Income Disparity; what it should mean.

income disparity graphLet me explain or shall I say ask. I certainly do not hold all the answers, but have many questions to be answered, as do we all. My writing this is to just help progress our understanding and debate.

This graph that I made titled “Income Disparity vs. Wealth Disparity” is the result of my skepticism. Many of us have seen graphic representations depicting income and wealth disparity. Most of the time when I see these kinds of pictures I’m skeptical at the data used and the accuracy of these graphs. So, I decided to try it myself. I researched data directly from the IRS data tables. Then when making the graph, I took great concern to preserve the accuracy of size increases relative to the data. When I say, “the average top 1% earns 29.3% more than the average bottom 99%”, the red circle in the graph is exactly 29.3 times bigger than the blue circle.

So now that I have a graph which I can trust, we can look at it and see what it says to us. Obviously we see that some people earn a great deal more than others. To be more specific, the data I used compiled by the IRS took into account 141 million tax filings from 2007. The top 1% is made up of 1.4 million tax filers, and the bottom 99% has 139.6 million tax filers. The average income of the top 1% was $1,429,000 while the average bottom 99% earned $48,710.

The first thing I say to myself is, “So what if some people earn more than others”. People are allowed to earn more, especially if they worked harder.  Being the centrist that I am, I certainly don’t have a problem with some people making more money than others. The people who do really well probably did work harder, went to school longer, are just smarter or had some great ideas that they turned into a profitable business. I for one see no problem with some people earning more.

But the biggest question in my mind that I can’t ignore is this…

If the top 1% earns 29 times more than the average, did they work 29 times longer or harder?

There are a few things to consider here. First lets look at the value of time. If the average person works 40 hours a week, then someone who earned 29 times as much should have worked 1,172 hours per week. Of course this is physically impossible. There are only 168 hours in a week.

Next let us figure in the factors of efficiency. Certainly people can earn more and be more productive by being more efficient with their time. Some people can work harder and smarter making the value of their time worth more. So let’s say someone in the top 1% can increase the value of their time by a factor of 3.  They can accomplish 3 times as much as the average person by being smarter with their time and by working faster and harder.  This would bring their 1,172-hour workweek down to 391 hours. This is still physically impossible.

Let’s stop for a moment to consider what IS physically possible. There are 168 hours in a week. Certainly all this time can’t be spent working. We still need to sleep, eat and go to the bathroom. Let’s assume someone only takes 6 hours out of the day to sleep, eat, poop, and works the other 18 hours each day towards earning money. That leaves only 126 hours possible to work each week.

After we’ve figured in the value of time and the greater efficiency that someone may work with, we came up with 391 hours needed to work in order to earn 29 times as much. If it’s only possible to work 126 hours a week, we subtract this from 391 hours and we are left with 265 hours to account for.

So, we have someone in the top 1%, who works 18 hours a day, 7 days a week and works 3 times more efficient than the average person. But they still earn 265 hours more per week than the average 99%. How do we account for this?  The other factors we have not yet considered are innovation, ingenuity and talent. These are much harder to account for. How do you place a value on innovation or ingenuity?  How much should someone be rewarded for coming up with the next best invention? According to our figures here, assuming someone in the top 1% works 126 physical hours at 3 times the efficiency, they are then rewarded in addition to their time, another 6.6 times more than the average worker. Is this right? Maybe, maybe not? (The above is just an example to consider. We could change the numbers to say that someone in the top 1% still only works 40 hours per week at twice the efficiency, which would be a value of 80 hours per week. This would mean that their innovations or ingenuity earned them an additional 1,092 hours per week or 27 times more than the average person.)

While we don’t want to punish hard work and innovation, we need to be mindful of what can happen to our economy and society when a few people earn exponentially more than the average worker.  This situation can and has had drastic effects on inflation, the cost of living, job creation and can also affect new start-up companies. All of these topics and problems we address further in my book Social Capitalism.

The above are just questions that look to find the right balance between rewards and the work or innovations that people put into the system.  Then there are questions concerning  how taxes and tax fairness play into all of this.  While I believe people should be rewarded more for working harder or smarter, there are many problems that arise in an economy where there is a largely disproportionate system of rewards and concentrations of wealth in the hands of the few.

Does this mean that the wealthy are earning too much or is the average worker earning too little?  In order for the average worker to earn a bit more it has to come from somewhere, typically out of the high profits and earnings of the top 1%. While many would call higher taxes on the wealthy a form of wealth redistribution (which it is), we need to also ask, “Is higher taxes on the wealthy punishing the rich or is it a necessity to ensure a balanced, healthy system and society?”

What do you think?