Navigating The Muddy Waters of Inequality

December 2019 – The disruptions in Chile are in many ways shocking. But so are the riots in France. The causes for all these things are hotly debated, from foreign interference to domestic politics. Many point to rising inequality. Yet the most sophisticated research in this area has come to question whether inequality has actually increased very much or at all.

The Economist recently ran an article in which it pointed out that it was back in 1998 when Thomas Piketty came to the conclusion that “the 1%” had made out like bandits at the expense of “the 99%.” This startling statement condemning the ultra-rich was based on an innovation in which he and his co-author, Emmanuel Saez, pioneered the idea of using tax data rather than survey data to study the incomes of people.

It is hard to overstate the influence of this research. When you hear Elizabeth Warren or Bernie Sanders, or when you hear protest leaders in France or Chile justify their movements, or if you read Occupy Wall Street’s claims, it is as if the research from 1998 is providing their vocabulary.

Always remember, as John Maynard Keynes said: “Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.”

America has actually been the poster child for this growth in inequality. But as The Economist explains: “ a recent working paper by Gerald Auten and David Splinter, economists at the Treasury and Congress’s Joint Committee on Taxation, respectively, reaches a striking new conclusion. It finds that, after adjusting for taxes and transfers, the income share of America’s top 1% has barely changed since the 1960s.”

Studying subjects such as wealth and income are very tricky because there is no requirement to report many things and, even if we know they exist, valuing them is difficult. In other words, if we expand Medicaid and so make every poor person eligible for some kind of free medical insurance, we are giving people something of value, as it might cost $7,000 a year on average per enrollee. If we take this payment in kind and add it to a poor person’s income, it dramatically changes the statistics, but a poor person without health problems might not feel any more prosperous.

Using tax data is also a problem because tax laws change. For example, Reagan’s tax cuts encouraged people to organize business affairs to use pass-through entities, such as LLCs and S-Corps. This led to income that was previously taxed on corporate returns — and did not show up as individual income — to now appear on individual returns.

Also, society changes. The Piketty numbers were based on each taxpaying unit, typically a family. But there has been a change of social structure where poorer people either don’t marry or get divorced, and so, they file individual tax returns. These social changes have been less pronounced among the wealthy. So the latest research is skewed more at individual income and wealth rather than family income and wealth.

Wealth is even harder to track than income. Fluctuations in real estate, art, equity, bonds, etc., lead to what are really wild guesses used in the research. Often research will take incomes on tax returns and impute a return rate to guestimate asset values. This is sketchy to begin with and doesn’t account for art, homes, etc.

Most studies look at a particular year, and even if accurate, that year’s statistics are not representative of American society’s fluidity. The Economist piece reports, citing research by Cornell University’s Thomas Hirschl, 11% of Americans will join the top 1% for at least one year between the ages of 25 and 60.

Age itself is a variable. One of the best predictors of who will increase their income and build assets is who is poor now. The Economist piece notes: “Measures of inequality of any kind tend to suffer from the fact they do not track individuals, but slices of the population which are made up of different people at different points in time.”

The problem, though, is not just a bad economics book. Though that might have given a language to protestors and politicians, it is doubtful they will find happiness in better economic texts.

The problem is serious and three-fold:

First, there is a moral problem. Envy is a deadly sin, and to focus on inequality rather than improvement of one’s own place in the world will lead to nothing but unhappiness.

Second, the focus on redistribution is a mistake. If protesters were out there urging more rigorous schools, apprenticeship programs, access to libraries, etc. ­— things they could use to lift themselves — that would be one thing. But to think they will raise themselves up by taking from others is profoundly mistaken.

The most valuable wealth is in the mind. It is knowledge and habits. Over the generations, many countries have expelled people and/or confiscated all their wealth. It did not make the countries richer. It made them poorer. They lost the engines of economic success. So when Idi Amin threw the Indians out of Uganda and kept all their wealth, within a few years those Indians were at the top of the income scales in the UK and Canada, while Uganda’s economy just collapsed.

Third, there is a mistake in thinking most guarantees to employees lead to success for employees. Most of the time, it leads to constrained opportunities. Demanding fewer hours, employment guarantees, richer pensions — none of this creates wealth. It mostly makes it risky to hire people, so fewer get hired and the cycle continues. The very policies implemented in hopes of preventing misery are what cause more misery.

For the produce industry, navigating these socio-economic realities is going to be an important part of business in the years to come.     pb