Income Inequality
by Dr. Doug Cardell
One of the most common questions I am asked concerns income inequality in one way or another. Income inequality is the result of two somewhat related causative factors. The lesser factor is a money management gap. You've heard the saying, "The rich get richer, and the poor get poorer." Have you ever really thought about it? Is it true? If so, why is it true? Well, it's only half true. The rich keep getting richer, but the poor are getting richer also, but sometimes more slowly. As a result, the poor today are much better off than the poor fifty or a hundred years ago and vastly better off than millennia ago. The implication is that the rich are doing some hidden evil to gain riches at the expense of the poor. Is that true? What if we changed the context to help us understand? What if we said, "Runners get better at running and non-runners don't get better"? Would that surprise anyone? Would it imply that runners were doing some hidden evil to gain running skills at the expense of non-runners? Of course not. Runners improve because they run a lot. Nonrunners continue to let their running muscles atrophy and may even get worse. The rich get richer because they have invested time and effort learning to manage money effectively. The poor don't do as well because they haven't developed these skills. Another way of making our original statement would be, "People who manage money well gain money, and people who don't manage money as well don't do as well." So, of course, the rich get richer, and the poor less so. This same reasoning is valid in virtually every form of human endeavor. People who develop and practice skills improve beyond those who don't develop and practice those skills. Why would we expect money management to be any different? How do you make a small fortune without money management skills? Start with a large fortune! Although that argument makes sense, it is not the only reason; there is a much more powerful reason. In the end, it boils down to innovation. Innovation tends to happen cyclically, and right now, we are in the midst of this type of cycle. So the question is, why does it happen, and why in patterns? Significant innovations usually precipitate it. The first industrial revolution, the second industrial revolution, the agricultural revolution, and the current computer revolution are examples. These innovations divide the populace into relatively well-off early adopters and those who cannot afford or resist the shift. The two groups exist in tension. While separate, they are connected as if by an invisible rubber band. As the early adopters forge ahead and the rest of society lags back, the tension in the rubber band increases. It stretches as the two ends get further apart. Those that employ the new technology gain productivity advantages and increase their income creating income inequality. The second industrial revolution is a good example. This revolution resulted in the rapid increase in the use of assembly lines to create consumer goods. It began in the late 1800s and ended in the mid-1970s. These cycles take a long time to manifest. Thirty or forty years after the beginning, income inequality peaked during the late 1920s. Those investing in assembly lines, like Henry Ford, made huge profits. At the same time, the benefits of assembly lines had not yet reached the average consumer. In addition, they forced many workers into lower-paying jobs. The rubber band was stretched tight, but inequality began dropping as the benefits of assembly lines became more widespread in US households, and workers began to retrain for the higher-paying jobs the new technology created. Between 1950 and 1980 was a time of some of the lowest inequality in history. The rubber band pulled the top and bottom closer by raising the bottom. But it also created substantial societal changes. During this time, households experienced an unprecedented increase in functional wealth. The household appliances, refrigerators, gas and electric stoves, home heating and air conditioning, washing machines, and dryers gave the average household the equivalent of four or five servants one hundred years earlier. It freed women to enter the workforce if they chose. Around 1977 a new revolution began—the computer revolution. The same pattern repeated as the rubber band began to stretch. Like Gates and Jobs, early entrepreneurs of this new technology made fortunes, like Ford, half a century earlier. Businesses and individuals who bought computers enjoyed a competitive advantage and increased their income. And just as in the past, workers were at first slow to retrain, resulting in lower real wages, thus increasing the inequality gap. This new technology was expensive. An entry-level computer like the TRS-80 cost about $2900 in 2022 dollars. Only the well-off could afford this new technology, but as they bought more, the companies used the income to lower prices and research ways to improve. As computers improved, more workers lost their jobs, and many had to retrain. Inequality increased. But because the early adopters bought into it, the funds to improve the technology and make it less expensive meant that computers have become more and more affordable and powerful. Below is a chart comparing the TRS-80 with a modern desktop computer and an inexpensive cell phone. The chart shows that, while crude and expensive by today's standards, it paved the way for society-wide benefits.
Innovation usually leads to some form of automation. An obvious current example is the increasing use of self-checkout lanes in stores. It was predictable. The recent push for dramatically increasing the minimum wage forced a price rise that the consumers were unwilling to pay. The higher prices did not provide the customer with a higher level of service, so they looked for alternatives. Generally, two options typically present themselves, automation and outsourcing. Outsourcing supermarket checkout hardly seems practical, so retail businesses are choosing automation. Stores, to keep prices down, tried self-checkout lanes. Customers complained but chose lower prices, so self-checkout lanes became more common. Many people talk about how terrible it is to put people out of work like that. Still, it is a natural consequence driven by consumer choice. For example, scanning and bagging groceries saves time in checkout lines. Many say we should do away with this automation and keep the checkers. Still, the idea here is to create value for the consumer and society. If the idea were to create more jobs, that's easy, keep the checkers and make them all work with one hand tied behind their backs. That would provide many more jobs. But why stop there? Let's eliminate the checkers' scanners and return to manual cash registers. Then there would be even more jobs. But at what cost? Furthermore, why stop at checkout lanes if it makes sense to eliminate self-checkout technology? Why not eliminate all innovation? The wheel certainly put lots of people out of work. The wheel allowed one person with a wheeled cart to transport the same loads half a dozen people could carry, eliminating the jobs of the other five, but led to new careers in wheel making and cart design as well as chariot builders. Luddites—innovation protestors—have made the same kind of argument against every innovation you can think of. Do we really want to return to the caves and refuse to allow any human progress in the name of protecting jobs? Of course, no one wants to see people put in the position of changing jobs or even careers, but this is the only way ever found to make society better for everyone in the long run. In our example in the table above, in only 50 years, computer technology improved from something the majority could not afford to computers and cell phones available to almost everyone. Now, 97% of the US population has cell phones, and 85% have smartphones that are millions of times more capable than the first TRS-80 for one-sixth of the cost. All innovations that only some can afford initially and want to buy help innovators figure out what consumers want and are willing to pay for. If the early adopters had not purchased those TRS-80s, the computer revolution would have stalled, and there's a good chance we would have missed out on the benefits we enjoy today. The rubber band that connects the early adopters and the rest of society stretches tight, increasing income inequality, but then contracts to pull the rest of society to a much better place. All of the innovations we enjoy today began with the well-off. Microwaves, VCRs, DVD players, televisions, appliances of all sorts, automobiles, air conditioning, electric lights, and much more we originally only found in upscale homes. Look around you and think about the things you can see. How many were at one time only available for the well-to-do? Eliminating the effects of the inequality rubber band means eliminating the rewards that inevitably follow—for everyone. One proof of this is the shrinking middle class. Yes, it is shrinking; since 1971, four percent have moved into the lower, but twice as many have moved into the upper class. This increase in upper-income folks will almost certainly drive the next wave of human progress. The inequality rubber band is a crucial ingredient of human progress. A world without income inequality would be dead; no improvement, no growth. Every innovation requires a paradigm shift that changes fundamental aspects of society. People are often loathe to embrace change, but change is the only element of life that never changes. The only constant is change. Embrace change and help others deal with it; it's the human thing to do.
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