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The big myth about income inequality that just won't die
Conservatives want you to believe other people's wealth doesn't affect you. It does.
 
Sorry, but kids of America's wealthiest, such as Bill and Melinda Gates, inherited a big leg up on the majority of us.
Sorry, but kids of America's wealthiest, such as Bill and Melinda Gates, inherited a big leg up on the majority of us. (REUTERS/Anthony Bolante)

It has been three weeks since Thomas Piketty released his blockbuster economics tome Capital in the 21st Century, but Piketty-mania is still roiling the internet. And while much of the noise is the sound of celebration — Capital is "the most important economics book of the year — and maybe of the decade," Paul Krugman told readers at The New York Times, praising the work's careful analysis of the widening gap between the rich and the poor — one particularly pernicious myth about inequality seems to only be growing louder.

According to the scathing tweets and comments that follow any praise for Capital, it is no business of ours that wealth is concentrating in the hands of a few and that inheritance is on the rise. Such wealth has already been created, the criticism goes, so it doesn't have any effect on you. Instead of trying to break up that wealth, you should focus on making your own.

This is a common conservative line, of course, and one that fits in neatly with their rhetoric about envying the rich — but it is deeply confused about what wealth does.

First, even if you wrongly think of wealth as a store of money and property created long ago, the distribution of it still impacts people's lives, especially in America.

Modern life is fraught with very expensive risks lurking around every corner. A sudden illness or accident could render you disabled and unable to work. A recession or economic restructuring could render you unemployed and render the skills you've spent your life learning useless. Reaching old age with inadequate savings could mean living your golden years in poverty.

Many societies have created robust social insurance systems to protect their populations from these kinds of risks. The U.S. has done so as well, but to a much lesser extent. Because social insurance in the U.S. is so inadequate, it is incumbent upon people to self-insure against these risks. That means they need to have enough wealth to draw upon as a cushion if they end up facing hard times. But here's where the social contract fails: When the bottom half of the country owns basically none of the country's wealth, they can't self-insure against these risks. Instead, they must lead a relatively perilous life in which one misstep or mistake could wreck them and their families.

Second, wealth is not just a pile of dead value created in years past. When utilized properly, wealth ensures its owners a share of future income, too.

Most people seem to equate income with working: You go to your job, do your tasks, and get a paycheck. But this is only half of the story. At a macro-economic level, a nation's income is divided between owners and workers, with the part flowing to the owners called "capital's share" and the part flowing to the workers called "labor's share." In recent years, capital's share of the national income has been as high as 37 percent, which is to say 37 cents of every dollar of income in a year goes to passive owners of wealth.

This is what the debate about wealth ownership is primarily about. It is not about who keeps what was produced in the past. It is about who gets what is produced in the future. It is about who gets how much of the one third of national income that flows to capital.

If ownership of wealth was widely dispersed, as in John Rawls' model of a property-owning democracy, this would not be problem. One third of the national income would flow to passive owners, but we'd all enjoy relatively equal shares of this unearned income. Everyone would get a chunk of capital income alongside their personal labor income each year and things would be basically all right. As wealth concentrates though, more and more of "capital's share" will go to fewer and fewer people, which could culminate in a society more unequal than has ever been seen before.

 
Matt Bruenig writes about poverty, inequality, and economic justice at Demos, Salon, The Atlantic, The American Prospect, and The Week. He is a Texas native and graduate of the University of Oklahoma.
 

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