Why Income Inequality Matters: Motivation

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 Money360) entitled . 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.