Social Question

wundayatta's avatar

What is the real impact of increased disparity in income distribution?

Asked by wundayatta (58357 points ) October 2nd, 2012

A study in the American Sociological Review tells us the (not-so) news that Republican administrations are responsible for the increasing portion of income that goes to the top 1%. It’s scientific proof that Republicans make the rich richer.

Well, we’ve be discussing this for ages, but what does this really mean in our lives as we live them? And what do the rich do with all that extra wealth?

It seems to me that they have to either invest it or spend it. What is the difference between them investing or spending the wealth compared to the 99% investing or spending it? Does their investing and spending create fewer jobs than our investing and spending? Or does it make no difference?

If they invest, don’t they have to build stuff? Don’t they have to hire people to build or make stuff? If they spend, doesn’t that support jobs for people who make the stuff they buy?

What if we save money? Doesn’t that get invested, and we earn a return. Does that lead to more or less job creation that 1% investments? Of course, the 1% get the return on investments and we don’t, if we don’t have money to invest.

Similarly with spending. The 1% benefits from what they buy, and we don’t, if we have no money to buy with. But if they buy and invest, don’t we get jobs, and then we get money to invest or spend?

And if they have more money, don’t they have to invest or spend more? Unless they send it out of the country. Which is probably what is happening these days. Giving more money to the 1% is probably a way of investing overseas, and helping the rest of the world.

Well, what do you think?

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31 Answers

zenvelo's avatar

First of all, they don’t spend it, so it lowers the velocity of money in the economy, thus decreasing the size of the economy. Give a rich man $1,000 and he sticks it in the bank. Give a poor man $100 and he spends it at places where other poor people earn money and they spend it too.

And, while a rich man’s investments may eventually increase spending on capital projects, it does not move through the economy. And, as you note, it gets invested elsewhere.

The other problem is that spending decisions are in the hands of relatively few people. And, by concentrating wealth in relatively few, it makes it harder for anyone else to succeed.

Seek's avatar

Your details mention nothing about tax-free hideaway bank account in the Caymans.

Yetanotheruser's avatar

With low taxes and wide-open loopholes, there is no incentive to do anything with the money other than stash it in interesting bearing accounts off shore where it will grow untaxed. After the tax reform act of 1976 the tax rate, for example, the highest tax rate was 70%, for a household making more than $786,871 married filing jointly, (adjusted for inflation would be $1,385,059) in today’s dollars). Under a previous tax rate, set by the Internal Revenue Code of 1954, taxes of 91% would be paid on a nominal income of $400,000 for married filing jointly (adjusted for inflation it would be $3,032,157).

One of the advantages of a high tax rate on top earners in an economy, in addition to the revenue, is this: If I had a company that made me a million dollars in a year, and I would be charged 90% tax on that million dollars, I would be much more likely to re-invest that $900,000 back into the company, whether it would be for R&D, expansion, diversification, what have you. That would be money back into the economy, jobs, and increased velocity of the money (thanks @zenvelo ).

P. S. Source for tax information is taxfoundation.org

Hypocrisy_Central's avatar

Fact from fiction, truth from diction. The only thing that does it make a welfare state of those who are under the top 5%. As wealth out paces the middle class, not because they can’t keep up, many do not want to take the risk or make the moves to keep up, thus they <believe> wealth is escaping them when they are really just letting it run from them. The rich do spend money, and they spend it where the middle class works, the dry cleaners, home improvement store, the music store, clothing stores, auto repair shop, the grocery store, movie theater, restaurants, etc. Not all of those establishments are owned by the wealthy, and those that do, they hire the middle class and lower class giving them jobs. When they frequent these places they are often the better tippers (I have been there with them). Money that is invested overseas is a byproduct of John Q Citizen spending habits. To keep cost down manufactures go where labor is cheap, the same way John Q shops where he can find the best deal on gas, tires, TVs, etc. Labor Unions can be a good thing (I was once a union man) but they can also be sandbags to the economy. When labor get so large and want concessions that hurt the business, or make the workplace or manufacturing inefficient they do more to hurt everyone else in the process of helping their union members. It may seem as if the wealthy is not spending much because they don’t spend vastly more than John Q does at Macy’s or Best Buy, or spend as much of a percent of their income as John Q, but they spend money. The biggest difference is how those who do not have wealth or won’t go after it will think they are getting shortchanged

Yetanotheruser's avatar

@Hypocrisy_Central When labor get so large and want concessions that hurt the business, or make the workplace or manufacturing inefficient they do more to hurt everyone else in the process of helping their union members

The need for strong unions is strength in numbers in negotiating with strong management. There has been a systematic effort, since Reagan, to bust or weaken unions. There is a continuum of anti-union attitude that started with Reagan’s first presidential act (dissolving PATCO).

I am tempted to rant on this subject but I don’t want to derail the OP

JLeslie's avatar

Great Question.

@Yetanotheruser I found your answer especially interesting. I had not thought about how high tax rates can incentivise the wealthy to invest, because the money would be taxed at a high rate.

@wundayatta I had never really thought of middle class investing vs. wealthy investing, so I am interested to see the answers you get. What I have mentioned before is there is more spending done by the middle class than the wealthy when we look at similar amounts of money. For instance if a millionaire another million, and he likely won’t spend most of it. Give 10 middle class people $100k and they likely will spend quite a bit of it. Let’s say for simplicity they all buy a new car, average $30k each. Ten cars sold, more people employes to make those cars. If the wealthy guy buys a $300k car the money is the same, but only one car being made, so fewer people employed. There is also more of a chance the car is not made in America, but not necessarily. It is not black and white. Also, the wealthy guy might only spend $150k on his new car, still an expensive car, but half the amount spent, less sales tax for the state etc.

As far as investing, I have a feeling, but I never saw stats on it, that investing in real estate and the stock market probably goes up among the middle class when the market seems like a sure thing. Because I think the inexperienced less knowledgable consumer/participant joins in on these things when it seems like everyone is doing it, while the wealthy have advisors who work the markets all the time, during good and bad times. People who have less ability to lose, are more likely to be risk aversive I think, but some of it relies on personality.

However, when a lot of people are out of work, maybe there is more of the possibility of them venturing into small business to do something, anything to make some money.

I do think the situation of the rich getting richer and the middle class and poor getting poorer creates resentment, especially in the American culture. We do not accept a mentality of being born into a station in life. We feel everyone should be able to make it, live a decent life. When economic situations seem very unfair, and employees feel abused, or people feel they cannot get a chance to succeed, there is going to be some push back. Whether it be unions, unrest, or an outright revolt this time is yet to be seen. Some countries have incredible poverty in large numbers and the citizenry seems to accept it, maybe it is their belief system or such a long history of the country being that way, or the poors lack of knowledge of other ways of life, but not America, we are not passive in the long run about inequity that is so extreme.

jerv's avatar

When the bottom 90% have less money, they spend less. That lowers demands, which reduces the need for workers, which increases unemployment. While it’s not exactly a zero-sum game, any wealth that is created is not through anything tangible, nor through services provided as fewer people can afford those; rather, it is based on speculation of what things may be worth in the future. Can we say “bubble”?

Also, it may be a coincidence, but the last time wealth and income were as concentrated at the top as they are now was mid-October 1929. Think about that ;)

BTW, how do people save/invest when even mere survival eats up their entire net income? And why is it that the rich are given all sorts of breaks that cost those of it’s barely rich enough to have to pay taxes more; why are we subsidizing the wealthy? How is that sustainable?

CWOTUS's avatar

The level of economic ignorance in this forum continues to stagger me. It’s no wonder that we’re in the economic mess that we’re in, given that the thinking here often (not always, but “as a rule”) leads the general public.

In the first place, when “the rich get richer” it does not necessarily follow that “the poor get poorer”. (In point of fact, I think that the quote that’s often misquoted is “the rich get richer, and the poor get more children”. That, at least, seems to be a truism that is often true.)

Economics is not a zero-sum game where the amount of wealth in the society is fixed and any bit that you get means that your neighbor is made poorer on that account. That is simply not so. Other than a tiny minority of people in the USA, for example, who choose to live as hermits or have mental and emotional problems that drive them to live in the streets, 95%+ of all of us live better than royalty of medieval days. And during the intervening years, some people have gotten stinking, amazingly rich.

That should be considered: Some people have amassed unimaginable wealth, and yet we’re all better off. That’s not a coincidence, and it’s not that we got better off “despite those rich bastards”. More often than not we bettered our situations as they also feathered their own nests.

But I’m not going to swim against the tide here forever. As Casey Stengel used to say, “You could look it up.”

flutherother's avatar

Since the founding of America the rich have got richer and by and large the poor have got richer as well. There is no doubt that the average man today lives a life of luxury compared with the rich of medieval times but it would be foolish to believe that this is because of some law of economics and it will continue forever.

When big corporations pay minimum wages in order to maximise profits and the minimum wage is as low as it is and getting effectively lower there are real effects on people. However hard they work and however many hours they put in they see their dreams for themselves and their families receding. There is a clear choice; do you pay your workers a decent wage or do you pay your shareholders and company bosses excessive amounts. The labourer is worthy of his hire or what are we. We are talking about our fellow citizens here. The rich spend money for sure but the ‘trickle down’ effect is a lot less effective than the ‘trickle up’ effect when the average man earns a decent amount.

Apart from anything else history tells us that as income disparity continues it becomes blatantly unfair and will put a strain on society leading to unpredictable consequences. A country is like a ship. Its citizens are all in it together.

JLeslie's avatar

@CWOTUS So if a company has a total payroll budget of $5 million, and the top three people get $1 million + each and then people at the lower levels make $8 an hour each (I am missing a lot of other levels in there) or they could give the top people $750k and pay the lower levels $15 each, how is that not making the richer richer and the poor poorer? The difference in corporations and how the top and bottom are paid in America is much different than other western countries. We have a much wider gap. The payroll budget is a fairly finite number. It seems to me bringing up the pay of workers is what helped grow the American economy and standard of living through the 60’s, 70’s, 80’s, and 90’s. Along with other factors.

CWOTUS's avatar

The simple response to your postulated example, @JLeslie, is that you’re not owned by any employer. You’re free to sell your services to other bidders or to open a firm of your own and compete with your current employers. Surely if the employees are so competent and underpaid, they will all want to work for your establishment. You’ll put the former employer out of business.

If your assumptions are correct, if you can obtain financing, if you can take the risk and if your skills are “all that”, anyway.

The other thing to consider is that “payroll budget” isn’t generally set by law. If the business grows beyond expectations, then so will the payroll. So go ahead and grow the business and see what happens.

jerv's avatar

@CWOTUS Look at the increases in income though. A rising tide had not lifted all boats, and despite the overall increase in prosperity, most people are either no better off or actually worse off than they were twenty years ago. Wealth is not a zero-sum game, but when 90–95% of the gains go to less than 10% of the population, it may as well be. More people sharing a smaller slice of the pie; a slice that is shrinking faster than wealth creation makes the entire pie grow once you adjust for inflation.

Jaxk's avatar

@JLeslie

There is another flaw to your logic. The top earners (generally CEOs etc.) Can have an immense impact on the business. Indeed the difference between growing and shrinking. We tend to look at these guys as just another job which anyone could do. That’s not the case. A good CEO can be as much art as science. If I have a painting (which I do), painted by an artist that I consider quite good, I can have that painting for $20. Not exactly the same as a Picasso but it required as much dedication and time as the Picasso. Shouldn’t it be valued the same?

My favorite example is Lee Iaccoca. He took a failing Chrysler and turned it around in just a few years. How much was that guy worth. I guarantee, doubling the salary for the workers on the production line would not have turned Chrysler around. Chrysler owned almost 10% of all corporate debt in the US. How many hundreds of thousands of jobs were saved by this turn around. Again, how much was this guy worth to Chrysler?

The truth is every corporation is looking for a Lee Iaccoca. And they are willing to pay through the nose for him/her. Are some guys overpaid? Absolutely. But that’s true on the production line as well.

Hypocrisy_Central's avatar

@Yetanotheruser The need for strong unions is strength in numbers in negotiating with strong management. Sometimes the management is not very robust. I have seen unions unionized just to parlay for increased perks. I have seen unions where the unions got in the way of productivity more than protecting jobs. When a worker can’t get off his forklift to help another person clear a pallet of widgets so the path can be clear to allow the forklifts to get through quicker, faster, and safer (increasing productivity) because the union won’t let him (supposedly the forklift driver would be taking or doing some other person’s job, making them expendable). Making sure fare wages and safe work environment I can see, to say we workers MUST have 6 weeks paid vacation a year is another thing.

CWOTUS's avatar

@jerv if you look at “cash” or other more or less arbitrary measures of money as “the sum of all wealth” then you miss the bigger picture. Even someone with zero income and zero net assets is actually better off right now, today, than someone twenty years ago who did have income and assets (at least to a certain level, on a scale of time that brief).

Twenty years ago that person would not have had access to many of the things that he does have access to now, whether he owns them or has paid for them or not.

The person with no income and no assets today still has more opportunity, more assets around him that he can still use, than the person twenty years ago. That’s not even counting the “public” assets that others may have paid for.

Money isn’t the only way to measure wealth.

JLeslie's avatar

@jaxk Lee Ioccoca spoke at my college graduation. I have great respect for him. I went to school in car country, in MI. He mostly spoke of immigrants coming to this country and looking to the future. I am fine with him making a few million a year, but also want the laborers to make a decent wage. The union brought up the wages, and the benefits for that matter, and in my opinion eventually the union went too far with demands. But, if the employees had been well paid to begin with, I don’t think the union ever would have been needed. That is the risk, treat employees like shit and you risk them eventually getting fed up. Greed in senior management, stockholders, the labor force, and the union, along with management feeling liket hey had a lock on the American market damaged the industry for a while. It seems to me when unions started really taking hold in America and raised wages for labor the middle class grew, and it was a time of great economic growth and prosperity for America. There was a false bubble there eventually, everyone was being overpaid (everyone is incorrect, I use it losely) and long term view was not taken into account enough regarding the company bottom line with pension benefits, health care etc. But, the American economy seemed to be humming and everyone was throwing around money. A lot was on credit of course, bad news, but people felt confident.

Jaxk's avatar

@jerv

I know this whole idea of growing the economy from the bottom up sounds good but it doesn’t work. New start ups are way down. That’s where the good jobs get created. If we simply increase welfare and food stamps, the only jobs we create are at McDonald’s or Walmart. That’s where most of the jobs have been created under this president. If you want the middle class to grow, if you want wealth creation, we need to energize the entrepreneurs. Get the private sector to invest in new business and expanding the business we have.

The more jobs we create at McDonald’s, the lower the average salary. Raising the pay for McDonald’s is not a solution.

Jaxk's avatar

@JLeslie

If we are talking about unions, especially auto unions, we’re a far cry from minimum wage. It sounds like you’re advocating the government assume the role of a union by adjusting the minimum wage. If I’m not reading you correctly feel free to correct me.

I would caution you about using the growth periods as an example of what we should do during a recession. It is the recession that is causing the drop in incomes. If we can get back to a growth economy, average incomes will rise again.

JLeslie's avatar

@Jaxk Actually, I was advocating companies paying a decent wage without being forced to. Some do. I was talking about unions coming in when people were paid crap, then I said unions gained too much power and labor was paid too much in some instances and benefits were also out of control. Did you read what I wrote? I was very critical of unions also. i am trying to keep them out, by not taking advantage of employees in the first place.

wundayatta's avatar

The discussion about the economy is all well and good, but I’m really interested in what people actually do with money, and how it gets fed back into the economy.

I started thinking about how rich people spend money. But I came up against the idea that there is only so much they can spend. They have to do something with the rest of it, and I guess what they do is put it to work. How? Generally, with that amount of money, they buy companies.

Which companies? Where? Well, they’ll buy companies that give them the biggest return on investment given the risk they are willing to accept. Given that they have so much money, they are probably willing to accept a lot of risk, which means they are probably willing to invest overseas, where returns are much higher.

That means that the income disparity is likely to lead to a flow of capital out of this country. Except wait. When the Chinese companies make money, the investors make money, and then what will they do with that money?

The big question is when will they invest it in America? And the answer to that question is they will invest it here when they can make big returns here. Bigger than foreign returns. And when will that happen? When Americans have a lot of money to spend.

Thus, it seems to me that when income disparities get large, rich people will probably find more opportunities overseas, thus leading to more poverty here. If we tax the rich people highly, and use that money to support workers in becoming more competitive and in small businesses starting new businesses, and in paying to keep people alive, then we create markets for people to serve the people in need. Plus we create demand, which entrepreneurs will want to meet.

Is this not a reasonable goal? Why do we want American money to be invested overseas instead of here? Don’t we want to juice the local market? Wouldn’t creating demand locally do more to develop the local economy? Wouldn’t programs to reduce income disparities do more for local economies, and won’t the rich hardly even notice, anyway? They already have more income than they know what to do with.

CWOTUS's avatar

Is this what you were looking for, @wundayatta? It’s not hard to find.

emilianate's avatar

My husband is pretty successful with money and he told me the standard short answer. You mess with the bull, you will get the horns. Never try to man-handle an entrepreneur because you’re the one who is going to pay for it by losing your job, lowered salary, paying more at the cash register, or something called regulatory capture which basically means the laws and regulators that are designed to tame the rich guys, actually become friends, not foes with the entrepreneurs (corruption).

The answer is pretty much right in front of you. An entrepreneur is driven by monetary incentive. Offer him the best incentive out of all the competing countries, and they wont ever have a reason to leave. Lower taxes and lower regulations. Let people negotiate with the entrepreneurs on what is fair and let pain solve problems, not artificial sweeteners. Let people’s money punish corrupt business practices – boycotts, lawsuits.

jerv's avatar

@Jaxk I am not talking just about McDonalds. I am talking about the entire non-executive class. As cost of living has risen, wages have not. That is as true for skilled workers as it is for burger-flippers. Hell, two of the junior machinists in my shop are still on food stamps!

Now, if wage increases were something that every employed person got instead of just executives and those with powerful unions behind them, we could have fewer people on government assistance, which would shrink the budget and lower taxes for everyone. And I don’t think it’s to much to ask that all who worked actually be able to afford to live without being subsidized by taxpayers. Think of it as an investment, a cost-cutting measure.

How about growing the economy from the middle out? Let’s try that again; it seemed to work well during the later half of the last century, and we’ve had increasing problems since we strayed from that, so let’s go with what works instead of what was discredited before it was tried, and proven not to work when it was implemented.

@CWOTUS Other than internet access at public libraries, I fail to see that. Food is no easier to get, shelter is actually a bit harder, medical care is still a luxury that many are forced to go without… been there then, was there again relatively recently, and there was no practical difference. And it’s only going to get worse as assistance is cut by those that would rather spend money subsidizing the top earners.
Oh, and by wealth, I am talking merely about the ability to live self-sufficiently, not the ability to buy luxuries like 60” TVs. Now, what do you mean by opportunity? There are more job-seekers than jobs (and by a wider margin than yesteryear), so you must be talking about the opportunity to start your own business. If running a business is so easy then you nullify any arguments that a good CEO is worth more than a wage slave unless you are conceding that most people do not have that opportunity.

jerv's avatar

@Jaxk And by “from the middle out”, remember that not everybody can be an entrepreneur, yet entrepreneurs are not the only ones who deserve to get paid at least a living wage.

CWOTUS's avatar

Your assumption is incorrect except for the tiny fraction of people who are pretty much incapable of even caring for themselves, @jerv. I’ve known several entrepreneurs who were that because they couldn’t get a job, which they would have preferred.

zenvelo's avatar

@Hypocrisy_Central I guess you liked the replacement NFL refs.

jerv's avatar

@CWOTUS Are those entrepreneur friends of yours successful? Anybody can fail at running a business. Also, pimps and drug dealers are technically entrepreneurs, and are often unemployable for an interesting variety of reasons.

I cannot tell whether you are arguing that entrepreneurship is so easy that even a person who fails at burger-flipping can do it, or that skills are so easily learned and opportunities so abundant everywhere that anybody can be anything. In the former case, you are saying that you know people who cannot to run a fryolator even with training, while in the latter case every kid who dreams of being a professional ball player will make it into big leagues and land multi-million dollar contracts without fail.

The only other alternative I can see to you being utterly and laughably wrong is that entrepreneurship requires talents (mostly administrative, some social) that not everyone has. It is possible that the entrepreneurs you know went that route because the only thing they are good at is running a business; they have different aptitudes and abilities.

I agree with “nothing ventured, nothing gained”, and feel that one must always take risks to reap rewards, but you seem to be under the impression that everybody is allowed to take any risk they want if only they have the balls. Sorry to burst your bubble, but it takes more than balls to succeed.

BTW, I thought the only people that couldn’t get jobs were the certifiably disabled; are your friends disabled, or is it just that there are not as many opportunities for the allegedly-lazy poor people as many Conservatives seem to think?

Seek's avatar

@jerv I could kiss you for that one.

Yetanotheruser's avatar

@Hypocrisy_Central Unions (in particular, the labor movement in general) have had a direct hand in increasing the quality of life and the standard of living in this country (and others) over the past 100 years. You can thank this movement for the 40-hour work week, the mandated lunch break, minimum wage, and a 2-week annual vacation, to name a few.

The unions, as I posted above, have been under attack since the 1970’s. The right-to-work laws passed in many states act as an incentive for each individual worker to “ride for free” by not paying the costs, which may lead to the collapse of the union and no collective bargaining agreement.

Many unions (especially trade unions, like carpenters or electricians) provide a multi-tiered pay structure which includes levels ranging from apprentice through journeyman to master. These unions (many times in partnership with cooperating contractors) provide essential training to these workers,ensuring high quality, safe, and efficient work. Personally, if I were going to hire a tradesman, say an electrician, and I had my choice between two individuals who had proper licensing and certification, and similarly positive background referrals, the only difference being one was a union member and the other was not, I would tend to choose the union member.

ETpro's avatar

@JLeslie asked me to chime in on this, but @jerv and @Yetanotheruser have said most of what i wanted to say.

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