Tuesday, 24 November 2015

Income Myths

“Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.
This is known as "bad luck.”

Robert A. Heinlein 

There are so many modern myths concerning income a few are highlighted in the video below. I've got plenty more to say on the subject as this only scratches the surface.

I was once in the poorest 20% in so called "poverty" as progressive would say. This was back in 2005 just after I graduated and landed my first job just to pay the bills and gain experience at first. Fast forward 10 years to 2015 and I am now in the so called top 10%. I don't feel it as I'm still the same person with lots of enthusiasm and a will to try and make a difference. That 10 years makes a world of difference, I have gained real world experience, employees now value my skills and knowledge. The whole point is people do not stay poor. I'm a real life example and can comment it on it. I'm not the only one. My dad had a similar journey. He started on very low wages, in fact he constantly reminds me that everything was very expensive back when he was young compared with now. He was chuffed to get a brand new car at around the time I was born in 1983. It was a basic Ford Fiesta. Today it would look like a tin can on wheels but back then it was a high priced item.

Washing machines, dishwashers, microwaves - that was living the dream, I still remember my parents buying the various appliances as they became more affordable. Now we buy them when our existing ones break; they have become so cheap its mostly too expensive to pay someone to fix the broken one. From growing up on a council estate my dad has elevated his income into the top percentiles by hard work and a passion for what he does for a living. He started at the bottom like me and gained skills and knowledge as he matured over his 40 years in the workplace. People look at the snapshot statistics and say "the poor are getting poorer and the rich are getting richer!". This misses the vital point that people move through income percentiles during their life and when this is analysed then the whole premise of the Socialist sob story begins to fall apart.

Tom Woods did a recent podcast doing a wonderful job of highlighting some of Thomas Sowells recent book with snippets about incomes. At the bottom I've attached the podcast for anyone who wants to listen with many myths completely torn apart. When tracking people over a ten year period the phrase "the poor are getting poorer and the rich are getting richer" actually turns on its head. The bottom 20% find their incomes rise by on average 91%. Meanwhile the top 1% see their incomes fall by 26%. Now we are tracking individuals rather than static income percentiles, the picture becomes rather different. The phrase lies, damned lies and statistics rings truer then ever.

What we also find is that the elite brackets of the so called 10% and 1% are not as elite as people would have you believe. In America over 50% of the population enters the top 10% of earners during their lifetimes. Even in the top 1% of earners, over 10% of Americans are associated with this bracket at some point in their lives. In the study they also found that 10 years later most of the people in the top 1% were no longer there.

Now of course certain individuals may remain in the bottom 10% all of their lives for whatever reason but even these people gain tremendous due to the advances and wealth of others. Even if we were to look at the most lazy and incompetent individual in society they actually gain the most from Capitalism and free markets. Innovations such as cars, electronics, Internet, travel; all of these have now become accessible to the common man and all were once only available by elites. They became affordable because markets continually drove innovations and price reductions. People who create such goods may get very rich in the process, but to succeed they may have had to take huge sacrifices. 80 hour weeks. Taking lower pay when they could be earning a higher and more reliable income with an employee. Risking their assets, relationships, bankruptcy. Truth is, most of us can't handle these sorts of pressures. Thats why we should be grateful for the people who can. Meanwhile the lazy person who has a job but does as little as possible, gets a steady income, doesn't risk their own net wealth or deal with the pressures listed above, gains from all the innovations of the people who do go through such trauma.

So why has the share of incomes increased for the top 1% or the top 0.1% in particular? There are a number of reasons the most obvious one is technological change, the world has become more connected and richer. Now companies operate in places that historically were never available. India, China, South America - all are opening up and if you can create a global product then you can sell it to more people who are all wealthy than 30 years ago. Computers and the Internet now allow global reach to any budding entrepreneur. CEOs have to manage global supply chains and can consequently scale to larger markets, therefore they are paid more due to the global impact they have. During the same period taxes for the rich have fallen significantly. In the UK top tax rates used to be well over 90% and are now around 45%. Despite this halving of tax rates the rich have never paid more as a percentage. Back in the 1970's it was around 15% of total tax, now it has risen to over 30%, ironically there has never been more socialist distribution from rich to poor despite what the progressives will tell you. Consequently people on higher tax rates now declare their income rather than go through the bother of escaping tax when the tax rates were too high. Back in the 1970's CEOs would get their income in other ways; off book assets, or dividends or any other clever accounting trick. They always had the higher income in the past - they just never declared it.

Its time to abandon the politics of envy. The bashing of the 1%. The demonisation of the millionaires. We should all be more civil to one another rather than allowing the socialists and progressives to divide us all into tribes and to create hate against one another - the politics of envy. Peoples incomes change over time. People generally do not stay poor forever. To envy certain income percentiles is to envy yourself. Limiting peoples freedoms has never done anyone any good. The poor getting poorer and the rich getting richer is just another Socialist myth.

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