To understand the dangers of income inequality, one need look no further than the recent news story of a California businessman who tried to pay homeless Los Angelinos $40 to stand in line for an iPhone. While it’s tempting to write this off as just another depressing media story, doing so would be missing the point. What the story really reveals is this: exchanging services only works when people come from a place of relative income inequality. When that’s not the case – as when the rich pay the poor to do their dirty work – that stench you smell is none other than the rank odor of economic exploitation.
Let’s start with the basics. In our schadenfreude, it’s easy to forget that the prima facie ‘crime’ this businessman committed will, in fact, be repeated millions of times across America this year . Every time we see someone pay a maid to clean their house or a Taskrabbit to build their Ikea table, what we really see in an implicit statement that someone’s time is more valuable than that of their maid, neighbor, or driver. Most economists will rightly point out that under normal circumstances, this is a healthy economic exchange. Paying someone to wait in a line for you is no different.
Our real outrage stems elsewhere: from the vague notion that this was not a fair exchange. That paying college students or (for the sake of illustration) a lawyer to wait in line is okay, but paying the homeless is not. It’s a notion rooted in what economists call the concavity of the utility curve, which states that the amount you’ll do to earn a dollar will decrease as you become wealthier. A homeless man may wait in line all night for $40; to get Bill Gates to pull the same hat trick may well cost you a cool $1 billion.
Therein lies the rub. Billionaires will outsource, as they always have. But the rise in income inequality has created something far more ominous – an overclass of the ‘petty rich’. These folks may well be the greatest danger that America’s middle class has faced since the Great Depression.
The issue is that as the average gap between the rich and the poor grows, the people working in the financial district aren’t making twice as much as the middle class – they’re making ten times as much. And when you make ten times as much as your neighbor, it suddenly becomes a lot easier to justify hiring them to do things you just don’t want to do. The problem? Your neighbor can no longer afford to hire you back. That’s not economic exchange – it’s a one way transfer of economic activity that may well reduce the amount of real output in our economy.
The phenomenon is readily apparent here in San Francisco, where dozens of startups have suddenly sprouted up to cater to an influx of engineers earning six figures. Increasingly, the old residents of San Francisco, squeezed by skyrocketing rents and costs of living, are finding that the best way to survive is to enter a new service economy catering to the 20 and 30-something year-old professionals earning several times more than their neighbors. From eBay Now to Google Shopping, Uber, and self-professed “entrepreneur” prostitutes, a city and a country rooted in egalitarianism are being transformed to serve a rich upper class of people who literally cannot be bothered to service themselves.
And when that happens, America’s middle class transforms into those homeless men waiting in line at the iPhone store. Instead of producing or creating, their most profitable option is to do people’s dirty laundry, cut their hair, and otherwise take the small change thrown to them by people for whom $50 is a rounding error on next Tuesday’s paycheck.
This dystopia isn’t a fantasy – it’s already a dangerous reality in countries like Turkey and Mexico, where it is more common than not for the rich to hire drivers, nannies, and maids – not to mention, eventually (and not incidentally) security staff to keep everyone in check. When we acquiesce to inequality as the new status quo, we are acceding to an economy where America’s middle class begins to resemble this sad reality.
We can and must do better.