This is the big one. On this episode of The McFuture podcast, we dig deep into why everything we heard about income inequality is wrong. Here are the real root causes. Enjoy. (Though slightly less thrilling, you can also read it below…)
In case you weren’t among the millions who slept outside Amazon’s warehouse to get my first book, I anticipated the 99% movement and made a lavish case for why businesses should fix a hollowed-out middle class. Here’s a caveman summary: money go, customers go. It’s that simple. Still, not one ‘thank you babka’ from Bernie Sanders… Today, I’d like to finish what I started. I’d like to prove why income inequality is absolutely the wrong way of framing the problem.
By now you’ve seen plenty of articles, signs, and books about inequality. I can only hope they were recycled properly. A few, like Thomas Piketty’s Capital, are good at explaining the problem, but 696 pages without a single laugh?? Some things are more unforgivable than inequality. Plus, his solution was anticlimactic: global wealth tax. Great. I’ll add that to my to-do list, right after taming Mars and wooing Giselle.
In more practical terms, “inequality” can be explained and solved with a single word: I-v-a-n-k-a. No… The word is: expectations.
It turns out that our expectations are at the core of three solvable problems standing between us and the mythical American Dream we’ve heard so much about.
OK, let’s get into it.
IS THERE A PROBLEM?
Believe it or not, the answer isn’t obvious.
A study by USA Today shows that to achieve the American Dream, a family of four needs to earn over $130,000 a year. Problem is average family income is only $53,000 a year. In all fairness, your kids are probably slacking. Two words to get their asses in gear: Serena Williams. Now, chop, chop! Smash some balls and bring home those Tubmans!
Many young Americans have given up on being rich. It’s no wonder why. Most adults have no retirement savings, 46% can’t come up with $400 in a pinch, and the middle class is poorer today than in 1989, the year N’Sync watched New Kids on the Block and decided, ‘This is amazing! Someday, that’ll be me!’
It’s not all bad news. N’Sync has since disbanded. That might be why Americans are still happy despite their inequality. Many would rather make $50,000 today than $100,000 in the 80’s – because of all the cheap, amazing technology we can use for…porn…? And our middle class is still way richer than almost anyone else’s. In your face, Paraguay!
What’s not clear is if “equality” was ever real or sustainable in the first place. Maybe what we saw during the industrial era was a fluke. All those people, without college degrees, supporting families on one income. HA! What next, KFC chickens re-assembling themselves, like Voltron??
The history of mankind is anything but kind. It’s a big, grimy, backbreaking serfdom. Maybe we’re just Ubering our way back to the norm.
Problem is we’ve had a taste of the good life. Like a lion raised in captivity, biting into live flesh for the first time (likely, his trainer’s). Once you get a taste for blood, it awakens your primal instincts. You don’t just quietly slink back to that crappy bag of Purina Lion Kibble. Now, you gotta eat the assistant.
We expect more. But can we have it?
WHY IT’S ALL ABOUT EXPECTATIONS
The real issue with “inequality” is we’re comparing wages to all the wrong things – to the past, to CEO pay, to other countries. In fact, the OECD found inequality does not correlate to happiness.
In reality, the only thing income must do is meet – or exceed – our expectations. These expectations are the spawn of culture and technology.
When this country IPO-ed in 1776, our list of expectations read like a homeless shelter with two stars on Yelp: food, no rain in the living room, and an occasional moose pelt. Sure, we eventually got inventions like the printing press, steam engine, and locomotives. But those weren’t going into your house, much less your pocket.
It wasn’t until the industrial revolution when we finally got good stuff. Driving Model T’s, watching I Love Lucy, and scorching our tongues with Hot Pockets. Along the way, we added indoor plumbing, electricity, refrigerators, radio, TV’s, telephones, microwaves and VCR’s that still blink ’12:00′ at my parents’ house. Hell, we can barely keep ourselves from smothering the flight attendant when Delta’s Wi-Fi sputters.
My, my how things have changed…
The inconceivable has become indispensable.
And it won’t be long before we say the same thing about teleportation, sex drones, and pocket meat replicators. Just don’t put the meat in the sex drone… Trust me, the cleanup…
Making and selling our growing list of conveniences created lots of jobs and rising incomes. That let us afford, demand, and then expect more and more stuff. More conveniences. More big ticket government services, like social security, Medicare, healthcare and college degrees.
The most devious thing about this process is how quickly useful innovations transform from conveniences (or luxuries) to necessities. Some days, a few hundred million spoiled homo sapiens wake up expecting to own some gadget they only knew existed five minutes ago.
Over time, these expectations pile up. This creates a layer cake effect. Luckily, as we add shiny, expensive new expectations, older ones flatten out, get cheaper, or improve. Timeless classics, like food, are in perpetual price decline. In college, I sold lunchbox-sized cancer bricks called cell phones to rich guys. Today, every fetus gets handed one in-utero, for an extra 20 bucks a month.
It’s not just new expectations. We want more from existing ones. A perfect example is healthcare. Everyone wants it, but not the black & white version from the 50’s. Or, the hacksaw brain surgeries from the 1800’s. We want VR-assisted organ transplants, 3D-printed prosthetics, erection pills, MRI’s, dieticians, fertility treatments, and sex lasers. Who even knew you could binge on stuff we hate using??
But everyone affording base expectations is not enough. Income must also cover two other essentials.
People aren’t robots (yet). We crave freedom. But freedom is anything but free. It takes discretionary (slush) funds. Depending on the person, that could mean a vacation, XBOX game, or a totally essential leech treatment. Even low doses of wealth can buy lots of freedom in the digital age.
3. SECURITY (SAVINGS)
We need at least a year of emergency funds and 20+ years of retirement savings. That means saving 15-20% of income over a lifetime. Less in countries where social security includes nannies and foie gras.
Together, the Optimal Income formula is:
[Innovations] + [Fun] + [Security] = [Expectations]
[Expectations] = [Optimal Income]
As long as this formula stays in balance, most of us will be content. We’ll eat burgers, watch football, and vote for Hillary. Everything will be just peachy for Christmas…or Festivus. This has been true for most of the 20th century. Old expectations almost always* got cheaper as newer, expensive ones came along. They kept pace with income.
Then, something strange happened…
THE REAL CAUSES OF ‘INEQUALITY’
1. THE QUICKENING
In the late 70’s, American incomes stagnated. Our savings rate dropped from 16% to less than 3% in the mid-2000’s. (We’re at about 5.8% today.)
America went on a shopping spree. Many blame the credit bubble. But all the recession did was highlight one subversive truth: the reason we’re overspending is expectations started piling up faster than ever.
New inventions reach more people in less time than ever before. And we want them all!!! Layer after layer after layer.
The good news is our lives are getting better faster. And many of these new luxuries are affordable, but mainly because they’re made with little labor – or, by little laborers. So, there’s more to want, but fewer good jobs to buy it. And, when self-driving Ubers kill car ownership, cheap transportation will make things even cheaper, but also snuff out entire categories of jobs.
It’s so Romeo and Juliet….
Even what we’ve witnessed with Occupy Bernie Sanders isn’t about people suddenly falling in love with socialism, hating the rich, or yearning for grandpas who look like Larry David. Same with Trump. They’re byproducts of our expectations outpacing our ability to attain them. People pedal faster and faster but never get ahead of their desires.
This creates a scarcity mindset and casts doubt on corporations, government, foreigners and eventually, the American Dream.
2. THE THREE MONSTERS OF INEQUALITY
The dirty little secret is – even flat (or declining) incomes, can be “Optimal Incomes” – as long as old necessities get cheaper about as fast as new ones arrive. This is ALMOST the case today.
Part of the problem, is not everyone has come to terms with the reality that at least two of them – healthcare and education are now base expectations. The other problem is all three just happen to be ‘blessed’ with heavy government intervention. This created price distortions that are keeping all three costs from compressing, like every other expectation.
If the government backed unlimited loans for computers in the late 90’s, the way it did for education and housing, we’d be talking about Laptop Inequality today. Dell, Lenovo and Apple would soak consumers the way colleges do today. We’d be taking out $30,000 mortgages to buy an iPad the size of a Buick.
Not only are these three expectations driving inequality, but they’re stealing from us. They’re gorging on money we’d otherwise save or spend on other necessities. And, they’re robbing every other business in America by hogging more than their share of spending.
THE GOOD NEWS
There’s a light at the end of this tunnel. Since 2008, the cost of housing has normalized and dropped compared to other prices. Just don’t try telling that to a New York apartment hunter, unless you’re prepared to get violently #hashtagged right in your Twitter.
Even better, lots of smart entrepreneurs are innovating ways to tame all three monsters. Ironically, the same force that drives inequality, innovation, might just alleviate it.
We will get to Optimal Income, but the journey won’t always be pretty.
I’ll cover more on this throughout this season of The McFuture podcast, including conversations with some of the world’s top innovators, thinkers and cultural icons addressing these challenges.
For now, check out my other pieces on this subject:
- The Prosperity Paradox
- Three Words That Could Save Healthcare (and Entrepreneurship)
- Unshackle The Debtors (Education)
And a few others I recommend…
(A version of this post also appeared on LinkedIn here: INEQUALITY WE TRUST)