Deep Thoughts on Big Questions: Income Inequality, Dire Economic Trends, and My Kids

Income inequality is growing
We haven’t all been benefitting equally. Not even close.

The New York Times recently published some original research about the relative wealth of different countries’ middle class. For the first time in history, the USA did not come out on top; we up in the Great White North did. While this is interesting, it is not what I wanted to write about.

What struck me was the angles of inclination of the bars showing changes in income levels from 1980 to 2010. There has always been income inequality, and there always will be. That is not the problem. The problem is the incredible increase in income inequality over the past 30 years, and more specifically, the rate at which income inequality is galloping ahead. Adjusted for inflation, American up to the 10th percentile are actually making less than they were in 1980. From the 10th to the 40th percentile, growth has been mediocre. From the 50th to the 95th percentiles, growth in income has been much more pronounced, with the angle of inclination getting steeper as the percentile increases.

The picture isn’t quite as dire in Canada. (You’re going to need to open the graph in a separate window to follow along. Follow the above  link to the original graph, and then hover over the various grey bars to see other countries compared to the USA.)

For one thing, the bars in the Canadian graph all go from lower left to upper right. This means that we are all better off, in a relative sense, than we were in 1980. The troubling aspect for me is that the observation about the angle of inclination getting steeper as one’s income rises still holds true for Canada. Granted, the difference in angles isn’t quite as steep as it is in the US, but the contrast from the left side to the right side of the graph is striking nevertheless.

Income increase differences are not inevitable

While it is (usually) true that a rising tide lifts all boats, there is the implicit assumption that all boats are lifted equally. Clearly this is not the case in either Canada or the USA.

By way of contrast, look at Ireland, Norway, and France. In all three of these countries, the angle of the bar (i.e. the increase in income over this time period) is much more consistent across all income levels.

I can almost hear Kevin O’Leary screaming in my ear: “So what! If you want to increase your net worth, you have to start a business and bring value to the market. If you can do that, you’ll be rich and successful, if not, you’ll go to ZE-RO because that’s what happens: only the strong survive!”

What many of the super-rich don’t seem to understand (or choose to forget) is that they were able to accumulate their fortunes not only through hard work and innovation – which nobody can deny – but also because they live in a society that allowed upward mobility. For this to happen, there has to be a strong middle class. The main reason that the USA has prospered over the past century isn’t because there are a small minority of super-wealthy at the top; that condition has existed in countless societies around the world since the beginning of civilization. No, the reason the America (and Canada) prospered was because of an economically and politically strong middle class. This middle class has been well-educated and has had purchasing power. There were economic goals to which they could aspire, and there was a reasonable chance of attaining those goals. These people were living, not just getting by.

Once a large percentage of the population becomes ensnared in the poverty trap, we all suffer. It is in all of our interests to have a strong, active, engaged middle class.

The beginning – and end(?) – of the middle class

Henry Ford is commonly credited with being a major factor in creating the American middle class. By raising wages, he enabled his workers to be able to buy the very products that they were building. While this may indeed be true (his workers did buy the products they made) his reason for raising their wage may not have been so altruistic as is commonly related. He raised wages not out of the kindness of his heart, but because we was tired of not being able to retain a trained workforce. He did the math, and realized that it was more cost-effective in the long-run to retain workers with a higher wage than it was to constantly retrain new workers.

Motives aside, Ford did indeed play a major role in the development of the middle class. Today, because of a variety of factors, the circumstances that gave rise to the middle class are changing. Over the past thirty years, the North American manufacturing base has been devastated. The rich and powerful are constantly calling for the lowering of taxes – and often getting their way, limiting governments’ ability to care for their more vulnerable citizens. Companies now seem to think that it is somebody else’s job to train workers, whether that be the government or their competitors. (Search your local Kijiji for help wanted ads for any trade. The vast majority are for companies who are trying to poach other firms’ third or fourth year apprentices or journeymen; nobody want to start training an employee from scratch.) The Temporary Foreign Worker program is in the news a lot these days, with major employers being accused of (but not yet proven to be) using the program to replace Canadians who want to work at those jobs. Defined benefits pensions have been under attack for years, and will probably be gone altogether within 10-15 years, even if that means governments are tearing up contracts that were negotiated in good faith. The replacement of employees with lower-paid contract workers is epidemic.

Down here, it’s just winners and losers, and don’t get caught on the wrong side of that line

(Bruce Springsteen, Atlantic City)

Lest you think I am advocating for an overthrow of the so-called ruling elite, and installing a workers’ paradise, I assure you that I am not. All I am pointing out is that the notion that a person can grow up, keep his nose clean, get a decent job, and retire comfortably is increasingly the exception, rather than the rule. People need to become aware that, much more than has been the case for most of the last century, you’re on your own as far as building a good life for yourself and your children. Employers are looking to squeeze every last dime they can, and governments are less and less able (and willing!) to help those who need it most.

Really, more than anything, this post is meant to make people realize that they need to step up and take care of their own interests, because it is becoming increasingly obvious that nobody else will. As the rich and powerful become ever more so, the divide between the haves and have-nots will continue to widen. I firmly believe that things are going to get worse for the middle class before they get better. Unlike some people, my goal in life is not to be super wealthy, and to cavort with high-flyers and movie stars (or even to become one myself). My goal is to live a good life, and to be there – physically and emotionally, as well as economically – for my family. I want to give my kids the same kind of upbringing that I had. The problem these days is that circumstances are such that these simple aspirations are increasingly out of reach, and the younger you are, the truer that is.

Don’t just whine about it

The fact is that every generation has had its challenges. Young people today will not come of age in the same way as their parents did. But that’s OK. By being nimble (no longer just a good idea, but pretty-much a requirement) and being willing to create your own luck through hard work and innovation, and by taking care of your own finances (this is a personal finance blog, after all) young people will be able to navigate the new realities of work and making a living. I was raised by two wage-earners, and I always thought that that would be how I went through life, too. The more I think about the overall situation these days, the truer it seems to be that there really are only winners and losers, and I have no intention of getting caught on the wrong side of that line. Nor, as much as I can help it, will my children. This is why I plan on educating them about money, and why I plan to encourage them towards entrepreneurialism as they grow up.

I guess I feel a bit lucky that I took control of my financial situation at the time that I did – close to 10 years ago now – because the first step to solving a problem is realizing that a problem exists. By starting my kids off a few decades earlier, I hope that what came to me as revelations in my 30’s and 40’s will be self-evident to them from the time they’re teenagers.

7 thoughts on “Deep Thoughts on Big Questions: Income Inequality, Dire Economic Trends, and My Kids”

  1. Does the fact that the median income earning Canadian earns more than the median income earning American really mean that the Canadian middle class is now richer than the equivalent group in the U.S.? Given the differences in purchasing power in both countries is it still not probable that Americans can buy more ‘stuff’ and thus based on purchasing power are still better off? As well, along the lines of this article, it might be interesting to see what portion of the total ‘pie’ (GNP or some such measure) has been going to the Canadian middle class over time. Based on the steepness of the lines it seems likely that the Canadian middle class could actually have become relatively poorer over time (maybe just less ‘poorer’ than their American compatriots).

    1. Hi xo,

      Thanks for stopping by. The article only claims that the after-tax middle-class incomes are now higher in Canada than in the USA. Purchasing power is not discussed. Having recently visited the USA for the first time in a long time, I (anecdotally) agree that they are able to do more with the same amount of money than we are here. In terms of overall purchasing power, I suspect that they are still ahead of us. (At least until they get sick or injured.)

      There have been a number of reports of long-term wage stagnation on both sides of the border. Here is a link to a stats-can graph demonstrating inflation-adjusted wages from 1981 to 2011. Pretty flat looking, I’d say.
      http://www.statcan.gc.ca/pub/11f0019m/2013347/ct002-eng.htm

      I think your last line does a pretty good job of summarizing the situation: we’re now less poor than our American cousins.

  2. Great post! I watched an amazing documentary last night on Netflix by former U.S. Labor Secretary Robert Reich called “Inequality for All.” It’s about the widening economic gap in the United States and why that’s a problem. You should check it out.

    1. Hi Addison,
      Thanks for stopping by.

      As luck would have it, I signed up for Netflix yesterday!

      I hope I’m not coming across as conspiratorial or anti-business. Although the majority of this post focused on explaining the problem, the main point I wanted to make was really about the solution: get your act together, and take care of your own future!

      It seems to me that a lot of the social programs that we have (such as OAS and Canada Pension here in Canada) were put in place when expectations (from lifespan to lifestyle) were a lot lower. The fact is that we, as a society, have been living beyond our means for a generation or two, and the time of reckoning is getting closer. The rich will be fine, but the rest of us had better make sure we’re taking care of ourselves. The idea of having 20-30 years of stress-free, well-funded playtime after retirement is nothing more than a fantasy if you don’t plan and act carefully while you are young.

      Jeff

  3. It’s fashionable to lament income inequality these days because it is not a static event.. Levels of income inequality vary over time. Presently we are approaching peaks not seen since the late 1920’s. Central bank Quantitative Easing has so far enriched the so called 1 % at the expense of the 99 %.,however that will inevitably change , and revert to the mean.
    On a personal level , I thoroughly agree that best action to take is to ensure that your children are financially literate.

    1. Hi John,
      Yeah, I was really hoping that this post wouldn’t be seen as an angry tirade about the injustice of it all. (So far, so good among posters to date!) There are indeed unjust aspects of the current economic situation, but as individuals, there is precious little we can do about it. (Defeatist?)

      I agree that at some point, things will probably get better, but until they do, the thing I wanted people to take away was that the only practical solution is to take care of yourself and your family. That is best done by educating yourself about finance and thinking about the long-term instead of just this season’s hot new fashions.

  4. The only other comment I would make is that , according to others charts I have seen, it would seem that levels of income inequality in Canada are not as high as US rates, more on a par with some of the Nordic countries.
    As so often seems to happen, by the time the public become aware of a problem, the dynamics are already moving on.

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