Needing a break from all the negativity in the news these days, I read Matt Ridley’s The Rational Optimist (Harper-Collins, 2010), a refreshing rebuttal of the pessimism that has so dominated modern public discourse. I previously read Ridley’s books Genome and The Red Queen which stimulated my interest in genetics – the subject of my second novel Wonderful by Design. When I picked it up, I didn’t realize that The Rational Optimist would be relevant to the novel I’m currently working on, tentatively titled As Good as It Gets, which is set in the 1920s.
Many in the media have reported that income inequality in the US is now similar to how things were during the Roaring Twenties and perhaps the Gilded Age (late 1860s to 1896). See Paul Krugman, “The Rich, the Right, and the Facts: Deconstructing the Income Distribution Debate”, American Prospect (June 4, 2014). Based upon that premise, we’ve seen numerous politicians and Presidential candidates on the Left take up the cause of socialism and redistributive justice over the past few years. I’ll let others debate the politics of income inequality. Instead, I’ll focus on the history of this issue.
As Ridley points out, while economic inequality has increased in a few countries, globally it has fallen. It’s hard to find any region of the world that isn’t better off today than it was 50 years ago. While it is true that the rich have gotten richer during that time period, the poor have actually done even more to improve their situation. The United Nations estimates that poverty has been reduced more in the past five decades than in the previous 500 years. The UN has reported that the poor in developing countries have in fact increased their consumption of goods and services two times faster than the world as a whole during the period 1980-2000. Based upon my recent trips to Haiti and the Central African Republic (two of the five poorest countries in the world), I can say that, while average citizens in those nations do indeed suffer from a range of economic and social calamities, most now have access to technology, communication and other modern conveniences that were unknown just a few decades ago. Would most Americans find their standard of living acceptable? Absolutely not, but that doesn’t mean there hasn’t been any progress.
What explains this overall uptick in the global standard of living? Let’s look at one very important factor – energy production, which is at the center of the climate change debate. In 1800, an hour of human labor (work) paid for 10 minutes of reading light from an oil lamp. Today, an hour of work pays for 300 days of reading light. With the introduction of LED lightbulbs, that’s about to increase to 3,000 days of reading light. That’s pretty much true throughout the world, although the electrical supply in some previously affluent countries like Venezuela had become undependable. Ridley talks about similar advances in food production, healthcare, transportation, etc. – all of which make life much more pleasant today than it was 200 years ago, just about everywhere.
But Ridley wisely points out that the biggest gains in individual and societal happiness do not come from affluence alone. More important than economic success is the freedom to make choices about one’s lifestyle – where to live, who to love, who to marry, what career to pursue. Although Ridley recognizes that widespread injustice and other social barriers do indeed impede the pursuit of happiness, he argues that it is the moral duty of society to continue to change, innovate and grow. Intellectual development and associated economic growth are unstoppable forces unless wrong-headed public policies get in the way.
If you’re still with me, you may be asking how any society, particularly one as advanced as ours, can tolerate the concentration of wealth at the “tippy top” of the economic ladder. Without question, the very rich (the top 0.01 percent of Americans) have done the best in the US economy since 2012. But, whether or not one considers that to be “fair”, a close examination of public data paints a very different picture than the one being presented by the media. Simply put, most of today’s wealth in America was earned, not inherited. We are not Europe where wealth transfers from one generation to the next for centuries. In the US, few fortunes survive for more than a few generations. All people move up and down the income ladder throughout their lives, and only a third of those with net assets of $5 million or more grew up wealthy. America’s most successful people earned their wealth the old-fashioned way – through enterprise, risk-taking and professional skill. At least a third of the top 1% of income earners are entrepreneurs. Many started with few resources and only a dream. Despite what is commonly assumed, sports and entertainment figures comprise only 2% of the top 1% of income earners. All of these statistics are addressed in more detail at J. Bakija, A. Cole, B.T. Hein, “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from US Tax Return Data” (April 2012), http://web.williams.edu/Economics/wp/BakijaColeHeinJobsIncomeGrowthTopEarners.pdf
It is also important to note that the so-called rich don’t always do as well as they have over the past several years. In the 2007-2009 recession, the income earned by the top 1% fell 36.3%, while the bottom 99% fell only 11.6%. Also, when the rich do extremely well, everyone else benefits too. According to a 2018 Congressional Budget Office report, from 1979 to 2015, the top quintile increased their income by 103% in adjusted after-tax dollars, while the bottom quintile increased theirs by 79%. That discrepancy might trouble some people, but had those income gains been spread equitably, they only would have amounted to an additional $900 a month for each family in the lower 80% – nice, but not enough to make anyone feel “rich” who wasn’t already.
Lastly, despite those who blame the rich for the economic vulnerability of the poor, there is no statistical correlation between income inequality and poverty. In other words, the fact that some people become rich does not mean others consequently become poor. This is not a “zero sum” game. A rising economic tide does indeed float all boats, but inevitably those gains are not evenly distributed for a variety of reasons. The history of all economic systems, not just America’s free market, shows that the government policies designed to help the poor (i.e., higher taxes on the rich, more welfare for the poor) often have the unintended effect of making matters worse.
Ridley argues, and I agree, what a society needs to do to raise its overall standard of living is simply get out of the way. For millennia, humans improved their living conditions through the free exchange of ideas and goods and, most importantly, by having a positive outlook about the future. Even in the face of today’s challenges, that formula remains valid.
Very good article and summary of a very divisive subject! I wish this subject could be discussed in this rational way with more facts and less envy of others and expectation of entitlement!