Why does income inequality exist in the U.S.?

Question

Why does income inequality exist in the U.S.? What are the social/changes and trends? Why are they happening?

Answer 1

Hi Dianna,

 

That is a great question without any easy answer.  The situation is multivariate (a large number of variables are at play) and the only way to really even begin to get a grip on the question is to 1) begin to define and isolate the variables; 2) figure out how the variables interplay with each other; and 3) figure out how much each variable independently affects the outcome.

 

Having said that, let us examine some possible variables:

 

1)  Income inequality exists because there were wealth distribution factors historically that were purely happenstance or undue political influence.  For example, there were distributions of land at random times in our history that greatly affected the wealth of future generations (e.g. the land distributions under Andrew Jackson).  To be a recipient of such a distribution required some effort, but also required a bit of being at the right place at the right time and some political connectedness didn't hurt either).

 

2)  Income inequality exists because of meritocratic forces.  Some people are simply better at making money than others.  Studies have shown income to have a positive relationship to intelligence.  They have also show income to have a positive correlation to certain measurable social skills.

 

3)  Income inequality exists because of socio-economic momentum.  People who are born into wealthier families tend to have more access to education and to investment capital and so have a better chance of becoming even wealthier in subsequent generations.  There are very few true Horatio Alger stories.  Many of the ultra-wealthy spent childhoods with parents who were  in the upper ranges of the upper middle class.

 

4)  There seems to be evidence of some ethic/racial bias in income creation... or at least there was historically.

 

5)  If you agree with the arguments Malcom Gladwell makes in "Outliers," income inequality is probably influenced as much by purely random events such as the month in which you were born as anything else.

 

6)  Once your income stream reaches a certain level that allows you to invest a significant portion of your income, the wealth gap between you and those you have left behind begins to widen because a large number of investments tend to outperform inflation in the long term with sufficient return to allow even further apportionment to investment.  (The so-called Time Value of Money)

 

I'm sure that I could think of at least a dozen more reasons.  You have to research each of these reasons and decide which ones seem plausible to you.

 

Warm regards

 

Jim Owens