Wealth Inequality Does Not Bother Me

wealth inequality
My 2004 Honda Civic with 200,000 miles on it looks like a Ferrari compared to the Model T

If you listen to the nominees of both major political parties in America, you’d hear that wealth inequality is one of the most existential threats to America in the 21st century. Indeed, in many public policy conversations, unequal division of wealth in America is treated as a no brainer negative for the country. However, I will make an argument that what we should be concerned about is not concentration of wealth at the top, it’s financial literacy and the rate of economic growth.

We’ve Been Here Before: The Gilded Age of America

If you’re unfamiliar with the 19th century in America post Civil War, watch the History Channel series “The Men Who Built America.” There were major anti-competitive practices and labor abuses during this time for sure. However, the concentration of wealth during this period led to the creation of Carnegie’s US Steel, the Vanderbilt railroad empire, and Rockefeller’s Standard Oil.

The creation of these three massive industrial powerhouses alone is partly responsible for our victory in back to back world wars. We were the Arsenal of Democracy not because of a successful Five Year Plan like the Soviet Union, but because of oligarchs who built larger fortunes than the world had ever known before.

Back in this period of the late 1800s, wealth inequality was just as bad as it is today, if not worse. Disgust at these oligarch’s ostentatious lifestyles as well as our need for tax revenue in the run up to World War I led to the imposition of the income tax. The goal at that point was not so much to transfer wealth as it was to place the burden of funding core functions of government on those who could most easily afford it.

Fast forward to today, where 1% of Americans hold 40% of the wealth, as Bernie Sanders insurgent campaign reminded us. The only big difference between these periods is that we have socially useless fortunes among our oligarchs now. In the Gilded Age, industrial titans ruled the economic elite. Today, a hedge fund manager is just as likely to be on top. I will not argue that this is a problem in our society as it pushes talent into financial markets when their brainpower could better be used elsewhere.

However, we also have titans such as Zuckerberg, Gates, Musk, and countless other “anonymous” billionaires who have helped America lead the world economically in these past several decades as Rockefeller, Carnegie, and Vanderbilt did in the 1800s.  I would rather them have more capital to spend on creating new products than take it away to improve equality.

The Poorest 10% Today in Some Regards Live Better than the Upper Class of 1900
wealth inequality
The bathroom of John D Rockefeller, richest man in history. Indoor plumbing was a luxury only the ultra rich could afford until the early 1900s. Source

If you’ve ever been inside a home from the 1800s, you’ll notice chamber pots in all of the bedrooms. This was the sanitary and upper class way of excreting waste without having to go outside in the cold/heat/rain/snow or whatever conditions happened to be that day. The very rich had servants who would empty these pots. Gilded Age billionaires like the Rockefellers and Vanderbilts had indoor plumbing before anyone else for sure. However, their patronage of these inventions led to their availability for a mass audience. Our government did not pass a law intended to transfer wealth from these families so that working class people could gain access to toilets. It happened organically thanks to force of markets.

Poor people today might drive old cars, live in drafty houses, or not have access to good health care, but they are still so much better off than the upper classes of 1900. The reason is economic growth driven by technological progress. If you disagree with this assertion that the poor have it much better off than politicians say, consider this. Model T’s broke down all the time, required extensive mechanical repair, and barely drove at a reasonable speed. Today, even clunkers can reach 60MPH and need far fewer repairs than even new cars in the 1970s. We have the Japanese car competition from Toyota to thank for this increase in quality.

In 1900, what rich family had air conditioning? Now for a half day’s wages, you can buy a window unit that keeps an entire room comfortable even on a hot day. During 1900, a servant would need to keep a fire going to heat up a large house or burn coal in a furnace. Today, we have powerful natural gas heaters that keep Minnesota comfortable during the winter.

We Need the Rich to Buy Teslas and Self Driving Cars

Here’s what I know about wealth inequality today. We need the rich to stay rich enough that they buy frivolous things like Teslas and self driving cars. After all, Tesla has frequently won the “Consumer Reports best buy” through its quality manufacturing. However, because of current battery technology limitations, these cars have to be very expensive. The market for them is limited to the very rich who live near electric charging stations. Eventually, range will increase and better technology will drive the price of these efficient vehicles within reach of the middle class.

We are seeing that very thing happen today with the $35,000 Model 3. I expect we will see a similar trend with self driving cars. Google will release an incredible piece of software integrated with Maps attainable to the upper middle class, Apple will release a sleek and beautiful design for an inflated price for the rich, and Chevy will release some strange technology that people only buy for the tax credit.

The Gilded Age Is Responsible for Many of the Great Institutions of Today

Could we have transferred more wealth from oligarchs to working families during the Gilded Age and possibly be a more equal society? Possibly yes. However, the Rockefellers created University of Chicago. The Vanderbilts bilt Vanderbilt University. The Carnegies literally built 2,000 public libraries all over the country, giving working class people access to education and a means to better their lives. Carnegie also endowed the arts, lent his name to a famous performance hall, helped build Carnegie Mellon University and more. He built an institute for scientific research, funded a pension fund for teachers to make the profession more financially incentivized, and even built the Hague Court in the Netherlands.

The desire to be famous and remembered in history drives great people. Gates and Buffet follow today in Carnegie’s example to give away the majority of their fortunes. They tackle problems such as education reform that are captured politically by special interests and global diseases of the poor where Big Pharma doesn’t see paying customers. Politicians who do not redistribute wealth or create new programs will not be remembered nearly as much as those who do. Hence, altruistic desires to better the poor’s condition go hand in hand with their desire for fame and a place in history.

With the rich, we must deal with foolish spending and wasteful behavior. With politicians, we must deal with pork barrel spending, earmarks, corruption, the dead weight loss of taxation, and slower economic growth. I’d rather take my chances that Musk will make a way for us to go to Mars.

Educational Inequality is What Really Bothers Me

I’m living in St. Louis right now, and it’s incredibly segregated and unequal. To be blunt, the schools in the city have bad reputations, which leads to all the mostly white families of means moving to the suburbs for their well funded school systems. The white flight leads to further funding declines for the city school systems, which exacerbates the problem further.

I have written about racial inequality in personal finances before, and this is the part that bothers me. When we talk about race blind programs like food stamps, the earned income tax credit, or Temporary Aid to Needy Families, we paper over the deep injustice in America. By solely increasing the material standing of poor and often minority communities, we treat symptoms and not the problem. This is another big reason wealth inequality does not bother me because I believe it’s the wrong target.

Let’s equip every child with financial knowledge that will keep him or her from going to the payday lender, the credit card companies, and the pawn shop. In middle class families, parents do this from personal experience. In poor families, teachers fail to teach the next generation good financial habits to break the cycle of poverty.

In St. Louis, white families live on the other side of the big public park in the city. They do so because it is another municipality apart from St. Louis city. No court can force them to bus in majority African American students from the city, as the districts are not one in the same. Instead of blatant segregation, the economic elite in St. Louis uses the high property values of the “good school district” in the region to keep out anyone who doesn’t have a high income, who is far more likely to be black or brown.

If we want to take on poverty in America, the LBJ’s War on Poverty has no been successful. I suggest we take on the entrenched system of public education in America by disconnecting property tax revenue from funding, allowing choice to poor families, encouraging charter schools, and federally funding personal finance education in every school in America with high levels of poverty. Hiding behind 50% income tax rates as Sanders suggested in this presidential campaign in my opinion will only slow down the technological advances that our descendants will use in 100 years to live as only the very wealthy live today.

Questions for You
  1. Does wealth inequality bother you? Why is it bad/good for America?
  2. What is the best way to help the poor? Education or transfer programs?

11 thoughts on “Wealth Inequality Does Not Bother Me”

  1. Not American, so my context is quite different.

    It bothers me because it is closely correlated to housing in NZ. Everybody deserves to live in a healthy, warm, dry house. And that is not the case. It causes people to get sick and even die, and that’s not on.

    1. The problem is when govt ensures that as a right, it hurts the people they’re trying to help. In South Africa, there are shantytowns of people waiting to get their govt paid for house, and the waiting list is 20 years long. That policy has backfired and given them lower economic growth

  2. Great article Travis. I agree with everything you’ve said. But to me the part that jumps out the most is how you mentioned quality of life has improved so much across the board.

    As you correctly pointed out, technology has such a deflationary effect that awesome technologies become cheaper and much more accessible. Thank goodness we can all afford indoor plumbing and smart phones now!

  3. You said: “With politicians, we must deal with pork barrel spending, earmarks, corruption, the dead weight loss of taxation, and slower economic growth.” Yes, the federal government is great at turning $100 into 50 cents through sheer waste.

    1. Some govt involvement is necessary, for example maintaining a road system, running the military, providing education and other key services. However, I feel like we are at the point where we’re shooting ourselves in the foot economically

  4. Lmao man you’re a joke?! You say the poor are better off now because they have functional toilets now? Really?! Any good historian/ researcher knows that you cannot in any way shape or form compare these two vastly different times and conclude that people are better off now. You’re a joke.

    1. Why cannot you not compare? The middle class and the rich are far better off as well. In 1919 there was a spanish flu epidemic that killed millions of people around the world because we dont have the kind of healthcare we have today. In 1900, a poor family: had no access to healthcare, had no means of transportation, no dental care, no indoor plumbing, clothes took up 14% of their budget, food took up 40% of their budget, and they had no cell phones or means of communication. I just sold an old phone that’s better than the iphone 1 for $39 on ebay. People can have a $20 a month phone bill. Hence, I’d say it’s easy to compare these two different times in history and determine that the poor are far better off now than they were. The driver of this is technological progress.

  5. I think you’re touching on something vitally important when you discuss the need for the investment of excess capital in order to drive innovation and subsequently develop the market conditions that allow for economies of scale and the eventual commoditization of high quality goods and service, which often leads to an increased average standard of living, via price deflation.

    But this model is predicated on the assumption that excess capital is, more or less, consistently deployed for such investment (which should lead to increased competition based on quality and price and have the secondary and tertiary effects of a greater labor needs and a rightward shift in aggr. demand.) However, the capital accumulation cycle more reliably entails a degree of latency and sublimation between the stages of capital creation and deployment, during which, excess capital is often saved or spent on goods and services with relatively low economic multipliers. And this lag is when the state can correct for sub-optimal allocation and place money in the hands of people who will spend it in ways that are comparatively more effective for economic productivity.

    While there are mechanisms within the tax code and monetary policy to induce investment broadly and to acheive specific policy goals (green energy, home ownership, etc.), heightened wealth inequality can, at some point, cross a threshold where capital is hoarded and remains insufficiently utilized. That’s where the concern lies and creates a collective action problem which could arguably be resolved with a more direct redistributive policy.

    1. Great points, I would argue that it’s the very friction caused by government redistributive policies that causes the wealthy to create highly inefficient legal and tax structures to maintain as much of their wealth as they can, thus leading to inefficient investment and gumming up the system. Offshore trusts, life insurance based estate strategies to avoid the death tax, corporate tax strucutres, and other strategies would not exist if not for the already complex ways the govt tries to take your money. Back in the 40s-70s these structures were even worse with higher marginal rates. That’s why politicians starting with Kennedy began slashing top rates bc of the inefficiency. I’ve never bought into the idea that we need to redistribute just so the consumer can have money to spend. If you look at how we achieve most progress in this country, it’s through technological innovation that comes from business and entrepreneurs, who need capital to grow and expand, not through consumers

  6. “In 1900, a poor family: had no access to healthcare, had no means of transportation, no dental care, no indoor plumbing, clothes took up 14% of their budget, food took up 40% of their budget, and they had no cell phones or means of communication.”

    Many, many people (especially families with children) in the US today pay over 50% of their income for housing, and sometimes close to 90%. You discuss how the price of luxuries like phones and cars has fallen, and you discuss what is available to you, but not, say, what percentage of income food takes up for people living at poverty level today.

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