The Poor Get Richer

Fortune Magazine notes an alarming trend:

(FORTUNE Magazine) - I have good news and bad news. The good news is that income inequality in the U.S. -- after 30-plus years of steadily increasing -- may be decreasing. The bad news is why that trend is reversing. It looks like another lesson in how profoundly a globalizing economy is upending what we thought we knew.

Rising income inequality has settled comfortably into America's big economic picture as a reliable--and much lamented--megatrend. Starting around the late 1960s, U.S. incomes started to become more disparate. The trend was remarkably steady. Recessions might slow it down or briefly reverse it, but mostly it just marched on...

But now it appears just possible--based on the latest research available--that the whole chain of causation is falling apart. Wait before you cheer.

The evidence is in a new Fed study of family finances, the latest in a triennial series. It shows modest but clear signs of incomes converging rather than diverging.

Whether it's presumed that the fact that the rich normally get richer is a result of government action or inaction, it's always presumed that such is a bad trend. Even Fortune notes that it's a "much lamented megatrend." But ought it be? I think not. But before I explain why, I'd like to explain the trend in the simplest manner possible:

The rich get richer because they continue to do the things it takes to get rich.

There's no rich gene or rich pill. People getting rich is the result of actions, taken over a lifetime, that result in them accruing riches.

They don't spend more than they earn. They save and invest. They work. And those acts are habits that anyone can pick up, which is why the rich getting richer is not a bad thing but a good thing. The fact that the rich get richer, combined with the fact that they are not the same rich (most people will occupy several economic bands over the course of their lives) mean that the incentives in place will work for anyone who does the sort of things that make one rich.

People get richer as they age. It makes perfect sense. They learn new skills. They get promoted. They develop products or companies or a clientelle. They gain education. Their kids move out. And all these things that get the blame for the much lamented trend are actually incentives that allow individuals to improve themselves.

And that's a good thing.

Don't believe me? Turn it around and examine it for a second. What would happen to individuals if there was no distinction between rich and poor. What if the kid who flunked out of school earned the same as the PhD physicist. What would be the incentive to get an education? What if the poor salesman earned as much as the good one. Where would be the incentive to learn new skills, work long hours, treat customers well? What if the person who spent every paycheck on Johnny Walker always had as much left over as the one who saved and invested? What would be the incentive to save rather than consume?

The rich get richer because people are rewarded for improving themselves and serving their customers, whether those customers are employers or buyers. The poor get poorer because they don't do those things.

Walter Williams, peace be upon him, once laid out a three-fold plan that guarantees one will escape poverty: stay in school, have your kids in marriage, and never quit a job except to take a better paying one. Everyone who acts responsibly has the opportunity to get richer. Those who do not will probably get poorer. And it will because because of their own actions.