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Income inequality: Whose side are you on?

Written by William Cowie - 8 Comments

Sometimes you just get a feeling something is wrong. You can’t put your finger on it, but you know, you just know, something is not right. Maybe you see something and wonder if you’re seeing it right. Then someone else mentions the same thing, confirming what you suspected. Then you read about in a news report or a blog post. And gradually it becomes “common knowledge.”

I’m talking about the growing gulf between the haves and the have-nots. Economists call it the inequality of income distribution; sociologists call it the precursor to social upheaval. We just call it unfair. The smart ones among us just try to learn what we can in order to get on the right side of the growing gulf.

Is It Real?

If there’s something we’ve all learned, it’s that you can’t go by what the media tell you. Just last year, everyone was on the ledge over the “fiscal cliff,” ready to jump. Now, however, you’re surprised someone even remembers “fiscal cliff.” Next came the scare over sequestration. That, too, came and went. Then it was the shutdown and debt ceiling. Media hype, we learn, doesn’t always translate into real change in our daily lives.

So what about this income inequality thing, then? Unlike the “crisis du jour” events above, this one is, if anything, under-hyped — because it is very real. Some smart people, just about a hundred years ago, figured out a way to measure it. It has a name, the GINI ratio or coefficient.

What’s more telling is this is something our illustrious Federal Reserve has been tracking for quite a while now:

income inequality

A higher number means more inequality. The graph confirms what most of us feel to be true from casual observation: the years after World War II saw a rising in general prosperity as the GINI ratio gradually fell.

However, it started rising around 1968 and hasn’t stopped. There was a temporary dip as the housing boom created the illusion of prosperity for the middle class; but as the recession ended, it is clearly evident that it has been favoring the haves, as the GINI ratio breaks new records every year.

What Do You Do?

The natural, yea easy, thing to do is sit back with a cold one before dinner and figure out whom to blame. Democrats blame the Republicans, who in turn love to blame everything on the incumbent administration. That makes us feel good, doesn’t it? We know the solution — if only the dumb bozos in Washington had us on their speed dial, we’d solve all these prickly problems in a heartbeat.

However, this has been going on for 40 years, through all permutations of who controls each house of Congress and the White House, so there’s no single group, party, or administration to blame.

Here is the reality: No matter how hard we try to assign the blame, none of that helps you improve your position. Instead of figuring out who is to blame, wouldn’t it pay you much better to figure out how to be on the right side of this divide, if there is one and it is widening?

So what should you do?

Get A Degree

This article has a graph which clearly shows that having a degree, while not guaranteeing success, improves your odds dramatically. I know it’s a hot topic, guaranteed to heat up the air temperature, but it is possible to get a degree affordably. (It’s a topic for a post all its own, but if you look past the hype about the burgeoning student debt, you’ll see way more than half of that comes from the publicly owned online universities who have entire departments aggressively hard-selling students to get into their programs with student loans.)

Bottom line: it may not be easy, cheap or convenient; but if you want to be on the right side of that gulf, here’s one of the undisputed keys to get there.

Save and Invest

There’s no question that tax policy has favored the haves. In particular, it favors investing. Nothing puts you on the right side of the widening gulf as having investments, whether they be in bonds, stocks or real estate. For ordinary people to get there, saving and earning extra income are petty much the only realistic ways. Is that convenient? No, it isn’t. But it has come to “pick your poison” — either you’re a have-not, or you pay the price to not be one. Either way, there’s something to be unhappy about, but only the latter option has a positive side to it.

Get Married

Say what? Well, that was my first reaction, at least. But this article on CNBC last weekend got my attention. Christine Schwartz, professor at the Univesity of Wisconsin says, “There’s the economic reality that people … often feel like they need two earners in the family to meet a given standard of living.”

A further reading of the article reveals that this conclusion may be more due to higher education, but it’s still an interesting read and food for thought.

What Do You Think?

How are you  improving your odds of being on the right side of the widening inequality gap in America? Do you think you need to be on the right side of that gap? Is there anything else we all should be doing to get on the right side of the gap?

Published on October 30th, 2013
Modified on October 27th, 2013 - 8 Comments
Filed under: Economy

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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8 Responses to “Income inequality: Whose side are you on?”

  1. 1
    Robert Says:

    Part of the problem is that the middle class semi skilled jobs, man of which were in manufacturing, have gone overseas. Technology, the current tax code, the globalization of the economy all help to cause to export those jobs, but businesses have to be competitive. There are no easy answers. Many want to tax more so that goverment can then redistribute. Others say cut spending so that the entire government will not go bankrupt. No easy answers.

  2. 2
    philip Says:

    I have been wondering lately that if my standard of living right now really ain’t that bad and most the middle class are really doing ok as well, living in a decent home, eating what they like, buying the toys etc that they want, obviously not every single boat and RV etc that you might want, then how is it so bad to me that some have super high income? Sure it would be nice to have that and all, but really isn’t quality of life what really matters vs comparing what I have to what someone else has… i.e. keeping up with super rich joneses?

  3. 3
    Debbie M Says:

    We can’t all be on the right side. That’s the whole problem. Big business likes to save money in every way possible, including labor costs. There just aren’t as many good jobs any more. More people are getting into self-employment, but that is a bumpy ride.

    I think better laws for self employment and small business, better laws for competition (i.e., against monopolies/oligopolies/too-big-to-fail), and better laws for externalities [disallowing exports of things that are illegal here (such as the worst pesticides and low-wage jobs)] would be good ideas.

    Meanwhile, I think having roommates is almost as advantageous as getting married.

    I gave up a good-paying job just to save my health and sanity and I have not been able to get another one, so I’m just using frugality skills to handle being on the wrong side.

  4. 4
    fredjohnson Says:

    Your points are all good ones. I’ve done all three and its worked for me. Coincidence? Maybe, maybe not. I guess I’m in the top 1% of income and new worth. Do I get tired of the Obama & Co demonizing ALL folks with money both the ones who earned it and the ones who inherited it? yeah, especially since he’s doing it to score votes in his never-ending political campaign. That being said, I use to be a have-not early in my life. I’m not anymore. Not going back to it either, no matter how much demonizing gets thrown at me. I’m too busy making money to worry about it.

  5. 5
    BG Says:

    If we assume for a second that the DOW can be used as a very general gauge of the economy’s overall health, then it is interesting to note that the DOW and GINI ratio have both been on a similar upward trend since 1970. Coincidence? Possibly. Or maybe income inequality, while being a fabulous policital talking point (any type of “inequality,” for that matter), isn’t necessarily a problem when it comes to answering the question, “How are we doing?” Sure, we might not all be the “Joneses,” as Philip mentions, but maybe things would be worse if we didn’t have the Joneses. Maybe I just “don’t get it.” That’s fine, too. But I’m not a Jones, and I’m perfectly content with the general direction of my life over the last 10 or so years of my working life. (I’m 33)

  6. 6
    Will Says:

    Even back in grade school there were the smart kids and the “dumb” kids. We had our Golden Boys in sports, and then our Smart Kids that carried Slide Rules on their belts (dating myself). In life that has not changed. No matter how much I practice, I will never match Tiger Woods in Golf. We are never going to be equal. And then there are financial decisions we might make in life. 40 years ago, when we moved into our first house, I decided to double the equity portion of my mortgage payment. Though we could afford it, I never bought “the Fancy Cars” I really wanted or took the fancy vacations the TV Ads said “I Deserved”. 20 years later, now 20 years ago, my home was mortgage free.
    People say “I am lucky”. I disagree. I worked and sacrificed to make this a reality.
    My story is probably not popular because it involves personal responsibility which is not PC with todays crowd.
    It really irks me that others are looking at me as “this rich guy” that needs “to share”, when they have never done their part to take care of themselves.

  7. 7
    Fehmeen @ Loans and Lifestyle Says:

    This article reminds me of something a comedian (can’t remember his name) once said – The society is divided into three classes for a purpose. The upper class just spends their time carefree and happy, and the middle class is made to work their necks off for fear of becoming part of the lower class.

    I think the situation applies to a lot of us who are learning the importance of earning more and more money to keep ourselves and families safe from poverty, which isn’t a very far off destination in reality.

    That’s the biggest motivation for us to look around for new ways to earn money, and the safest bet is definitely to get a degree first and then slowly work your way onto a stable job.

  8. 8
    Imran @ Xomba Says:

    Saving and investing really puts you on the right side of the income inequality curve. The government in most first world countries favor those who can save and invest. While it’s fun to sail differently from other I think it’s important that your money goals are congruent to those of the government, that way there’s no nasty surprises in the future. Great post, thanks for sharing.

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