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Rising income inequality is a driver of high living costs

Hello there! This post is from Holly’s husband, James Rivera. For context, please read the earlier blog post on “hidden” wealth being used for real estate speculation as a driver for rising home prices, and consequently, property taxes, for just one example. The Trump executive order to get rid of two existing regulations for every new regulation from January 2017 has likely widened the inequality gap (aside: I only say “likely” because the government report from the GAO, published in August 2019, uses data that ends in 2016, but the trends are clear and alarming).

One of my favorite magazines, Scientific American, has an article in the current issue (November 2019) that supports this claim:

Is Inequality Inevitable?
Wealth naturally trickles up in free-market economies, model suggests
By Bruce M. Boghosian, a professor of mathematics at Tufts University
https://www.scientificamerican.com/article/is-inequality-inevitable/

This article is behind a paywall ($6.99 for this issue), so I will not post its entire text here. If you can afford to subscribe (or just buy the current November 2019 issue), then I highly recommend you do so, if only for this article (it’s just that good). The math is just multiplication and addition, and in the article you can read how it is elegantly simple, valid, explained well, and easy to comprehend. Alternatively, Scientific American is available to read at your local public library, but a search on kcls.org shows the August 2019 issue is the latest one available, so you will probably have to wait a few months to read this particular article.

But in the interest of getting this information out, here is the bullet point summary from the top of the article and five small excerpts:

  • Wealth inequality is escalating in many countries at an alarming rate, with the U.S. arguably having the highest inequality in the developed world.
  • A remarkably simple model of wealth distribution developed by physicists and mathematicians can reproduce inequality in a range of countries with unprecedented accuracy.
  • Surprisingly, several mathematical models of free-market economies display features of complex macroscopic physical systems such as ferromagnets, including phase transitions, symmetry breaking and duality.

“…as of 2010, 388 individuals possessed as much household wealth as the lower half of the world’s population combined—about 3.5 billion people; today Oxfam estimates that number as 26.

“…TRICKLE UP
We find it noteworthy that the best-fitting model for empirical wealth distribution discovered so far is one that would be completely unstable without redistribution rather than one based on a supposed equilibrium of market forces. In fact, these mathematical models demonstrate that far from wealth trickling down to the poor, the natural inclination of wealth is to flow upward, so that the “natural” wealth distribution in a free-market economy is one of complete oligarchy. It is only redistribution that sets limits on inequality.

“…Luck plays a much more important role than it is usually accorded, so that the virtue commonly attributed to wealth in modern society—and, likewise, the stigma attributed to poverty—is completely unjustified.

“…Such a phase transition may have played a crucial role in the condensation of wealth following the breakup of the Soviet Union in 1991. The imposition of what was called shock therapy economics on the former states of the U.S.S.R. resulted in a dramatic decrease of wealth redistribution (that is, decreasing χ) by their governments and a concomitant jump in wealth-attained advantage (increasing ζ) from the combined effects of sudden privatization and deregulation. The resulting decrease of the “temperature” χ/ζ threw the countries into a wealth-condensed state, so that formerly communist countries became partial oligarchies almost overnight. To the present day at least 10 of the 15 former Soviet republics can be accurately described as oligarchies.

“…Given how complicated real economies are, we find it gratifying that a simple analytical approach developed by physicists and mathematicians describes the actual wealth distributions of multiple nations with unprecedented precision and accuracy. Also rather curious is that these distributions display subtle but key features of complex physical systems. Most important, however, the fact that a sketch of the free market as simple and plausible as the affine wealth model gives rise to economies that are anything but free and fair should be both a cause for alarm and a call for action.

So, what can we do about it?

For starters, do not fall into the misguided trap of thinking poor people have “done something to deserve it”. Likewise, do not jump to the flawed conclusion that rich people are smart simply because they are wealthy, and if you hear Democratic presidential candidates calling for “a tax on the rich”, don’t be too quick to dismiss the idea. Furthermore, perhaps an “alternative minimum tax” on billion dollar corporations (that pay nothing by exploiting tax loopholes), or something similar, might be a good idea, too. Just a thought.

Some other ideas directly from Oxfam’s website:

  1. Stop offshore tax dodging which costs the US and developing countries more than $100 billion each year.
  2. Ensure that working families everywhere can make a living wage.
  3. Fight discrimination of all kinds and ensure equal pay for equal work.
  4. Support social safety nets for everyone, everywhere.
  5. Ensure every person has access to affordable, high quality healthcare and education.

However, just to be clear, we should NOT be demonizing wealthy people for their success (well, unless their personal actions suggest they deserve it). Rather, we should fix the broken system that enabled them to accumulate too much wealth using tax loopholes in the first place. And, appropriately taxing their excess income to help pay for the government infrastructure that helped them accumulate it in the first place, is quite fair.

-James Rivera (Holly Zhang’s husband)

1 thought on “Rising income inequality is a driver of high living costs

  1. The Scientific American article is NOT paywalled – at least from New Zealand, as of December 22nd NZ time.
    So probably free to all.

    https://www.scientificamerican.com/article/is-inequality-inevitable/

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