Income Inequality Is Simple to Explain

Want to understand why there are big differences in household incomes? The Census Bureau provides some easy to understand data.

	Lowest Quintile	Q2	Q3	Q4	Top Quintile
Average HH Income	$               11,034	$          28,316	$        49,309	$        79,040	$            169,633
Earners per HH	0.42	0.90	1.29	1.70	1.97
Percent Married	17%	36%	49%	64%	78%
Percent 35-64	44%	47%	55%	64%	75%
No High School Degree	27%	17%	9%	5%	2%

The four variables -- marriage, age, education attainment, earners in the household -- account for more than 90% of the variance in household income.

American households in the top income quintiles are far more likely to be married and well-educated. They are more likely to be in their peak earning years. They have far more household members earning income. These may seem like "duh" facts, but they are critically important. Most low income households are low income because of these factors.  If you're 25 or 70, you quite obviously aren't as likely to be earning as much as when you are 45. If you have a working spouse your household income will be higher. If you drop out of high school, well . . . duh.

All of this simply illustrates that it is simple choices (like finishing high school and getting married) and demographics (being in your peak earning years) that influence your household income. It is NOT some conspiracy on Wall Street or "greedy corporations" that are holding you back.

Demagogues, of course, have the opposite take. Blame others for the consequences of your choices.

Technology and the 1%

Since a sitting president seems to be banking his reelection on demagogueing "the 1%", it would be nice if a man as smart as he claims to be would actually inspect the reasons that these differentials come about.

One of the main drivers in income disparity is technology. Years ago if you wanted to get your taxes done, you likely went to see an accountant in your neighborhood. These accountants were skilled both at understanding the law and computing your taxes advantageously. They made a good living, and the income difference between a really good accountant and a so-so one, was maybe 5X. Today, millions of people use programs like Turbo Tax to do what these accountants did. Instead of paying hundreds of dollars to one, you can pay $15-20 to get your taxes done. The multiple of income between an accountant, and the people who created Turbo Tax is, what? 1000X?

Years ago when you wanted to build a stock portfolio, you employed a broker who worked in a brokerage that provided the analytics and execution. You paid $100+ per trade and, frankly, you had to be a big customer to get the best information and execution. The income difference between a really good broker and an average one was maybe 10X? Charles Schwab figured out how to do all that for $8 per trade no matter how small an investor you are. He earns at least 500X what an average broker does.

Would we really be better off if we could turn back the technologies that amplify the differential between those who leverage them highly and those who don't? Those who rail against "the 1%" are simply modern-day Luddites who imagine they will be better off standing in front of the technology train and yelling "stop". Meanwhile the productivity increases that technology brings drive the standards of living ever higher for "the 99%" all over the world.

"Envy shoots at others and wounds itself."

Since 1970, public-school employment has increased 10X faster than enrollment.

This is a particularly gruesome illustration of what happens when government and unions conspire to create a monopoly.