E-piphany

Before I get into a distinctly non-inflation thought, I want to add another non-inflation thought and offer my congratulations to the UK on the occasion of her independence. Congratulations for throwing off the oppressive yoke of her Continental overlords. We did that once, and it worked out really well. I heartily believe that every society should refresh its independence at least every thousand years or so. So good job, mates! Sorry about that Rugby World Cup, but after all this was more important.

I should also point out that the sky does not seem to be falling in the UK, or elsewhere for that matter for any reason related to Brexit. I should also point out that I told you so.

Now, on an wholly different topic – inequality. I had a thought a few days ago and after mulling it for a bit I concluded that there might be something useful in the concept so I thought I would share it. I first discussed it briefly with an eminent retired economist of my acquaintance, and he thought the proposition was intriguing, so here goes…

There has been a lot of teeth-grinding and navel-gazing about the idea that societal inequality seems to be growing worse over time. One way to measure this is with the GINI Coefficient, which ranges from 0 (everyone in society shares income, or wealth, depending on what is measured, equally) to 100 (one household gets all the income for the society).  The calculation of the coefficient isn’t important for my purposes, nor is dwelling on its imperfections. Clearly it is an imperfect measure, but for my musing it suffices. The GINI coefficient has been rising steadily for some time in the US, and in most other countries in fact.

But consider this: does the fact that lifespans are also lengthening have anything to do with the growing measurement of inequality? After all, the longer someone is in the workforce the higher we would expect their income to be and, assuming any savings discipline at all the more wealth we would expect them to have. If the average lifespan is 50, then the oldest in society have less time to accumulate than if the average lifespan is 80. (Hey, look at all the billionaires. None of them are spring chickens.) Moreover, when a wealthy old person dies their wealth gets distributed and diluted, rather than remaining concentrated – the Vanderbilts and Carnegies are not as wealthy now as they were in the 1800s. So my hypothesis is that while I don’t claim this explains all of the apparent increase in inequality, I suspect it explains part of it.

Further, I wonder if the increased concentration of corporate value and power in larger and larger megacorporations might also be related to the relatively longer lifespans of corporations – the diminished frequency with which companies are broken up by antitrust crusaders or corporate raiders, or allowed to go bust (see GM et. al. in the Global Financial Crisis) allows them to accumulate “value” over longer and longer periods of time. I’m not talking market cap – Tesla, Facebook, Amazon, etc are all worth far more in the market than their actual economic heft. But a lot of the big banks might fall into this category today – heck, big finance companies on both sides: e.g. Blackrock! In short, I wonder if a lot of the problems with corporate ‘greed’ that Bernie Sanders and his ilk decry could be solved by the simple expedient of making the system more capitalist rather than less. Break them all up!

Of course, I wouldn’t argue for killing people at their retirement parties, so the same solution doesn’t exactly apply. But here, too, there might be merit in an alternate prescription that is essentially the opposite of the socialist path. Rather than trying to suck up all of a millionaire’s wealth when he/she dies, preventing him/her from passing along wealth to another generation, give more incentives for distributing wealth earlier. Give larger deductions for charitable contributions, larger gift exemptions, and so on. Distribute earlier and the concentration at the top won’t be as large.

One final point, and that is about inflation. Greater inflation also tends to cause wealth to concentrate more at the top since the wealthy tend to own more real property and consume a smaller proportion of their incomes. And autocratic regimes tend towards higher inflation. So I suppose what I am saying (and I didn’t know I was going to say this when I started to write this column) is that the prescription for less inequality is to have more creative destruction and for society to lean more towards freedom and capitalism than towards government intervention and socialism. I might even argue that this country’s lurch away from true capitalism, especially since the Global Financial Crisis, is a key reason that income and wealth has become less well-distributed. (And, as I wrap up with that statement, I do one more Google search and discover that others have already made some of these points. See this article for some historical perspective of inequality under non-capitalist regimes).

Discuss.

P.S. I feel like I ought to give some credit here to my teenage son, Andy, whose flirtations with questions of inequality has caused me to ruminate on these issues more than I might otherwise have done. Keep on questioning, son!