The most challenging problem in economics is not in the understanding of the theory or the model of economic development which is evidenced by the fact that many nations’ GDPs have been steadily increasing as various economic development models are applied. The real challenge lies in the finding of a solution to limit the wealth gap created by the economic development. The wealth gap in a society is invariably the consequence of economic growth. All economic development models based on the principle of getting uniform return across all the society members seem to be fruitless. A few as practiced by the communist countries have proven to be a failure when compared with other economic development models based on capitalism.
There seem to be two fundamental factors producing the above outcome. First, capital is a necessary ingredient for economic development and it must be applied strategically, selectively and timely to development projects to yield optimum return. Second, Human Resources are necessary for economic development but they must be selected based on human intelligence and talents, trained with right skills and knowledge and motivated by a driving force to devote energy and time in economic development projects. The above first condition also depends on talented humans to manage the capital under a management system ranging from a totally free capital system to a totally government controlled capital system with varying degree of man-made regulations. The second condition usually can be met by a competitive education system and a talent selection scheme. The motivation, however, is rooted in human nature, that is human’s desire for material or asset possession and a self-defined life style, which ultimately leads to wealth accumulation. We might term this model as ‘capital-talent’ model for later reference. Under this model, wealth has become the most effective and consequential motivation factor for talented humans to engage in productive economic projects. Even in the charity organizations and religious institutions, this materialistic motivation factor cannot be ignored. That is why successful charity organizations pay their executives millions of dollars in salary and all successful churches pay their pastors with full range of amenities including housing, cars, phones, salaries above average parishioners’ income and cushy retirement benefits.
There are ample successful examples of nations as well as private corporations applying the capital-talent economic development model. Just following post WW II world economic development, the U.S., Germany, Japan, and the four little dragons in Asia all can offer solid ‘case’ examples to support the above conclusions. China, after switching from an unsuccessful socialistic economic model to a ‘capital-talent’ model, albeit knowing the wealth gap issue and willingly letting a small group of smart people to drive their economy and getting rich, has shown us an non-debatable success story of economic development. So did many other nations and global corporations succeed in building their enterprises under the above principle. China’s rapid rise in economy or her GDP growth is accomplished with the consequence of the above capital and human driven economic development model producing the wealth gap phenomenon, a small number of people possess a large portion of the national wealth.
The U. S. is the wealthiest nation on earth as far as her national GDP and total assets is concerned. The U.S. is a capitalist country and is a beacon for the world coming to pursuing capitalistic economic development. However, the wealth gap problem in the U.S. is likely the most severe case. The wealth gap of course is produced and compounded yearly by income inequality (income gap). In 2015, the bottom 90% of people in the U.S. had an average income of $34K and the top 10% had an average income of $312K, nearly ten-fold difference. What is more shocking is that the top 1% average income was $1.36M and top 0.1% was $6.75M, 200 times greater than the average income of 90% of population. It is clear that income inequality will produce a larger wealth gap, since the majority of U.S. citizens are not making enough money to save or build assets. Based on the data from Internal Revenue Service and Congressional Budget Office, since 1979, the before-tax incomes of the top 1% of America’s households have increased four times more than the bottom 20% population’s income. The after-tax incomes of top 1% has increased on average 192.2% since 1979 -2013 whereas the corresponding before-tax income of top 1% has increased on average 186.8%. This shows that the tax system does not cure the income inequality problem and its consequential wealth gap issue. The U.S. has used welfare program to boost the income of the bottom 0-40% of the population, but the above data indicates that so long as the economic development operates under the ‘capital-talent’ model and its principles derived from human nature, the income inequality and wealth gap will persist. Even in the top income population, the same problem exists; the highest 0.1% income earners have seen their income rise much faster than the rest of top 1%. (The top 400 earners doubled their earning from 1992 to 2002) The seriousness of the wealth gap can be illustrated by the following statistics: In 2013, the top 10% of family holdings held 76% of the national wealth whereas the bottom 50% of the families held 1%, a rapid worsening from 1989 to 2013.
China has adopted the ‘capital-talent’ model thus naturally we expect the same consequence - creation of wealth gap in the nation, although no detailed statistics on household income and household holdings over the past five decades are available. China currently is applying a harsh anti-corruption measure to breakdown illegally created wealth but that is not the same wealth accumulated through the ‘capital-talent’ model. China has seen an amazing progress of economic development. The speed of economic development is naturally correlated with the amount of capital and talented Human Resources available. China’s GDP was less than $100 billion in 1971 to $12.8 trillion in 2017, an increase of 129X signifying a rapid rise. From available data (1952-2017 six and half decades), China’s GDP was $30.55B to $113.69B(1952-1972), an increase of 3.72X for two decades, $113.69B to $493.14B(1972-1992), an increase of 4.34X, and $493.14B to $12840.39B(1992-2017), an increase of 26X. These data support the ‘capital-talent’ model; from 1992 to 2017, China has the fastest growth of capital, educated talents and the impetus of Internet revolution making China the manufacturer of the world. Unfortunately, the higher the speed of economic growth is, the bigger the wealth gap will occur. Big wealth gap will produce social instability in any governance system. Something must be done to reduce the wealth gap, otherwise social unrest will take place. The tax system and welfare program (including minimum wage) practiced in the U.S. can not cure the income inequality and wealth gap problem without destroying people’s incentive to take on productive work. Perhaps, one suggestion to redistribute wealth is to encourage wealthy people to make large tax deductible donations to (1) Public infrastructure funds, funds for constructing roads from city to rural regions, airports, train stations, ports, bridges, museums, parks, and public transportation and utilities allowing donors names to be put on them and (2) Innovation funds, funds for supporting science and technology research benefitting the public and the nation. Government can establish these funds with low yields to let wealthy people to invest their wealth but benefit the less wealthy more.