Wealth Inequality Is a Problem, but How Do You Even Begin to Solve It?

Europe's hot new idea: Slashing compensation

You might consider America's vast wealth inequality, vividly illustrated in this viral video, to be offensive, infuriating, or irrelevant. But it is not terribly mysterious.

Rich people have more money. More money tends to lead to bigger properties, fatter savings, and better access to capital markets. As a result, the top 1% of the country controls between 40 and 50 percent of the total wealth from stocks and bonds. What's more, the very very richest people tend to be lawyers, doctors, and executives, especially in finance, with equity in their firms and companies. And that, right there, represents the overwhelming source of high wealth (as opposed to high income) at the tippy top: It comes from stocks, from real estate, and from business equity.

Poorer people save much less, don't have much in the way of a stock portfolio, and (somewhat by definition) aren't owners or partners in rich private firms. Instead, they might own homes. But homes, as we've seen, aren't always the steadiest investment. All of that explains why the share of total household wealth, which has fallen at the bottom thanks to the housing bust, is accumulating at the top 1 percent.

wealth change epi

The two easiest ways to think about reducing wealth inequality are (a) building up the bottom and (b) cutting down the top. These aren't equally sensible approaches, they're just the two most obvious. From the bottom, if we found ways to make poor and middle class families save more, they could invest that money in assets that got more valuable over time, and this would increase their wealth. From the top, one extreme solution beyond raising taxes would be to find ways to cap income and compensation.

If you find income-capping sort of a goofy idea, perhaps you're not a member of our trans-oceanic readership.

Europe in on a rampage against sky-scraping compensation packages. Months after France announced a new confiscatory top tax rate, the EU recently capped banker bonuses at twice their salary. This weekend, Switzerland voted to put historic restrictions on corporate pay. Two-thirds of a national referendum (in one of the finance capitals of the world!) voted to give shareholders the right to slash their executives' compensation and banned "golden parachutes" for outgoing executives. The new crime for paying a CEO too much money? As much as three years in jail or six years' salary in penalties.

When Switzerland puts its foot down on rich bankers, you know something's wrong.

But that doesn't mean the Swiss solution is right. The typical argument against capping incomes for a job is intuitive. If you found out that your company capped salaries at $80,000, you'd be a risk to leave for the thousands of jobs that pay $81,000 and higher. Giving shareholders the right to cut compensation and banning golden parachutes worth $70 million are a category different from capping wages at $100,000. But banks throughout the EU and in Switzerland are protesting the change, saying their best workers will flee to Asia or New York where they can be paid their market wage.

Maybe they're right. We just don't know yet. But it's notable that one of the richest countries in the world -- with the highest GDP per capita of any country with more than 7 million people -- is standing athwart this canyon of inequality saying "stop."

Maybe it was only a matter of time. The wealth inequality gap has been built by some factors we do control -- like governments' implicit and explicit subsidies of global finance -- and some factors we don't control, like globalization and technology making capital owners richer while they make unskilled workers replaceable. Both sides have numbers. The 1% has money. The 99% has people. Before the top-heavy returns of globalized capitalism get too out of hand, maybe we should think about some good solutions to wealth inequality before popular resentment leads to bad ones.