Equalizing the Income Inequality Debate

Equalizing the Income Debate Alexey Laputin / Shutterstock

Equalizing the Income Debate
Alexey Laputin / Shutterstock

Around my Jesuit community, I don’t have a reputation for having the cleanest room ever. I’m more of a “piles” kind of guy. And this didn’t get better once I started to get interested in the debate on income inequality, which has been much discussed in the news over the past several months. Piles of paper clippings are reaching dangerous heights around my desk. So allow me to dig in and share my findings with you.

Income inequality: talk about a hot button issue. I remember one of my siblings voicing much discontent some 12 years ago about the severance package of former CEO Jean Marie Messier. And this was not a populist-inspired rant, but rather an outcry from someone who was working hard, and who could not understand why getting fired could earn someone tens of millions of dollars. In the words of Tom Waits, “I was young and foolish” then and as a student of contract law (among other things), I replied something like  “those are the terms of the deal,” also hoping to awake my sister from her cultural biases.1

Boy, I love America. But over the past twelve years or so I met some of her real poor and I learned more about their realities: the income disparities between men and women, whites and people of color, what it means not to get benefits… The stats were convincing, but the stories were really compelling: the story of single parents who have to leave home in the middle of the night to get to work on time because they can’t afford a car; the reality of living from paycheck to paycheck; the middle class dad who became unemployed and then homeless; migrants on the parking lot of neighborhood home improvement stores, who by night slept in a downtown church that served as a makeshift shelter…

The struggle of the poor is one side of income inequality. The other side of the debate tends to be the more talked about. Recently, people refer to it by a nickname for the upper tranche of our population: the 1% – basically those who make the coveted six figures and up a year. Now, full disclosure: I’ve never made a million dollars, not even $100 000, and I don’t know what it takes. Full disclosure #2: I have previously made clear that I have a rather inordinate fascination with Park Avenue bankers, even if we’ve had a bit of a fallout recently.2

Nonetheless, there are various dimensions of the differences in income in our country and in the world. There are personal struggles: the lot of those who are left out of the job market (because they are too old, too little or too much qualified). There are those who earn too little to actually make a living. There are also those who live only to make more money, and it’s never enough: “I’ve gotta do better, and earn more,” and … crash? Is “more money” the 21st century version of a society-accepted addiction?

Income differentials also have a societal, structural dimension. We, somewhat unconsciously, construct a cast of people who become invisible to society because they don’t look good enough or they smell bad, and we admire the “rich and famous.” It’s interesting how these two adjectives seem to be interwoven in our everyday language.

Now, back to basics: the current debate is about income inequality, not simply income differences. Let’s be very clear: “income inequality” (whether spoken of by Senator Cory Booker or Representative Paul Ryan) means that things are less equal—usually meaning less fair—than they ought to be.3 So the issue at stake is justice. And here’s the battleground, folks: what does it mean to be just when it come to people’s income?

The best offense is a good defense Photo Works / Shutterstock

The best offense is a good defense
Photo Works / Shutterstock

I don’t want to tell you what to think. I think it would be unjust, if not just simply unproductive.4  But I do have a sense of what the arguments are. I’ll paint very broad brushstrokes.5 No one’s ever figured out baseball in one sitting, I would think, so let’s start with balls and strikes.
Maybe it’s helpful to sketch two camps: offense and defense.

First, the defense. The higher income earners are also economic decision makers: so they use their money more productively than anyone else. They have the knowledge, the opportunities, and the abilities to make the best bang out of their buck. When they invest $100, it will likely have a greater impact on the economy than someone who spends it for basic stuff.

Those high earners’ investments are said to benefit society as whole. Money invested in high return projects makes more money for the system, through more jobs, higher share prices and dividends (hence it helps pay for folks’ retirements and their kids’ college), etc.

The defense also tells us that the perceived increase on income inequality is actually a miscalculation. With increased benefits attached to work (health care, retirement accounts) and greater government involvement to both help the poorest and transfer money from the wealthiest to the government (I’m writing this on tax day 2014, so think of your tax rate here!), it is not true that the middle and working classes have been squeezed out financially.6 And this allows the defense to mount a counterattack: what’s true is that all these added-on structures have made it harder to create greater economic growth and jobs (then we’re back to the previous point).

On the offensive are those who argue that the differential between lower income earners and higher income folks should be reduced. That can be done, in simple terms, by reducing the pay of the top earners and/or by increasing the income of people at the bottom.7

But why change? The most basic point for the offense is that the “usefulness” of money depends on your situation, and should favor those who have less. Let me illustrate. When Bill Gates finds $100 on the street, that doesn’t really mean anything for him because he already has billions of dollars to live on. A hundred extra bucks is just a drop in the bucket.

But for, say, a homeless person, or a part time worker paid at minimum wage, $100 extra dollars can be significant, because every bit extra counts for that person.8 The implications in terms of justice are as follows: beyond a certain point (and that’s a major difficulty: which point?), extra money doesn’t really mean much for someone, so why not give income past that point to those for whom an extra buck makes a big difference?

But a good offense doesn't hurt either.  Aspen Photo / Shutterstock

But a good offense doesn’t hurt either.
Aspen Photo / Shutterstock

The Catholic church has somewhat quietly been sitting on the offense for a while. The church’s arguments are twofold. First, all human beings share in equal dignity as beings. Therefore, wage levels that do not allow human beings (and the family they have to care for) to live decently degrade human dignity.  Second, the Church advocates for solidarity. That is, we must care for one another, so those who are more privileged  have a duty to materially help those who are in material and financial difficulty, via time, talent, or treasure.

I have said elsewhere, the Church is not a Marxist party: equal human dignity and the duty of solidarity do not mean everyone should make the same amount of money and all things should be planned by a central authority. Rather, those principles mean that we cannot use money as an excuse to let some human beings leave in inhumane conditions. The latest official rehearsal of that argument is from Francis’ Evangelii Gaudium #53

Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality.

Exclusion goes against equal dignity and is therefore unjust. According to Francis, who is giving voice to the longstanding tradition of the Church’s Social Teaching, something must change in the name of solidarity and justice.

But not everyone is on board: the issue against the duty of solidarity is affirmed by the position that what you earn, by virtue of your earning it, is justly yours. After all, it’s legal. And that gets us to human dignity part deux: I earn much because I am worth it.

Shareholders approve seven, eight, nine figure pay packages for executives each year. A recent referendum about limiting executive pay in Switzerland was rejected. So people have been given a say, time and time again, and they seem to affirm our current system.

After all, even if both sides end up boiling the inequality debate to economic opportunity, there is no absolute consensus about what should change to equalize the economic playing field.9

Still, income inequality has stirred a wild debate these past few months. On the economics side, the debate has been shaken, and then stirred by an extended study by two researchers, who have been in the news for years: Emmanuel Saez and Thomas Piketty, who study income distribution across time and place.10 Those guys developed some pretty awesome ways to treat the quite unsexy data of tax returns over the past century or so, and Piketty is making moves to draw the implications in terms of economic policy.11 He’s offering some pretty provocative ideas, which definitely fit on the “offensive” side of the debate, yet published by the bluest blood of all academic presses: Harvard University Press. And the 700-page thing is atop the Amazon best-selling list as I am writing this! We’ve gone from hot button to tour de force!

So that makes me wonder what the conversation would be like if they met with Pope Francis and JP Morgan CEO Jamie Dimon, somewhere at the corner of Wall Street and St Peter’s Square?

— — — — —

 

  1. the French may be shy about talking dough, but I loved America, and in America business meant money.
  2. And, really, those guys don’t even make THAT much money compared to other folks in the banking business: say what you want about Jamie Dimon, Lloyd Blankfein, and their fellow bank CEO’s $20-some million annual compensation, but the real deal are heads of private equity firm, nine of whom took home over $160 million each (like, the lowest of the 9 is at $160 million!) last year.
  3. This is played out in a debate on the 50 year anniversary of  LBJ’s War on Poverty in WSJ January 25-26, 2014, C1-2. I told ya I had plenty of paper clippings to work with!
  4. And it’s not like I could, really, because I’m in awe when I walk midtown Manhattan and think of my buddy Jamie D in the JP Morgan CEO suite, only to be heart-broken at the sight of the man begging for money on the corner of 47th and Park.  So, I’m not even anywhere near coherence myself.
  5. For those who want to learn more about income differentials saber-metrics, check this out.
  6. Donald J. Boudreaux and Liya Palagashvili: “The Myth of the Great Wages ‘Decoupling’” WSJ March 7, 2014, A15.
  7. Again, for those who want to get a tad more technical: this could be done directly by wage caps and floors, or by transfers of money between agents (from haves to havenots). Wage floors (“the minimum wage” and transfers (taxes funding social welfare programs) are already at play in the real world. Caps are limits on how much people can make. More on this below.
  8. That’s called “the marginal utility of money”: the more money you have, the less meaningful an extra dollar is.
  9. William A Galston: Politics & Ideas “Where Right and Left Agree on Inequality”  WSJ January 15, 2014, A17.
  10. Piketty just published a book on capital accumulation that’s gathering quite a lot of attention. It’s also 685 pages. Happy summer reading everyone!
  11. Paul Krugman discusses Piketty and Saez’s modelling techniques and innovativeness  in his review of Piketty’s book.

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