In the middle of proverbial nowhere, there is a town called Widgeton. It was so named because the town grew up around its only factory, headquarters of a family-owned business which made widgets. Almost everyone in town either worked directly for the Widget Company or was otherwise dependent for their income on the payroll generated by the Widget Company. Through the entire twentieth century, the Widget Company made the best widgets in the world and was concomitantly rewarded. The company was profitable and the small Town of Widgeton thrived.
The Widget Company was a family business owned entirely by the Widgetmacher Family. The head of the family at the turn of this century was Simon Widgetmacher, who was the sixth Widgetmacher to head the Widget Company. Simon lived within a family compound in the largest house in town at the top of the highest hill in town. Literally and figuratively, in Widgeton, the Widgetmachers were on top of the world.
It had been their policy for generations for the Widget Company to treat its employees well; it paid decent wages and to give generous bonuses at the end of the year. The family was fully cognizant of their privileged position in town and treated the townsfolk with due respect. This attitude was largely genuine but not entirely benign; the family knew that both the factory and its family compound were within the municipal boundaries of Widgeton and that the residents controlled the local government and had some power over their lives and their business. With some effort on both sides, the town and its most prominent family lived in harmony as long as thing went well for both. The local government taxed the Widgetmacher property reasonably and the Widgetmachers were generous in their civic participation.
Between salary and stock dividends, Simon Widget routinely made over $1,000,000 a year. He had invested well over the years and was reputed to have a net worth over $100 million. He had three adult children, all of whom lived in their own homes on the family property. All three worked as executives at the Widgeton plant. They made about half what their father made.
The minimum wage the Widget Company factory was $15/hour, more than double the national minimum and particularly good for the rural area in which Widgeton is situated. There were about 1000 households in Widgeton. The average income of these households was almost $60,000. The average income of the four Widgetmacher households was over ten time that amount.
With this level of income disparity, is this an unjust economy? Despite virtual full employment and solid middle-class living standards, the answer is arguably yes. Widgeton had a clear dominant economic class with incomes which many would consider offensive. The income disparity in Widgeton was classic.
After a hundred prosperous years, competing firms entered the widget market with comparable products produced abroad at a cost which the Widget Company could not match. Simon and his sons refused to off-shore their widgets and remained committed to American production and to their long-time employees. The Widgetmachers considered alternative products and practices but they knew the problem was not their product but the cost of production. The emergence of cheap labor markets was as unsurmountable problem.
The proverbial handwriting was on the wall and the family knew that they were in trouble. They carefully and deliberately repositioned their considerable wealth so as not to be so singularly dependent on the Widgeton Company. Failing in a more competitive market, they continued the production of widgets.
The company continued paying a decent wage as they steadily lost market share. They did not lower wages but they did stop hiring. The company workforce ebbed by attrition. Each year the factory made less until there were no profits left. As dividends disappeared, the incomes of the family executives were reduced accordingly. They were still baronially rich but their wealth was no longer dependent on or sustained by the family business. In time, they reluctantly stopped paying year-end bonuses. Simon’s income from the company dropped to just his salary of $150,000. He still paid his sons about $100,000. With the cessation of the annual bonus, the average household income in Widgeton dropped to less than $40,000/year.
Simon was making an eighth of his old income; his sons, a fifth. The townsfolk on the other hand, were still making about two-thirds of what they used to make. Everyone was decidedly worse off, particularly the Widgetmachers, but income inequality was greatly reduced. The moneyed elite’s earnings advantage over the the Widget workers dropped from a multiple of over ten to a multiple not much over three. A economic egalitarian would be thrilled.
Over the next few years, the company faltered further. The market for widgets was strong but the competition was fierce as overseas manufacturering moved from cheap labor market to cheaper labor market.
The Widget Company ultimate failed. Simon died and his sone took what wealth the family had accumulated and moved elsewhere. The factory was boarded up and within a decade, the population of Widgeton dropped by half. The remaining households made what money they could by taking in each other’s laundry, but the average household income dropped below $30,000. No one did particularly well but those so inclined celebrated the more-equal incomes of the Widgeton townsfolk as the lived not-so-happily ever after.
This ending to this story is all the more tragic because of the Widget Company had been a very successful firm which was forsightful and enlightened in both its management and civic policies. The contrast between past and present was more dramatic because the Town of Widgeton was so singularly dependent on the Widget Company for its wellbeing. A business this size in a town ten times the size of Widgeton might have failed more gracefully and other components of the local economy might have saved the day. Nevertheless, the specific vulnerability of Widgeton does not obscure the moral of this story.
The moral of this story is: Income distribution don’t mean squat without income.