Wealth Inequality in America

Recently a friend of mine posted the following video on Facebook. Normally I wouldn't bother too much with watching a video on wealth inequality - I've heard all the arguments ad infinitum from the Occupy Wall Street crowd - but I paid attention to this because my friend who posted it used to be the New Zealand head of a major American IT company and is about as far from an Occupy protestor as you could get. I watched the video and decided that it made a fair point - the United States has a very inequitable distribution of wealth - and I decided to write a blogpost about the subject, but not before I'd looked a bit further into the issues shown on the video.

Like many of the claims made by the Occupy movement, the facts of the matter aren't quite as straightforward as the video makes them out to be, as the following critique video makes clear.

In spite of the validity of the critique, I'm sure the overall point made in the first video is sound - America has become more unequal in the last few decades. The video also implies (but doesn't provide any statistics to support the implication) that economic mobility has been reduced. This is, I suspect, a bigger problem for America than increased inequality per se.

British journalist Jonathan Freedland, who was The Guardian's Washington correspondent for five years, revealed a remarkable statistic about America in his book, Bring Home the Revolution, that reveals the United States really is the land of opportunity: of all the people in the bottom fifth of the US income scale in 1975, only 5 percent were still there in 1991. In other words, within a decade and a half, 95% of America's poor were poor no more. What is more, one third of those bottom-fifth families had moved into the top half of incomes within a generation. Another statistic that supports this picture of economic mobility is that four out of five American millionaires made their wealth from scratch.  The figures in Britain are substantially the reverse.  This is what makes America what it has been - the land of opportunity. But Freeland concedes that by the time he published his book in 1998 the trend was slowing and I suspect that since then it has slowed further.

Personally, I think income inequality does not particularly matter so long as people have the opportunity to improve their lot. The natural state of human beings is abject poverty - subsistent living. The beauty of the free market is that it allows people to improve their situation by using their abilities to produce goods and services that they can trade with others who produce other goods and services, thereby improving the lot of everyone. Even the lowly labourer benefits because he can use his labour to produce higher value goods (e.g. assembling iPhones) and get greater rewards for his labour than he would get in subsistence work. But the system depends on 'churn', i.e. the ability of people to improve their lot - the labourer saves up and sets up a small business or funds himself through night school and uses his qualification to get a better-paying job. Contrary to what Socialists believe, it really does work and the statistics Freeland quotes in his book proves that it worked for the United States.

Why has it stopped working? Well, I think the answer is simple - capitalism has become crony capitalism. America today is a place where if you are big and powerful enough (i.e. "too big to fail"), the government will support you and bail you out when you make bad decisions. The big guys get the subsidies, the tax breaks and the preferential regulatory treatment, whereas smaller businesses and the middle class salary and wage earners get the regulations, the compliance costs and pay the bulk of tax. The system acts as a brake on economic mobility. When the big guys are protected from failure and the little guys prevented from succeeding, it is no surprise that there is little economic churn. The Occupy crowd blames capitalism, as if America still had some form of genuinely free market economy, but it does not. Capitalism is not to blame, it is government that has perverted the free market and created crony capitalism by allowing its favours to be bought and sold. It is only a return to free markets and government 'of the people for the people', rather than of and for the powerful, that will solve the problem of increasing inequality.

Ethics in Business - A Little Case Study

You might have noticed that I'm a staunch defender of the free enterprise system and the right of individuals to pursue their self-interests unconstrained by government. I think private enterprise provides almost all goods and services better, more efficiently and cheaper than government does and I think that governments should get out of economic affairs, confining their role mainly to maintenance of law and order and defence.

I accept that business can get it wrong and that some people in business are unethical and even grossly dishonest. That doesn't make the free enterprise system bad any more than corrupt leaders make government inherently bad. But it also doesn't mean that I will sit by and watch businesses rip off their customers, especially when I have personal experience of their unethical behaviour.

Insurance companies, like banks, have had a bad rap recently. International bail-outs like AIG and the response of some insurers to natural disasters such as the Canterbury earthquake have provided plenty of material for those who would rather see insurance services provided by the state.

This morning I had a disagreement with my insurer, Tower Insurance, with whom we have all our insurances - cars, houses, contents, life, etc. It was a minor matter but it illustrates an ethical issue I have experienced with a number of large organisations - whether they are obliged to provide the customer with all information related to their pricing so that that the customer pays the minimal amount needed for the service.

We are entitled to a discount on all of our premiums because we have all of our insurance with the one company. One of our car policies, for some obscure bureaucratic reason, was not receiving the correct discount. This was a matter we had become aware of in the past and we had asked Tower to correct. Last week we had to make a small claim on this car policy and learned Tower were still not applying the discount. When I raised the matter with a Tower customer service representative this morning, he advised that it was my responsibility to check the premium statement every year to ensure I was getting the correct discount (despite the fact that there is no information on the premium statement to indicate whether this is the case). When I asked him whether he thought his company had an obligation to ensure the correct pricing applied without the customer having to double check, his response was "no". Of course, he was wrong both in law and in ethics.

This is not a case of 'caveat emptor' because we were aware of the previous error and had asked Tower to correct it, assuming in good faith that future premium statements would be correct. It is not the continued error that irks me, but the young man's attitude that the company had done no wrong.

I do not hold the young man responsible for his attitude. His views are clearly part of Tower's culture. This is a company that seems to teach its customer service representatives that if the company can get away with overcharging customers, well and good.  If the customer does not spot the error, that's the customer's hard luck.

It is this lack of ethics and integrity in some businesses that leads to the resentment we see in the Occupy Wall Street Movement. One of the reasons I defend the free enterprise system is that I see it as inherently moral compared to the inherently corrupt Socialist alternative. My incident was a trifling affair and does not change my view, but it indicative of an attitude I see in many, particularly larger, companies - an ethical elasticity that ultimately leads to Enron.