Earlier this week, I participated in a televised panel discussion on income inequality. The topic has generated much discussion lately, as President Obama’s central theme has been how to fix the gap between the rich and the poor. My general thought is it simply cannot be fixed by dragging out the usual redistribution solutions – raising the minimum wage, taxing the rich, etc. On the other hand, I think the answer does not lie with artificial wage floors and punitive taxation. The market should determine wages, and all income earners, not just lower-income earners, should be encouraged to work, invest and earn even more income without taxes designed to soak the rich. So will this help the top 20 percent? You bet it will., but it will help everyone else too.
How dare I stick up for the top 20 percent, or the top 1 percent, or even the top 1/10 of a percent. Am I the enemy? Before you judge, allow me to reflect on my life experiences. When I graduated from high school, I had no desire to go to college. In fact, even though I did fairly well in school, by the time I graduated I never wanted to sit in a classroom again. So I started my first full-time job in retail at minimum wage (which I will not disclose to you lest I date myself). I stayed in retail for a year, worked my way up to a slightly better-paying customer service position, then left to work in the hotel industry. This was something I had always wanted to do. During my first two years, I earned enough to move out on my own, buy a new but modest car, get a decent apartment, and buy a few new clothes. Did I have trouble making ends meet? Occasionally I did, but my income continued to increase as I learned all I could about hotel sales and administration. However, it never dawned on me to resent the hotel general manager, who earned several times what I did. As far as I was concerned, I did not envy him one bit for dealing with the daily unpleasantries of running a hotel full of picky guests and sometimes unreliable employees.
When I got married years later, I had tapped out my potential as a high school graduate in a hotel career. If I wanted to earn more at the hotel or at any other professional job in my fields of interest, I needed more education, so I went to college. My husband and I scraped up money to send me to college on a pay-as-I-went basis without student loans while we spent the rest of our money paying the mortgage and a car loan. No room for luxuries here.
Fast forward several years later – I am not by any means in the top 1 percent, but I am not in the tight financial position I was 25 years ago. This is rather typical for most families. As people get older, marry (or not), obtain more work experience and get more education under their belt, they tend to earn more. In fact, peak earning years are in the 50s. In other words, very few people start off high on the curve; they have to climb it. This is known as income mobility.
But how much does this help anybody else? A great deal, actually. As people work more and earn more, they have less time to do mundane tasks, so they pay somebody else to do them. This is known as opportunity cost – the cost of an alternative that must be forgone in order to do something else. For instance, I probably clean my house better than anybody else can, but because I put more value on leisure (because I have less of it), I would be willing to pay somebody else to clean so that I can flail around at Irish step-dancing, get my nails done, or curl up on the couch watching “Game of Thrones.” In essence, because I earn more, somebody else is earning money also by cleaning my house. Moreover, somebody is earning money keeping up my yard because neither I or my better half want to spend leisure time mowing the yard. Finally, I rely on my wonderful nail technician to sculpt my nails every few weeks; otherwise, my fingers would look like bloody stumps.
Sadly, the wonderful young lady that cleaned my house had to close up shop and pursue other opportunities. Contrary to what the media might say about high-income earners, they lost money after 2008, forcing many of them to cut back on things they would pay others to do. My nail technician struggled as people canceled their salon appointments. Fortunately, the gentleman that years ago knocked on doors in my neighborhood and offered to mow laws for cheap now has a thriving business that has grown larger each year (hey, even in economic hard times, most Texans hate doing yard work in 105 degree weather). Their businesses all enable them to support families, and when income earners in higher quintiles fail, so do they.
The point is…whenever economists talk about high-income households in defense of income inequality, they tend to ramble on about how Warren Buffet helps the capital markets by foregoing current consumption, how hedge fund managers buy faltering firms and turn them around, blah blah blah. But in my plain-spoken world, it is much more simple.