Tag Archive for 'income inequality'

The Income Ratio Problem

Income inequality is one of America’s biggest problems. My issue is not with what the wealthy make — even though they are richer than ever — but those on the other side of the socio-economic spectrum. I see it on the streets in San Francisco, one of America’s richest cities, with the chronic homeless problem but also with the local crime alerts constantly buzzing my phone.

American politicians are now jumping at this issue. The Extreme Left with its self-appointed mouthpieces of AOC and Elizabeth Warren are shaping the dialogue towards higher taxes. But unlike the reason why income tax was first introduced— which was to temporarily fund war — instead, their goal is to redistribute wealth in society. A point I’m sympathetic to due to the income inequality I see daily. But that equally kills a part of me, the enterprising side, as there is nothing more demotivating than to get taxed for your work.

And as much as I like that Jesuit heading up the Catholic Church these days, I disagre that inequality is the root of social evil. Consider this instead:

Income inequality in substance is the problem but framed the wrong way. It’s housing, health, nutrition, travel cost reduction that’s needed (not the penalisation of those who strive).

May 04 2019

The basic principle with a hypothetical

Let’s say Donald makes $1000 a month and Elizabeth makes $10 a month. And for Elizabeth to live a good life, with affordable housing and abundance to meet her nutritional needs, she needs $11 a month. If we tax Donald 70%, then Elizabeth can share with other low income people the $700 from Donald. But the cost of this, is that Donald will not be motivated to make $1000 or more realistically, he will find a tax scheme that reduces the chance he will pay the $700 which defeats the purpose of the tax.

Let’s look at it from another angle. Let’s say that Elizabeth still makes $10 a month. But it turns out, to cover her lifestyle costs, she only needs to pay $1. Why do we need to tax Donald if Elizabeth has what she needs?

Education is leading the charge

Of course, this sounds obvious but it’s not to politicians or papal leaders for some reason. Consider the explosion of online learning platforms like Udacity, Coursersa, Khan Academy to name a few — it’s a golden age of learning which previously was monopolised by universities and schools that charged expensive tuition to fund their expensive real estate. What’s happened in the world of MOOCS is that the cost to produce and distribute educational content has almost fallen to zero. We are in the midst of a transformation in society where a Stanford level of education is, quite literally, becoming free.

How to make housing cheap

Now let’s consider housing. San Francisco is one of the most expensive real estate markets in the world. Rent control, despite good intentions, has distorted the market and amongst many other issues is the reason why over 30,000 units sit vacant as landlords would rather not rent their properties (property values are also higher if without a tenant). The neighborhood groups prevent high rise apartment complexes from getting built, reinforcing the fact this is a big city acting like a small city. Add restrictive zoning controls like PDR that prevent residential development due to the politics of protecting blue-collar votes (and institutionalized with the ill-conceived Proposition X which prevents the cheapest way to create mass housing through the conversation of warehouses) and not to mention transportation and sewerage systems that cannot sustain population growth — and voila, you have a city that will always be too expensive. And will only get worse.

If Silicon Valley is grounded in San Francisco and there will be always jobs which is what’s largely driving demand to this global cultural city, then how else can we solve for limited housing supply? Here’s a hint: people drive to work…
Imagine the day when flights from Sydney to London will go from 24 hours to 4 hours, which is not a matter of if but when as the technology already exists (rockets going up and down versus planes flying sideways). Investments in transportation allow people to work from different cities, states and countries.

Or imagine if companies can support remote workforces where they don’t have to physically go into an office. Progressive Silicon Valley startups are now making this the defacto standard as the war on talent is settling in that direction.

Let’s change how we view the problem

Ideas like Universal Basic Income sounds great in concept, but also makes me nervous because higher average wages leads to demand-push inflation. But flip the idea — don’t give people more cash, give them cheaper access to goods and services they need. As you can see with the examples of education and housing, it’s already happening in the market.

We need government policies and investment in what will make drive the cost down of life and human growth. Income redistribution due to higher taxes are almost as foolish as the wars that they were originally created to fund. Let’s start thinking about income inequality instead as the Income Ratio Problem, where improving the ratio of costs to income can be solved not just by increasing income but by more supremely through systematic reductions in cost. This can be done with capital investment, smart policies, and human ingenuity and not by eating the hand that feeds us — human incentive.