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How do we Close the Income Inequality Gap?

With gasoline prices plummeting, terrorists killing innocent people, and world leaders in strife, many people around the world are worried about another major economic downtown.

Income inequality in the United States has never been wider. The United States, land of prosperity and opportunity, is now facing a shrinking middle class. If this happens, ideally you want these people to move up, but sadly that is not the case.

How do we fix this problem? Why are some people prospering and others barely have enough food on the table? Whose responsibility is it to solve this problem? The government, the rich, the education system, churches, charities?  

One of my favorite free podcasts is found on Freakonomics Radio. Some of you might be familiar with their awesome Freakonomics Books (What do Sumo Wrestlers and School Teachers have in common? What do drug dealers still live with their mamas?)

I recently listened to a podcast entitled “Would a Big Bucket of Cash Really Change Your Life?”

Why does poverty persist? Is economic mobility still a real part of the American dream? And if you gave every poor family a big bucket of cash, would it substantially change the trajectory of its future?

The podcast came about by a listener asking the economists the following question: if the 50 richest Americans gave 50 different random families living in poverty each a $50,000 one time windfall every year, would this significantly impact the poor family in such a way that it would help pave the way for their kids, grandkids, and other future offspring in a positive way?

The problem with this question is two-fold. First, it would be almost impossible to find 50 rich people that would agree to give $2.5 million to strangers every year. Second, it would take many years to track how the future generations were impacted by this large lump sun of cash.

Some have suggested looking at the statistics of lottery winners. We all know the negative track record most lottery winners have (most blow through all of it or end up worse compared to their life prior to winning). This would not be a fair sample to track because there is some truth to the adage, “What do you call someone who is bad a math? A lottery player.”  Statistically the people who are most likely to play the lottery on a regular basis are low income, low educated people. 

Imagine the surprise of two economic historians (Hoyt Bleakley and Joseph Ferrie, economists at the University of Chicago and Northwestern) who were able to find a real life case study that would provide an answer to the $50,000 question. 

These two economists are the authors of a fascinating new paper called “Shocking Behavior: Random Wealth in Antebellum Georgia and Human Capital Across Generations.” 

Basically years ago (think 1800s), the state of Georgia gave out lots of free land. In the beginning, the gifts were very much tied to “who you knew” in politics. They even gave away land that wasn’t rightfully owned by the State. 

Fast forward to 1832 when Georgia had a large amount of land to give away. They decided to distribute the land in a much more fair manner this go around. They created a land lottery system that allowed any white male living in Georgia for a few years eligible to sign up for one equal chance to win a 160 acre parcel of land. Participants had to pay 12 cents to register for the chance to win about $700.00 worth of land (a huge value at the time). Approximately 100 % of eligible people participated, with an approximate of 20% being winners of free land.

Would the winners of this land change the trajectory of the future generations with this windfall?

The two economists researched the recipients and their off-spring and how winning the land impacted the future generations.

Any guesses on how these people faired in subsequent generations?

I wish I had positive news to report, but sadly the recipients who won the land lottery with no prior wealth or savings did not fair well. Most of these people did not do the one thing that could have had a lasting impact on their future generations- invest in human capital.

What does this mean?

Educated people who gain wealth have often done so because they recognize the difference between a lump sum of cash that will be used to spend on things and a lump sum of cash that will be invested. Invested in education, the stock market, real estate, diversification, etc.

Lottery winners who blow through thousands or millions of dollars don’t realize that you should spend some, save some, donate some, and invest the rest. 

How many of you remember the anger when some (not all) Katrina victims were seen spending thousands of FEMA dollars on items at the Houston Galleria after the hurricane? 

So back to the question at the beginning of my blog. How do you close the income inequality gap?

This is my personal opinion. 

1. I feel that everyone from the top on down needs to stop blaming others for their situations. We weren’t all born with silver spoons in our mouths. Work hard and make your own destiny.

2. Family units need to stress the importance of education. Does this mean everyone has to go to college? No, but everyone has to go somewhere to be trained in some type of skill or trade. 

3. Don’t live for the moment and spend every penny you make. If you do, you will wake up one day with no money, no retirement, and no health insurance. 

4. Don’t be afraid of student loan debt. I’m not saying you should take out thousands of dollars to go to college and live a high lifestyle of eating out, living in a fancy apartment, etc. Instead, borrow the minimum, get a part time job, and study hard.

In conclusion, I want America to return to life where most people are considered to be a part of the middle class or above. I feel people who are fortunate should give back through charitable giving of time and money. However, we have to instill the value of hard work and education in all Americans in order for this gap to close. Are there people who have had horrible circumstances happen and can never financially recover? Yes. These people should be helped. Are there people who don’t have money because they don’t want to work or they aren’t smart with their money? Yes. These people need to be educated on the importance of budgets, investments, and a work ethic.

Our question for you, how do you solve the problem of income disparity? 

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