One of the most common and predictable difficulties faced by the Occupy movement and protesters of income inequality everywhere is that they’ve almost certainly been labeled as “communists” or “socialists” and once those words start getting thrown about, thought tends to stop. Indeed many of the Occupy protesters actually are communists or socialists and I personally don’t think there’s anything wrong with that. Unfortunately, the U.S. ran a very successful campaign against those two particular worldviews that still has our oldest generation, as well as the generation they raised, completely brainwashed against even learning the definition of the words.
All that aside, I’d like to show some mathematical evidence that you can, in fact, be a red-blooded American capitalist and still see better income equality as a meaningful goal.
The big problem, as I see it, is that whether they’re familiar with the math or not, most Americans believe that wealth lies along a normal distribution. That is, that the frequency with which you find certain income levels looks like this:
The dark blue area in the middle, they imagine, is the middle class, with varying degrees of “rich” and “poor” falling on either side of the range. This would be a pretty ideal picture, actually, and at some point or another might have represented what income in America actually looked like. Here’s what it actually looks like:
That chart is the fruit of my own labors, by the way. Feel free to use it wherever you like. Attribution would be nice, but it’s not required. Data for the chart was sourced from the U.S. Census Bureau.
Now economists say that wealth distribution like what we’re seeing above follows something called the Pareto Distribution, The Pareto distribution quite reasonably assumes that in non-communist societies a great portion of the wealth will come under control of a small portion of the populous. This inequality is the reason some of the Occupy folks believe they have to be communists in order to create income equality – but they’ve missed an important concept.
There is no such thing as a perfectly communist state. Even if you solve every last sociological problem, there’s still a huge technical problem of actually equalizing the possessions and income of every last person. You’ll never be able to do this perfectly and so you’ll end up with amounts of wealth falling along a normal distribution. Depending on how close to ideal your methods become, you’ll have varying values of σ meaning that your bell curve might be skinnier than, say, America in the 50s, but still a normal distribution. That’s the key point – it’s not about avoiding the Pareto distribution altogether, but about finding ways to tweak the distribution we all agree to live with to make the best possible world for all of us.
Looking at the chart of America’s current wealth distribution above, it doesn’t seem much like a Pareto distribution to me anyway. It seems more like a log-normal or perhaps even a Lévy distribution. Regardless of which distribution technically models the data best, there’s no question that there is a degree of positive skewness to the data, like so:
In a capitalist society, there is almost certainly a level of skewness to our wealth distribution at any given time, and it’s pretty unlikely that we’ll have negative skew. So if that’s just the shape of a capitalist market, then how can I possibly claim that reasonable income equality can be had with in a capitalist system? Well if the ideal is to approach a normal distribution with a reasonably low peak and a reasonably large standard deviation, then we have two factors we can control: the height of the modal peak and the distance of the mode from the median.
Compare the following curves:
The dashed curve is sort of like our economy right now. The difference between the mode and the median is fairly large, and it shows a very high degree of positive skew. The solid curve is more like our ideal normal distribution. In most cases you’ll find that the difference between medial and modal income is directly proportional to the Gini coefficient of the measured populous, and in some cases might actually be more effective a tool than the Gini coefficient. Regardless of the method used, the U.S. scores rather poorly.
So how can we change the shape of our curve? In this author’s opinion the answer is threefold:
- Improve economic mobility The ability of the average American to change his or her lot in life is at an all-time low. There are a lot of factors contributing to this, but one common factor is post-secondary education (PDF warning). Now my regular readers already know how I feel about traditional education and student loan debt, but despite soaring tuition costs, a college education is still (for now) one of the best investments the average person can make in their future.Unfortunately, this is a major contributor to the lack of economic mobility. For various reasons, children of low income families typically score lowerthan similar children with higher family incomes in many school subjects, and even those that do perform well are significantly less likely to complete a college degree. Any programs which contribute to high-performing yet low-income students attending and completing college should have a direct and measurable effect on economic mobility.It might also help if we could remove the Federal ‘no-escape’ clause added in 1998 that makes student loans the only kind of loans not able to be discharged during bankruptcy. I’m not saying we go back to pre-1978 rules where you could file bankruptcy immediately upon graduation but perhaps pre-1990 rules where you had to wait 5 years would be acceptable.
- Tax the wealthy
This seems to be the hallmark cry of the Occupy protests already, and is (rightfully) the one demand that earns many such protesters the “socialist” or “communist” tags. It does seem to be based directly on a quote from Marx, after all (“From each according to his ability, to each according to his need”) but regardless of the political leanings, it just plain works.How do we know it works? Well, we’ve done it. For most of American history, the tax rate for the top few percent of earners has been significantly higher than it presently is – as a matter of fact we haven’t seen a top tax rate below our current 35% since 1931! Our most prosperous eras, in fact, are all marked by top marginal tax rates at or above 70%.Given that programs like I mentioned above are only as good as their funding, it’s no surprise that the increased funding through taxation tends to create vastly improved economic mobility. Whether it seems communist to you or not, it works. Also, if you view such taxation and distribution of wealth as communist, you might be interested to know that the United States in the 1950s had a 91% top marginal tax rate.
- Bust up the old boys’ clubsIt’s been brought to national attention lately that big business (especially banks) and big government have been misbehaving at amazing levels for some time. Government has its hands in the bankers’ pockets and the bankers hold the leashes of the government. If you have any question that it’s that bad, you probably haven’t seen the news in the last decade.Here, for example, is a fairly compelling argument that Congress may have advised violent militarized actions against peaceful protesters. Here is a story about congressional lobbyists vying for an $850,000 contract to undermine the Occupy protests in the public eye and here(my favorite) is a story about our Congressional representatives performing insider trading of the same variety Martha Stewart went to jail for and seeing no penalties. How? In an obscene twist of the law’s intent, the letter of the law doesn’t consider it to be insider trading if you’re privy to (or able to actively change) the legal landscape that influences the business. Why hasn’t this loophole been patched? Because Congress won’t vote to change the law so that their unethical trading becomes officially illegal.All of this has to stop. All of it. Get the money out of politics as much as possible and likewise take the politics out of business. No more lobbyist firms, no more unlimited campaign contributions. If our government can be bought and sold then the wealthiest citizens will buy and sell them. It’s impossible to make meaningful changes that negatively impact the top few percent when they are the people holding the puppet-strings.
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