Bramma Business Insights

Focus on Opportunity, Not Income Inequality

America’s growing income inequality has begun to concern our elected leaders. In a speech at the end of last year, President Obama called it “the defining challenge of our time.”

The fraction of total income going to the wealthiest Americans has increased significantly over the past three decades. The highest earning tenth of households took home a little more than one third of all pretax income in 1982. In 2012, that group received half, research by University of California at Berkeley economist Emmanuel Saez reveals.

As startling as the numbers may seem, income inequality shouldn’t trouble those in Washington. Income is an outcome – a reward for how hard people work and how clever they are. In a capitalist society, if some people work harder or smarter than others, they should earn more.

Moreover, differences in income per se don’t bother most Americans. When people who start with little become rich because of their efforts, few are troubled. No Op-Eds decry the billions that WhatsApp’s founder Jan Koum earned by selling his start-up to Facebook for $19 billion. Nor do they complain about the billions that Warren Buffet made picking stocks, or the hundreds of millions of dollars per year that Oprah Winfrey’s takes home from her media empire. Getting from modest means to great wealth is the American dream.

Most Americans also recognize that “inequality is the other side of successful entrepreneurship,” as former U.S. Treasury Secretary and Harvard University President Larry Summers has pointed out. Most Americans recognize that starting a business is risky. They understand that a few people make it big, while most people don’t. Therefore, the greater income inequality among business owners than salaried workers passes without much complaint.

The real problem lies in declining opportunity for Americans to move up the socioeconomic ladder. That’s where recent trends are alarming. A shrinking fraction of Americans think they have the chance to get ahead.