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