The new way to get rich slowly

This article is by staff writer William Cowie.

The face of getting rich slowly is changing right before our eyes, even as the status quo is failing. Before this year’s State of the Union address, the President’s media supporters, fretting about his low approval rating, fumed“…never during his time in office has the state of the economy been better — yet rarely has he gotten such low marks from the public for his handling of it.”

The GDP is indeed at an all-time high. But, as someone said when I updated a group on the economy recently, “Did I just blink and miss the recovery?” Sound familiar? A paradox, indeed.

The main reason for the paradox is unemployment. The reporter above was correct when she said it’s never been better during Mr. Obama’s time in office … but she unwittingly nailed the problem: The incumbent Chief Executive has been in office quite a while already and never in the past century has it taken this long for employment to recover, prompting experts to dub this “the jobless recovery.” A recent Gallup poll shows unemployment is America’s number one problem.

Juxtapose the lack of well-paying jobs with record numbers of $100 million houses for sale and price records for art and collectibles and the rising tide of rhetoric around income inequality seems inevitable.

Talk is cheap, though, so I called up a few folks at the Federal Reserve to find out: Is there hard data to verify income inequality?

There is – and it’s much, much worse than you or I might have even thought.

The Inequality Gap

If you’re over 30, you might remember the power-duo Lennon-McCartney. Welcome to the new duo articulating life today: Piketty-Saez. Thomas Piketty heads the Paris School of Economics and Emmanuel Saez, the Center for Equitable Growth at U.C. Berkeley. In 2003, they published a landmark study on inequality that everyone has been using ever since.

recent update to the study shows that a stunning 95 percent of the entire gain from the current recovery has gone to just the top 1 percent of the nation’s income-earners:

Post trickle down

Interestingly, the 1 percent are not impervious to downturns. The table above shows they get hammered a lot harder by downturns than the plebs.

But the data also confirms: 99 percent of the nation is scrapping for only 5 percent of the total gain of this recovery, while the top 1 percent are snagging 95 percent of the entire nation’s wealth increase. This has never happened before.

Is it a permanent shift or just an aberration? The Pikkety-Saez data set goes back 100 years, making it easy to spot long-term trends. To distill all the data down to a single number, I created an “index of equality” comparing inflation-adjusted incomes of the 99 percent with the 1 percent, starting in 1913. A rising line reflects more for the 99 percent, comparatively.

index of equality

The chart shows that, for 70 years, the 99 percent did better, relatively speaking, than the 1 percent — in other words, income equality improved.

Then it fell off a cliff.

This is not how it was supposed to be. What changed?

Trickle down

After the 1982 recession, our government embarked on what has since been called “trickle-down economics.” In essence, the thinking went that if you bless the rich, they will create opportunity (and wealth) for the rest.

Did the wealth trickle down? In a word, no. Here’s a different look at the same data set. This chart compares the actual incomes (in 2012 dollars) for the two groups. To make them comparable, I indexed them based on the 1913 number.

Inequality indexed incomes

You can see how the advent of World War II created a spurt of income growth for the 99 percent as women went to work, industrial competitors Japan and Germany were decimated, and newcomer China had not yet awakened to take away American manufacturing jobs. It was the golden age of the American industrial worker, complete with job security, the corporate ladder, and, when you’re all done, a pension you can count on.

That came to a screeching halt in the ’80s as trickle-down economics became the new normal for all subsequent governments. The two lines converging after 1985 indicate the 1 percenters’ share of the nation’s wealth increased again … dramatically.

So what can you do about that?

Your first option is to vent your outrage over dinner or on the blogosphere. The rich, by the way, are feeling that. Tom Perkins, billionaire co-founder of the largest venture capital firm, recently caused a stir in a letter to the WSJ, complaining that the 1 percent are being vilified like the Jews in Nazi Germany.

Outrage doesn’t put food on the table, though. A more sensible option is to do something.

1. Embrace the new reality. The days our parents knew are gone forever. It’s hard now just to find a job with decent pay. Oh, and if you thought a government job is your ticket to security, think again. This Fed chart shows government jobs have been steadily declining for the past five years with no signs that the trend will reverse. Not only are you on your own for your current needs, you won’t be able to count on a pension or Social Security either.

2. Embrace the wisdom that doesn’t change. Live below your means and get rid of debt.

3. Invest. The 1 percent make their living off their investments. The tax code is harsh on labor but easy on capital. As you transfer your income from labor (a job) to capital (investing), you are likely to reap those benefits. Is this easy for someone making a living from an income-stressed job now? Perhaps not. But not making investing a serious priority only ensures permanent servitude to capricious bosses.

4. Reframe your income opportunities. What new income opportunities are there? In a nutshell…

Start your own business

This may sound daunting, even depressing, but consider:

1. We’ve never seen a generation so well-equipped to be on their own as this one. The main reason for this is technology. You have resources at your fingertips that your parents didn’t have. Sites like elance, fiverr and others provide brokerage platforms for personal services — a great starting point.

2. In human history, self-employment has always been the default: We are wired for independence. The technology of the industrial revolution took that away, but current technology is giving that independence back. In this new world, your efforts are justly rewarded by a marketplace which, while not perfect, is not as capricious as a fickle boss or an employer given to outsourcing jobs.

3. Never has it been as easy to start small while maintaining your day job. For less than $100, you can get a domain name and a year’s hosting. Getting set up to receive payments is a little trickier, but still easier than finding a well-paying job. There is a lot of free advice on how to do everything from marketing to shipping your product.

The revolution is under way already

Starting your own business sounds more radical than it really is. Several readers (and writers) on this very blog are already going down this road. They’re not alone. This Federal Reserve chartshows the dramatic shift from large employers to small employers, which includes start-ups. (It’s interesting to note how those weathered the recession so much better too.)

Even if you don’t open your doors tomorrow, start thinking what business could hold your future. Ask friends. Ask many friends. Some will be naysayers, others eternal optimists. Listen to both groups. Take cautions from the Eeyores, but don’t let them stop you.

It is a new day out there. You might not become a 1 percenter, but you can get a lot closer, get many of their benefits, and enjoy the freedom and fair reward your efforts bring.

It will still be getting rich slowly because durable things rarely are created overnight; but self-employment is the new way, make no mistake about it. And while getting rich slowly this way is a tougher road than just showing up for work and collecting a paycheck, the advances in technology keep making it easier. In the end, this road would be more rewarding than getting laid off five years before you plan to retire.

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About the Author: Get Rich Slowly

Get Rich Slowly — recently named most inspiring money blog by Money magazine — is devoted to sensible personal finance.

You will not find any get-rich-quick schemes here. Nor will you find multi-level marketing fads or hot stock tips. I am not pitching any product or book. Instead, you’ll find daily information about personal finance and related topics.

I share stories about debt elimination, saving money, and practical investing. I also post occasional reviews of books, magazines, and software. And, of course, I scour the web for the latest personal finance tools and articles.

Please note that I am not a financial professional. I’m just an average guy who found himself deep in debt. When it finally became too overwhelming, I began reading personal finance books, hoping to find answers. I wanted swift solutions to my problems. My research revealed that few people get rich quickly, but almost anyone can get rich slowly by patiently following some simple rules.