Inequality

Bankruptcy, Divorce, and Long Commutes. More Evidence That Income Inequality Sucks

Eroding the fabric of American life

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By David Sloan Wilson

The world is slowly reaching the conclusion that income inequality is toxic for human welfare. Books such as The Spirit Level, Why Nations Fail, and Capital in the 21st Century make the case at the macro scale by chronicling the fate of nations. In the United States of America, income inequality has swung like a slow pendulum, reaching an extreme during the Gilded Age and today. Well-being has swung in the reverse direction, as shown in this remarkable graph compiled by Evolution Institute Vice President Peter Turchin (go here for details).

two-centuries

Inverse relationship between well-being and inequality in American history. The peaks and valleys of inequality (in purple) represent the ratio of the largest fortunes to the median wealth of households (the Phillips curve). The blue-shaded curve combines four measures of well-being: economic (the fraction of economic growth that is paid to workers as wages), health (life expectancy and the average height of native-born population), and social optimism (the average age of first marriage, with early marriages indicating social optimism and delayed marriages indicating social pessimism).

A new study1 provides more evidence for the toxic effects of inequality, if more is needed. A team of economists led by Robert H. Frank measured changes in income inequality in each of the states and in the 100 most densely populated counties in America during the period 1990-2000. Income inequality was measured in two ways—the familiar GINI index and the ratio of the 90th percentile household income to the 50th percentile household income (P9050ratio). Well-being measures included non-business bankruptcy rates, the proportion of the adult population that is divorced, and the proportion of workers whose daily commute is an hour or more. The first two measures are obviously indicative of financial and other forms of stress. The rationale for the third measure is that most people do not want to commute more than an hour to work if they can afford to live closer. As with all good research of this sort, a host of other variables were controlled for.

The results spoke loud and clear: The states and counties that experienced the largest increases in income inequality between 1990-2000 also experienced the largest increases in bankruptcies, divorces, and long commutes.

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The new study zooms in on the bottom slice of Turchin’s graph and confirms the same trend using different methods and much more data. This adds confidence to what Turchin’s graph already shows, but for me the new study packs a more powerful emotional punch than the other studies. Comparisons of nations and 200 years of American history are one thing. The steady drip, drip, drip of inequality eroding the fabric of American life in every state and county, year in and year out, is another. Those three measures of well-being were chosen because of the availability of data. Think of all the other manifestations of stress that are also increasing in front of our eyes, once we know what to look for. That is the import of the new study. In common language, everyone in America and the world needs to know—and inform their elected officials—that inequality sucks.

  1. Frank, R. H., Levine, A. S., & Dijk, O. (2014). Expenditure Cascades. Review of Behavioral Economics, 55–73. http://doi.org/10.1561/105.00000003

9 January 2016


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  • Duncan Cairncross

    We need to stop saying “Inequality is Bad” when
    what we mean is “Too Much Inequality is BAD”

    Every time we say “Inequality is Bad” we open ourselves to the
    straw-man that we are aiming for perfect equality

    Some degree of inequality of outcome is required for all societies (and sports)
    to flourish

    IMHO there is an ideal amount of “Inequality of Outcome” that we
    should be determining and then modifying policies to achieve and maintain

    How much is that?

    I don’t know – I am very sure that it is a LOT less than the current situation
    in the USA and NZ and probably less than the inequality in even the most equal
    of our modern western societies

    • Swami Cat

      Duncan,

      I would extend your initial comment even further…

      What we should say is “structural inequality” is bad. In other words, the problem is fairness, not equality. Turchin and Wilson continue to pivot without proper discrimination between the two.

      Inequality can be relative to outcomes, or relative to effort or contribution. Problem is these are often inherently contradictory. It is possible to do all the work in a group and thus equality relative to effort would be to get all the rewards, which is maximal inequality in outcome.

      Every society needs to balance these with such factors as which fairness institutions create a society we are happy to live in, which creates the greatest growth rate longer term, and — importantly — how do we deal with people who “fairly” earn nothing (for example by either providing zero effort or zero value per their peers)?

      Organizing a society around your concept of an “ideal amount of inequality of outcome” misses the bigger picture of balance and would be self destructive.

      My take on the situation is that on a global level we are seeing unprecedented gains in welfare for those at the lowest levels (aka extreme poverty). Thus globally, human prosperity has never been in better shape. Never. Not even close.

      But the influx of a billion previously impoverished serfs has increased supply of labor. Thus suppressing wage growth of unskilled labor in developed nations and increasing rewards to the relatively scarce factors of capital and skilled labor. Until the forces of supply and demand approach equalization, which the higher returns encourages, we will see inequality within states increase as inequality globally and poverty in general decrease. This is basic economics (or even Cliodynamics).

      The take-away of the above is that rising levels of inequality of outcome within developed nations is part of the solution, not the problem. This of course does not apply to structural inequality or unfairness, which may also be rising and which are intrinsically destructive.

      But we are back to my initial point. Structural inequality is cancerous, but inequality of outcome depends upon the larger picture.

      • Duncan Cairncross

        Hi Cat

        You seem to think that the vanishingly small percentage of the population that is currently hoovering up all of the increase in productivity is somehow actually responsible for that increase

        I spent most of my working career “Improving Productivity”
        After 7 years as a Quality Manager at the Darlington Engine Plant increasing our output from 80 engines/day to 240 engines/day without spending any significant capital I was seconded to the USA as part of “Advanced Manufacturing”
        I became an “Tech Specialist” – to be rude a “Corporate Seagull”
        (flies over squawks about a lot makes a mess on the floor and flies away)

        I found that what I had to do was talk to the engineers and workers at a plant,
        find out what they wanted to do ,
        Do a little filtering and write up a proposal
        (Which was pretty similar to what I had been doing at Darlington)

        I would also add any other good ideas that I had seen or heard about at any of the other plants
        Then use my “Corporate Status” to push it through their management and help them implement it
        I think I had about a 40% success rate – the other 60% I just could not get past management
        But that saved millions!

        This was where the productivity improvements came from – the work force

        I don’t believe I ever saw anything useful coming from the very top ranks of management

        So – most of the productivity came from the 99%
        We did get some gains from capital – not as much as you would think

        When I look at the disconnect between wages and productivity over the last 40 years I see two things

        (1) It’s unfair – the reward is not going to those who created it

        (2) From a “market” point of view it’s stupid – if you don’t reward behaviour –
        and especially if people see their ideas benefiting others
        you reduce that behaviour – simple as that

        How much higher would that productivity curve have gone if we had been rewarding that behaviour?

        • Swami Cat

          Hi Duncan

          It seems to me that job you are describing puts YOU in the global one percent. Indeed, I would guess it is in the top third of the top one percent, and substantially higher if you had a working spouse. So just to clarify, you are the “hoovering” elite we are discussing. ($35k annual HH income = global top one percent). Indeed, the engineers and technicians you think were not properly rewarded are almost certainly all in the top one percent.

          But on to your specific objections on fairness and market stupidity.

          1). I would be careful about using personal anecdotes to explain multi-generational global trends affecting 7 billion people. My own anecdotal experience is directly opposite to yours if it matters (implying it probably doesn’t). I know personally of individuals making hundreds of million and billion dollar contributions, and other making huge mistakes. Small differences in quality are extremely important, and difficult to assess.

          2). You seem to misunderstand the role of executives. They are not paid or expected to personally come up with the ideas to increase productivity any more than a coach is expected to throw touchdowns. Their job is to increase productivity and profit. They do this by creating an effective institution which increases productivity. In your example, it appears they (You?) did so, though I have no idea if they did so more or less than competing firms.

          A coach’s job is to ensure they build and manage a team in such a way that games are won. Any coach foolish enough to think they should be both coach and quarterback is probably going to be short lived. In your case, the managers (and you?) created the environment, determined who would be hired, influenced the corporate culture, experimented with compensation, reward and promotional systems, so on and so forth. This is the critical element in determining whether they succeed vs the competition or not.

          And just to clarify, they are expected to increase productivity at minimal cost to optimize net profit. If they did so, they were great at their job, if they did not do so (they didn’t incentivize ideas enough) compared to competing firms then they were bad at their job. This is a real possibility.

          3). I suspect you also misunderstand the way wages are set. They are only indirectly based upon the contribution to productivity. We do not necessarily pay more for a miner of diamonds than a miner of coal. The wage is set based upon supply and demand of the best marginal employee to optimize net profit.

          In your case, these employees are competing with other prospective employees for a position of skilled worker or engineer with responsibilities which should specifically include “contributing worthwhile suggestions for improved productivity.” If proficiency at that skill is widely available and the job is in high demand by workers, relative wages drop as the market signals the need to move resources elsewhere. If demand by firms goes up and the supply of the optimal performers drops, wages increase. I assume this is how the engineers and technicians were hired and paid.

          And note, I am NOT JUST suggesting this is how it works. I am also implying that this is the way it SHOULD work and NEEDS to work to optimize productivity growth, all else equal.

          4). If you are stating that your firm is run poorly, then you are actually just reinforcing the complexity of the job. Long term poor performance relative to competitors leads directly to lower market share, lower profit and eventually bankruptcy (which penalizes everyone in the firm, thus reinforcing why workers want the best executives money can buy for their own selfish good).

          The turnover rate in American firms continues to be brisk, thus pointing to the importance of selecting and paying the best corporate and engineering talent (subject to the supply and demand constraints above) necessary to thrive.

          To combine these last two points, the demand for high quality, high effectiveness engineers, executives and entrepreneurs has increased relative to the supply. In great part this is due to the global expansion of markets. There are now billions of additional people to be organized into effective productive teams. As such, the returns to capital, skilled labor and executives skyrockets as wages for developed-nation lower skilled workers atrophies due to increased supply/competition.

          Again, this is not a negative side effect. It is the process doing what it is supposed to do to optimize human prosperity. That is what the system is doing and that is what we are seeing globally.

          4) you ask how much higher it could have been with even more effective corporate institutions. Exactly. Again that is why the elite are being paid so much. To discover these complex organizational patterns. It isn’t easy. As it gets more complex, it gets harder to manage well, and the differential between good performers and bad goes up, driving incomes up with it. It is an arms race, and thus half will still be below average, but the demands for the average keep escalating. Failure at the executive level is failure for the entire team. These are key positions and it is prudent to pay superstar salaries if necessary to bring in the best talent.

          One parting comment. The elite — again including you and the skilled laborers you bemoan — are in general not “hoovering” anything. They are contributing to global prosperity and productiveness. The last forty years has seen amazing improvements in productivity and the gains have been most felt for the lowest billion. More people have emerged out of poverty in the last two generations than any time in history of history. The pie is getting larger, and it is doing so at a rate as fast or faster than almost any prior era.

          • Duncan Cairncross

            Hi Cat

            I accept some of what you say
            With some major caveats

            First – performance actual and potential,
            A person’s “potential performance” is determined by:
            Intelligence, Drive, Determination, Hours Worked,

            Each of these is a human “property” – like height

            And each will be best described by a version of the “normal
            distribution” – skew normal

            After a long career analysing numbers I have seen that the actual “normal distribution” is as rare as hens teeth,
            Which actually makes sense – in any optimised system a random change is more likely to make things worse than better
            So we have a long tail on the “bad” side and a much shorter tail on the desired side

            Next we come to limits – the mathematical standard or even skew distribution just keeps going so in a large enough population you can get extreme examples

            In the real world there are limits despite a population in the billions there are no 12ft tall people

            So we have the median – and a small tail “above” and a longer tail “below” – I don’t believe that anybody is twice as intelligent as the median (but there are poor souls half as intelligent)

            But let’s say that there are such paragons
            Twice as intelligent, twice as much drive, twice as determined,
            and works 80 hours a week!
            2 x 2 x 2 x 2 = 16 times as effective – Sod it add another doubling
            – 32 times!

            So it is possible for a vanishingly small percentage of people to be “worth” 30 times the median

            There is NO WAY that a CEO is worth 400 times the median

            The truth is that most people are actually very competent –
            There is NOT a tiny percentage of creative people
            There are millions of people who can do difficult creative work

            If the Martians were to spirit away the top 1% in our
            society we would just keep on rolling – and probably do better

            If they were to take away the top 5% it would start to hurt – but that is 15 million people in the USA alone

            Next – the question of who gets promoted
            Two engineers – equal capabilities –
            One concentrates his/her energy on doing his/her job
            The other concentrates on being promoted
            Who gets promoted??

            The person who works towards that goal – effort put into actually doing the job is effort that could have been put into being promoted

            The result is that as you climb the ladder you see more and more people who are totally “me focussed” and less who are actually doing what they are paid to do

            In the big companies I worked with I found that at engineer/senior engineer/manager level most people were very job focused

            The senior executive much less so and Vice Presidents were universally “me focussed”

            The “me focus” of the senior people cost the company big
            dollars – mainly because it became a “never admit you were wrong” culture

            One senior plonker decided to move an engine test facility to gain some minor savings – he had assumed that the move would cost the same as moving an office

            The actual costs of moving that much hardware were about 20
            times his “estimate” – totally destroying the minor savings

            But the move went ahead anyway – to have cancelled would
            have revealed that he was wrong
            Lastly
            I was talking about inside our society when I was talking
            about the 1% – what is happening in the world is not relevant to what we actually see in our specific society

            The “Pie” is getting larger – but the 0.1% are not doing
            that we – all of us – working together are doing that,

            the 0.1% is if anything a drag on that process

          • Swami Cat

            “So it is possible for a vanishingly small percentage of people to be “worth” 30 times the median
            There is NO WAY that a CEO is worth 400 times the median”

            If a person is responsible for hundreds of billions of dollars and tens of thousands of careers then even a tiny difference — let’s say ten or twenty percent (not ten or twenty X) is worth billions of dollars to get the best person for the job. If one potential CEO can be had for one million dollars and another for fifty million, and the second is twenty percent less likely to lead company to bankruptcy, then the rationale for choosing the optimal CEO is the loss potential diminished less the difference between the two’s salary. For a smaller company, the one million guy is a bargain. For Apple, the board would be crazy not to pay pretty much whatever it took to get the best guy.

            This is how supply and demand work. If I was on the board, I would get the best guy for as low as I could pay him. Of course he or she would try to get the best job for as much as competing boards would pay. Somewhere between those two points we settle. The average pay of an engineer is irrelevant in every way to the discussion.

            By the way, can you share why CEO’s, who clearly have important jobs which millions of people depend upon, get all the envy and abuse? Basketball players and musicians make tens of million (retired basketball star Michael Jordan makes way more than the average Fortune 500 CEO and all he does is advertising) yet I rarely hear anyone complain about sports and entertainment fairness. Just wondering. Seems like tribal signaling to me.

            I agree with you on the importance of “politics” in upper echelons of business and politics. My experience is the higher up you go in both fields the more lopsided the individual is. I have no recommendation. I wonder if it isn’t true in most extreme jobs.

            “I was talking about inside our society when I was talking
            about the 1% – what is happening in the world is not relevant to what we actually see in our specific society
            The “Pie” is getting larger – but the 0.1% are not doing
            that we – all of us – working together are doing that,
            the 0.1% is if anything a drag on that process.”

            The world is the pie. That is the implication of global markets. By looking at a piece of it we are missing what the overall market is adjusting to and rewarding.

            I agree we are all adding value, but markets reward that value based upon supply and demand and the higher rewards for certain functions is the signal from the market that we need more people with higher skills moving into these jobs. Higher rewards in a market increase supply as people seek to capture those rewards. This drives down wages and returns to investment as the system equalizes. I am not upset by the market signaling people to concentrate their efforts in skilled and professional jobs and investing if that is what the global economy needs. And the market is signaling we need more of that instead of more unskilled labor (which we have too much of absent capital and entrepreneurs and leaders to coordinate them into productive efforts.)

            If you could reduce the likelihood of Apple from going bankrupt and you were on the board, would you arbitrarily limit the salary of the CEO to some ratio of what the average worker made, or would you optimize for the expected risk adjusted rate of return (effectively paying as much as necessary to get the very best)?

          • Duncan Cairncross

            You seem to be under the misapprehension that there is some relationship between the amount we pay these guys and their abilities!

            If you look at the CEO pay rates and business performance you see no correlation – paying more does NOT get better performance

            We are NOT short of self important executives and so called entrepreneurs

            We are short of decent engineers – but supply and demand is not helping that

            Supply and demand only works if we have
            Perfect information
            Sensible actors

            What we do have is a tiny number of golfing buddies using group think to persuade themselves that they are incredibly important and need to be paid a fortune

            If “Supply and Demand” was working the supply of CEO types would have massively increased
            Instead we have total incompetents like Carly Fiorina

            Professional sportsmen/women at least have decent measures of their capabilities and the best available are selected

            CEO’s ???
            The actual measure show no relationship between pay and performance

          • Swami Cat

            I would suggest paying CEO’s based more upon indexed performance options rather than primarily on salary and options. I have no idea if this leads to higher or lower average income, and don’t really care either way as long as corporate governance improves.

          • Duncan Cairncross

            Hi Cat
            The problem is the excessive CEO pay has the effect of damaging the morale of the entire workforce
            (Not to mention diverting funds that could be used for product or process development)

            The CEO is the leader – I have no issues with him being paid more than anybody else – although that is not necessarily always the case,
            Who should get paid more?
            The brain surgeon? or the “Administrator”?
            The creative engineer or the CEO??

            BUT it is essential that he/she is paid an amount that the rest of the workforce sees as being “Fair”
            The human animal evolved as part of a small band
            A lone human in nature is technically known as “Cat Food”
            But as part of a small band the cat becomes a rug and any animal is food
            That is the reason that humans have a keen sense of “fair” and the willingness to punish deviations from that

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  • Swami Cat

    I have addressed the errors of the wellbeing chart elsewhere, and thus will skip this other than to say that wellbeing as described by a two percent actual average increase in annual median income occurred throughout the entire time period with stops and starts which clearly contradict this chart (note in Turchin’s chart that the decade of the Great Depression is an era of increasing well being).

    On the issue of inequality by county or metro area, it is important to note that the author of this article and the linked study conveniently leave out a description of which areas have the highest inequality. It is the major cities, especially coastal cities run by the very people espousing the same “solutions” as Wilson and Turchin. It is specifically the far left, long term democratic strongholds of NY, SF, LA, Chiraq, DC, Boston, Baltimore, Philadelphia, etc. Note that these are the very areas most likely to have higher minimum wages, restrictive building codes, closed shop unions, and so on. The other key factor in SMSA inequality is high proportions of immigrants and non-Asian minorities. Divorce and bankruptcy are also HIGHLY correlated with ethnicity.

    Said another way, the political party preaching the propaganda of naive inequality is conveniently often the same as the party generating, causing, controlling and even benefitting from the inequality. Please inform your elected officials of this.

    Don’t get me wrong. I am in no way a Republican or of the right. But the inequality peddlers of the far left are twisted sideways on this one. To solve the real problems of commutes, divorce, poverty and bankruptcy we need more clarity on trends and causes and less spin and rhetoric.