The Wealth Gap Is An Entirely Political Invention

The U.S. Census Bureau recently released data indicating 15.1% of Americans were living below the poverty line in 2010 - the third consecutive annual increase and up from 12.5% in 2007, before the financial panic and recession. Also making recent headlines was President Obama's latest jobs plan, to be funded primarily by $1.5 trillion in increased taxes, aimed mostly at the "wealthy."

Together, the stories have served to resurrect concerns about the "wealth gap" - the idea the rich have gotten richer while the poor have grown poorer, and the middle class has either stagnated or has also gotten poorer. And it's true there's a wealth gap - if there weren't, that would imply perfect income equality, which doesn't really exist anywhere. And it's grown bigger over time. Some folks argue that's bad or unfair. Many argue it's immaterial. We'll leave the question of fairness to ethicists and politicians and focus instead on the economics behind the debate.

Economically, there's not much evidence a wealth gap is problematic. How do we know? Well, people have overall become better off even as the wealth gap has widened. Now, part of that could be the deceptiveness of the wealth gap. Consider: The top end is near infinite, so very naturally, as society progresses, that will continue rising. On the other hand, you'll always have high school kids in part-time jobs and recent college grads working for relatively little money; meaning the bottom end needn't necessarily move much, widening the gap over time. And even if the lowest income levels rise over time (however you want to measure that), that doesn't keep the upper levels from expanding, too.

Still, none of that's prevented global GDP from expanding, life expectancies from increasing and so on. Further, America's poorest today are vastly better off than they were even 20 and 30 years ago, thanks to innovation and progress. And the average American today can expect to live a much longer life surrounded by trappings that far exceed those that surrounded their parents. Remember: Economies are not fixed pies - it actually is possible for everyone to win, and what some may earn or obtain needn't detract from what others can. (One of the many beauties of capitalism.)

Second, most folks don't make consumer decisions based on relative wealth. Meaning, when deciding whether or not to purchase a new TV, people typically don't hold off because they're less wealthy than Warren Buffett, for example. So on an everyday, economic basis, most folks aren't especially inhibited by the wealth gap, which is again tied to the idea the economy isn't a fixed pie. Your range of economic choices isn't limited or inhibited by wealthier folks' choices, only by your own circumstances and preferences.

Finally, there's actually a high degree of mobility among income groups in the U.S. Historical data show those at the top of the income distribution don't necessarily (and in fact rarely) remain there indefinitely. Rather, there's a sizeable amount of upward (and downward) movement; meaning many in lower income brackets do in fact over time (and no doubt with no small measure of sweat and determination) move into higher ones.  All of this is a huge positive and speaks to the opportunities a free, capitalist society provides its citizens.

So if it's not especially an economic problem then, it's likely more of a political issue. And no doubt, political drivers matter to capital markets. But in our view, the major problems with the wealth gap are the resulting attempts to somehow "fix it" (whether or not you agree it must be fixed) that result in inefficient use of capital. Because realistically speaking, how would we fix it?

Well, we likely all know the textbook answer: Tax the wealthy more. Sounds great in theory: tax those at the spectrum's upper end and spread those resources among those at the bottom. But the problem is, that's already proven to be ineffective in narrowing the wealth gap. The fact is, we've had progressive income taxes in the U.S. since 1913 when the 16th Amendment was ratified. But the wealth gap has done nothing but grow overall, and unevenly grow since then.

Moreover, attempts to do away with the wealth gap entirely have all failed. What communist nation has achieved any degree of success? The now-defunct USSR? North Korea? Cuba? China? Except, China has a wealth gap, too - in fact, wider than America's. For the other communistic countries, vast evidence points to their citizens having less opportunity than in the U.S. (Another way to say that is, plenty of folks have moved from Cuba to the U.S., but not the reverse. Maybe they're not so bothered by our wealth gap.)

Fortunately, in the U.S., attempts to fix the wealth gap are usually limited to tinkering with the tax policy, and history shows country-specific drivers like tax policy changes have much less impact than people think because global drivers typically swamp local ones. We doubt the wealth gap debate will ever be resolved, and that's not a bad thing. Naturally, as society overall gets wealthier, the upper end will keep increasing. And in our view, an overall richer society is good, not bad.

(This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of September 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.)