Income inequality among the rich

From a BloombergView article by Megan McArdle, the following quote was interesting: “But the proportion of this unhappiness due to income inequality is actually relatively small — and moreover, concentrated not among the poor, but among the upper middle class, which competes with the very rich for status goods and elite opportunities.”

There is a lot of talk lately about the urgency to address income inequality and yet it is not really getting much traction among the broad population.   Income inequality talk is mostly coming from the upper middle class: people who make very good money but insist they are not part of the problem.   Although the topic is getting a lot of media attention, there is a noticeable lack of interest by people not in the upper income brackets.

The above quote provides an interesting perspective.   The issue is very important to a very small population of people.   That population is the top wage earners minus the rarer astronomically compensated.   These second-from-top wage earners find themselves struggling to compete for the luxuries available to the super rich.

For the rest of us who are not competing for these luxuries the income inequality doesn’t really matter that much.    Most of us are competing within narrow income ranges.   Below the upper middle class, the income ranges are relatively narrow: this entire population is earning between 0 and 100k.   Such income groups do compete in the same markets, and although the latter can consume more, it is rare that he will exhaust the supply available for the former.   There is plenty of retail quality goods for everyone.   The concern is how far the budget can stretch.

For upper middle class and upper class, the market is very different.  Their incomes span from 100k to 100s of millions.  Collectively this group is competing for very limited resources of status goods or luxury opportunities.    The income inequality especially hurts the upper middle class because most of the available luxury opportunities are being consumed by the extreme upper class.    These luxury opportunities are in the form of very large luxury homes in highly sought locations,  exclusive accommodations for travel or for access to celebrities, etc.   These are status goods precisely because they are so limited in availability.    The problem is not that their prices are so high, but that the entire supply is being captured by the extremely well compensated.

The rest of the population has little or no driving need to possess these luxuries.   The rest of the population participates in markets for goods that are not in danger of running out.

I am reminded of the recent movements claiming to be the 99% against the remaining 1%.    It now seems that this way of characterizing the problem may have been self-defeating.   If we are the 99% and we are more or less getting by, then why should we care about the remaining 1%.   That remaining 1% is living in a completely different market space than the rest of us.  As an aside, I often wondered why they chose 99% as the cut-off.  Perhaps it was because the most vigorous complainers were near the 99% point.

The protester’s argument is that the wealth in the 1% of top wage earners could be redistributed to make everyone richer.   It doesn’t much math or experience to realize that dividing that excess across 300 million people is not going to be very impressive.   It is hard to get worked up about a few more cups of coffee in a year.

But the issue is not going away.   The upper middle class is very motivated to take this fight to the richest class.   They are the ones who will benefit from the redistribution.   This makes sense.   Taking some super-star’s excess compensation and redistributing it among the not-quite super-stars is going to make a difference for this exclusive group.   The super-star will not be able to consume as much of the luxury items, leaving more available to the other luxury seekers.    And those other luxury seekers will have substantially more to spend to obtain the luxuries.   The redistribution is over a small population of not-quite super-rich.

This is a battle between the top and the very top.   In total, their numbers are a tiny minority.   They seek to politicize this issue in the hopes of motivating enough of the rest of the population to come to their side.   The problem is that even if successful the only outcome of this effort is to better redistribute the wealth among the wealthy.    Income inequality would be solved if all of the wealthy would have compensation more closely clustered.   That equality in being rich will remain extremely wealthy compared to the rest of the population.

In any event, the image in my mind is of an argument between two groups who reside far outside of the world most of us live in.   In general, the rich and the very rich are basically irrelevant to the rest of the population.   We participate in completely different economies.

The two upper classes are fighting over redividing the part of the pie that is already going to the two upper classes.    There is not going to be much change for the remainder that will be divided the same way as before.

I often wondered why heavily socialized or communist economies fail.   At the lower classes, there is generally a lot of good will toward each other.   It seems at least possible to cooperate in the way these economies suggest.   I think the above discussion may offer a clue.

In any society, there will be a few who rise to positions of power.   Within those ranks there will be even fewer who have the top power.  Those with some power outnumber those with the top power.   The larger number resents the excesses available to the top.   This is a miniature civil war being fought between the top groups.   The only way they can make change is to try to enlist the masses to support their side of the argument.

Again, I think if left to our own devices, the vast majority of mid to low income can work together cooperatively.  I think this is very possible even within heavily socialized economies.   The problem is that the the top classes don’t allow us to cooperate.   The top classes divides us in order for them to win their arguments of how to distribute the wealth among the wealthy.   The top classes encourages the rest of the population to take sides and stop cooperating.    Eventually, the will to cooperate stops because everyone is against each other.   The top classes remain no closer to solving their private disagreement.

I think about the societies of North Korea or Cuba.  These economies have shut down decades ago and there is no significant movement to get it running again.   I can imagine that the reason is a stalemate between the rich and the very rich (as measured in their society).

I have been reading some information about what the general population goes through in Cuba.   I get the impression that they really would like to work together to make their lives better.   The problem is that the top refuses to let that happen.   I had a hard time imagining why the top would refuse to make everyone’s life better.   Now I can see a possible answer.   An improved economy empowers the next-to-top group to threaten the top.   Maintaining the hierarchy of power at the top demands that everything stay shut down.

The rich want more of what the very rich have.  That fight over income inequality at the very highest level has shut down the entire economy.

Income inequality is an argument strictly between the rich and the very rich.   The rest of the population doesn’t really care about this argument.   However, we need to care.   We need to solve income inequality.    The reason is not because the rest of us will benefit from redistribution of the excess.   No, that redistribution will only occur at the top.    The reason we need to care is that the very top is quite capable of shutting down the entire economy unless the rich become more equally rich.

It is more accurate to rename income inequality as inequality of high incomes.    That’s what the argument is all about.   If the rich were more equally rich, we wouldn’t be having this argument at all.

Updated 11/15/2014: This NYT article provides another perspective of the inequality of the rich and the very rich.  I think this is the root of most of the grievances about inequality: the rich are quickly falling behind the very rich.

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3 thoughts on “Income inequality among the rich

  1. Pingback: Perceptions of income inequality is really about consumption inequality | kenneumeister

  2. Pingback: Income inequality and the inequality of patience | kenneumeister

  3. Pingback: Income and wealth inequality are different: income is contingent on conformity | kenneumeister

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