Why Income Inequality Matters: Motivation

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Over the Christmas break, I had a long conversation with my wife’s family about the income gap between the working class and the rich in the United States. Compared to them, I grew up extremely poor, and I rather surprised them by saying that I think such a gap is a good thing. Please note that I’m not saying that I think people should be impoverished (especially children); I’m merely saying that a gap between the rich and the poor is healthy in an open and free society.

Yesterday, I ran across a wonderful article at Yahoo! Finance by Charles Wheelan (a man who I’ve derided in the past on The Simple Dollar) entitled Why Income Inequality Matters. It’s a wonderful article, well worth reading (maybe Dr. Wheelan read my critical commentary?). Here’s a key excerpt:

There are some really good things about income inequality, namely that it motivates risk, hard work, and innovation. I’m sure Wall Street bankers are motivated by a love of their work — but a $50 million bonus can also help you get out of bed in the morning.

As a matter of fact, high salaries motivate not only the people who get them, but also the people who would like to get them in the future — a phenomenon that economists refer to as a “tournament effect.”

Thus, a $50 million bonus for a Wall Street CEO also inspires that ambitious guy in the mailroom to get out of bed if he thinks he’s got a shot at being CEO someday. Even my undergraduate economics students work harder because they need good grades in order to get coveted investment banking jobs.

Wheelan is spot on. I grew up poor, and I discovered that there were three kinds of poor people:

People who actively chose to be poor. These people are those who chose not to live a competitive lifestyle. Just down the road from where I grew up lived a person with a Ph.D. from Berkeley who basically checked out of mainstream life in the mid-’70s. He bought a small piece of land, built a log cabin out of the wood on that land, and spent all of his time fishing, hunting, and reading. He chose to be poor as a lifestyle choice. There were others like this as well who made their living quietly.

People who inactively chose to be poor. These people were the ones that played the lottery every week, followed celebrity gossip, and rambled on about how they were going to have big money someday, but just kept going to work in the same old factory doing the same old thing. They basically refuse to make choices that would raise them up from poverty for whatever reason. It is people from this group who you often see winning the lottery – then blowing it all in a few months.

People who choose to get out. The third group mostly is filled with younger people who see that this is a fool’s game and then try to get out of the situation. They do whatever it takes to go to college, get an education, and find work. What I often noticed is that these people managed to make the step to the upper middle class, but it was their children that did amazing things, as these people instilled some serious values in their kids and also gave them appropriate support.

I found myself in the third group, but I grew up with a lot of people in both the first group and, sadly, the second group as well.

So, what’s the point? The point is motivation. The first group doesn’t seek motivation from the rest of the world at all; it comes from within. The second group has no motivation at all. The third group, however, sees motivation in the actions and inactions of others and uses that motivation to build a better life for themselves. Which group is better off? Most people would argue for the third group, and some for the first; almost no one would argue for the second group. What’s the difference? Motivation.

Where do you find your motivation? For me, my motivation is my children. I don’t want them to grow up worrying about their next meal, but I do want them to grow up with a sense that they can tackle any problem that faces them, and if it knocks them down they can get up and keep going. For others, motivation might be simply having more money than their neighbors:

In other words, we care less about how much money we have than we do about how much money we have relative to everyone else. In a fascinating survey, Cornell economist Robert Frank found that a majority of Americans would prefer to earn $100,000 while everyone else earns $85,000, rather than earning $110,000 while everyone else earns $200,000.

What motivates you? If you have difficulty answering that question, you might have difficulty getting ahead in life because you haven’t decided what it means to get ahead.

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6 thoughts on “Why Income Inequality Matters: Motivation

  1. That’s so true even though many don’t see it or admit to it. I come from a lower-middle class family and I can feel the motivation to do better in school so that my (future) kids won’t have to deal with the same hardship my family is currently going through. I also would like to point out that living in the US has also slowly draining my motivation and I am slowly slipping into the second group. Why? Because life in America (even as of now) is still easier than life before. I fear that someday I may have no more motivation but I keep hoping that day won’t come but that’s exactly my problem, hoping, instead of acting.

  2. Key assumption: “in an open and free society”. Motivation is good if you really and truly believe you stand a chance. One of the points of the article (from my understanding) was whether or not that’s still true today in America. Do people feel like they have a chance, or do they feel the chips are stacked against them by the elite upper crust? I would argue that the answer is we don’t know, but an argument can be made that the burgeoning income gap could point to a situation where it is more difficult to make it.
    Just food for thought, although I agree with your post.

  3. In general, persons on an individual level do not make huge swings in class (poor to rich) in one generation. But the American economy survives because of the belief that this is possible. The belief that this is possible is sustained by anecdotal stories about poor people who strike it rich whether through hard work or luck. The “American Dream” is mainly bunk but it’s important for most of our society to believe it in order for the economy to survive.

  4. To an extent, I agree. However, as the Lorenz curve gets close to a right angle, I believe that is fundamentally demotivating. “The game is rigged. Why play?”

    http://en.wikipedia.org/wiki/Lorenz_curve

    I don’t think any nation has come up with the ideal combination of entrepreneurial support and welfare transfers to allow everyone in your group 3 to succeed. I’m not sure any ever will. But here’s hoping.

  5. Apparently, most of your commenters missed out on this great quote from TMND from the typical millionaire:
    “Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent.”

    HC, if success was a given, what would be the source of motivation for those who wished to escape poverty by their own means? Discomfort isn’t fun, but it is a pretty good motivator (just ask my kids).

  6. Yes, hard work improves your chances of success in the U.S., but this post seems to assume the U.S. is a meritocracy. In many ways, it’s not. Lots of people are born with strikes against them–race, class, gender, disability–that lead others to discriminate against them, consciously or not. These people have to work even harder, and even when they do so, they aren’t always rewarded. It’s no wonder then, that some people “choose” to be poor–they have learned some awful lessons from the culture. Meeting with more discrimination (subtle and explicit) than success, they lose their motivation.

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