveal what’s in our mind but in fact, it’s body posture.

Surely eye contact is important?  Sherry Turkle has been studying social technology for thirty years at MIT.  When I met her in the mid-90’s she was cautiously optimistic about virtual communities where adolescents (and others) can try out different personalities and learn better ways to interact.  No eye contact there.  She recently published a new book about not only social technology but the impact of always-on smartphones and also caring robots.  She is troubled by how these technologies amplify self-absorption.  Robots that make eye contact are especially seductive.

If a robot follows us with its eyes and responds to our words or gestures, we imagine it cares about us.  It fits our concept of interaction.  We are in fact happy to imagine the emotion that does not exist, maybe happier because that’s safer; we’re in control.  One of Sherry’s research volunteers was playing with her grand-daughter when her robotic “seal” was delivered.  Captivated by its responsiveness, happily imagining its need for food and sleep and responding to that, she soon ignored the real child.

Are concepts of interaction ever helpful?  My sheep didn’t seem to have concepts about each other.  Mothers and their lambs baa’d if they got separated.  Pairs of adult ewes sometimes interacted by standing nose to nose breathing lightly.  In both cases information was exchanged.  Was it correctly understood?

Maybe that’s not the right question.  Sheep and other creatures are programmed not to evaluate but respond instantly to input that might signify a threat.  There’s little or no cost when the threat is not real and great benefit when it is.  They, too, are imagining more than is being sent but in their case, it’s a survival mechanism.  Chickens run from an aircraft shadow because it could have come from a hawk

There is a form of communication that provides perfect information exchange.  Computer-computer communication includes extra data with each message so the receiver can know if the message was corrupted, and extra messages so the sender knows if the message reached its destination correctly.  Getting that to work is harder than it sounds – the network whose development I managed starting in 1971 took a couple of years to debug – but this is a case where message sent and received are identical and there’s no imagining of additional content.

The goal of humans communicating seems less clear.  We are happy to communicate with robots even though we fabricate the emotional content of message received.  We are often unhappy communicating with each other because what’s said is ambiguous and/or what’s heard is misinterpreted.  Why does this happen?  Because our interactions are formed by concepts about others and what kinds we like, don’t like or don’t care about.

Suddenly, I see the big thing.  Korean helps us notice we are speaking with a real person not an imaginary playmate.  Grandma’s robotic seal has the opposite effect, seducing her into an imaginary relationship in which she ignores her real grand-daughter.

We so easily imagine we’re communicating when all we’re really doing is entertaining ourselves.