“There’s class warfare alright, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffet, 3rd richest man on Forbes Richest Person List
“I like being able to fire people…” Mitt Romney, estimated $250 million net worth and GOP presidential candidate
Rich and poor America are drifting further apart, and standard of living is eroding for the vast majority of Americans. Not since the pre-Great Depression 1920’s have the very top received such a large share of the nation’s income. This trend is detrimental to the long-term stability of this country and all its citizens, including the top 1% as it reduces opportunities that were previously available. It is not irreversible; however, it requires an immediate response.
Over the past thirty years, the average household income of the top 1% (assumed to earn over $250K/year) compared to the bottom 90% has tripled from 14:1 to 42:1. The median US family income has grown only at an annual rate of 0.36% while the top 1% realized a 278% aggregate increase during this period. Joseph Stiglitz, winner of the Nobel Prize in Economics, notes in his recent book, The Price of Inequality, that “The United States has the highest level of inequality among advanced industrial countries…[and]…We are now approaching the level of inequality that marks dysfunctional societies…including Iran, Jamaica, Uganda, and the Philippines.”
Alan Krueger, Chairman of the Council of Economic Affairs, labels this bifurcation of high- and low-income earners as “polarization of income distribution”. As a result, the US middle class has shrunk, and the American tradition of equal opportunity is becoming a myth. As income inequality increases, the ability to improve upon ones economic condition decreases. Stiglitz concludes that in America, a person’s success depends more on parental income than in other economically developed countries.
While economists have identified numerous causes of America’s increasing inequality, there is no consensus as to the significance of specific factors. Any policies that address inequality should consider the following. The increasing regressive nature of the US tax system has benefited the top 1% disproportionately. Taxes are now the smallest percentage of US GDP since 1950 due to the Reagan and Bush tax cuts. The IMF reports that among the thirty leading western economies, in only two countries are tax revenues a smaller percentage of GDP than in the US. Current tax rates are significantly less progressive, impacting those with lower incomes more. For example, the top 1% benefit from 71% of all capital gains (because the lower economic classes have few capital assets, if any) which are taxed at only 15% (compared to the top marginal rate of 35% for salaries and wages which is virtually all of the lower class income). This is the major reason that the tax system violates the “Buffett Rule”- high income taxpayers should not pay a lower percentage tax rate than those with lower incomes.
Lower wages over the past thirty years have caused greater inequality. The minimum wage has declined by almost 30% (in constant dollars), and union membership (which has the effect of raising wages of both union and non-union members) has dropped 40% to less than 12%. Globalization of markets has often been a “race to the bottom”. Industry often relocates to the country with the lowest cost producer, leaving low-paying “service” jobs behind. It is estimated that over the past decade, our trade with China has resulted in the loss of 2% of the US employment. When Ronald Reagan proclaimed “Government is the problem”, he inaugurated the continuing push to deregulate and “privatize”. The 2008 global economic meltdown which affected the lower economic class the most (e.g., most of their wealth was in home equity which was significantly impaired, if not wiped out) is in large part attributable to dismantling the financial regulations instituted after the Great Depression that prevented US financial crises for decades. Deregulation and less supervision allowed the financial sector to increase the economic inequality through predatory lending, excessive credit card fees, and complex and high-risk “financial innovations” that investors, issuers, and regulators often do not understand.
Mitt Romney asserts that addressing the increasing inequality in this country is engaging in “the bitter politics of envy”. Edward Conner, a Bain Capital partner of Romney and major contributor to his campaign argues in the New York Times Magazine that we should have even more inequality. It is good for the entire country and promotes economic growth. Unfortunately, some Harvard Business School degrees convey neither an understanding of economic history nor an ability to look beyond one’s immediate self-interest and consider the long-term interests of all Americans. The increasing US inequality requires attention. It creates economic and social instability and is contrary to the American tradition of fairness and equal opportunity.
Historically, the economic meltdowns in 1929 and 2008 and the severe recessions that followed were preceded by sharp increases in inequality. In contrast, from the 1950’s through the 1970’s, a period of economic stability and growth, inequality declined. Stiglitz argues that “inequality gives rise to instability, the instability itself gives rise to more inequality,” identifying this a “vicious cycle”. Economic inequality causes money to go from those who will spend it (the lower economic classes) and create further economic demand to those who are well off (the top 1%) and cannot spend it all. As the cycle progresses, the lack of demand causes increased unemployment and those without go further into debt to obtain necessities, rely upon a fraying safety net, suffer from unfunded retirement accounts, etc. The economic uncertainty may cause the top earners to reduce spending and, consequently, decrease demand even further.
Economic instability leads to social instability. As income inequality increases, there is reduced contact among all Americans, and there are fewer shared experiences. The 1% may live in gated communities and send their children to private schools. The wealthy become less willing to spend on common needs; they do not depend upon public parks, schools, medical care, research, or security. They can purchase their own. Consequently, government investment declines. Studies have also shown that increasing income inequality correlates with increasing crime rates, and decreasing trust, health care, and community involvement, such as voting and volunteerism. Of course, the lack of employment opportunities or skills to be successful in those jobs available engenders frustration or worse.
Further challenges to social stability arise from the erosion of the United States’ tradition of fairness and equal opportunity for all. A very small segment of our community has growing and disproportionate power that benefits them and adversely impacts the vast majority. Americans are realizing that they were duped and “sold a bill of goods” by those advocated the Bush and Reagan tax cuts. Contrary to the continued assertions of some, Krueger confirms “that there is little empirical evidence that reduced tax rates increased income growth, jobs or business formation.” They were successful, however, in turning budget surpluses into record-breaking deficits that add to the national debt. The decade after passage of the Bush tax cuts exhibited the lowest average annual growth after WWII – even if the years after 2007 (when the economy imploded) are omitted. For the future GOP presidential nominee to identify the top 1% as “job creators” who need even greater tax cuts is sophistry and ignores history. In response to the 2008 financial crisis, the US spent far more to bail out banks and maintain banker bonuses than to help the unemployed – people who lost their jobs because of financial institution irresponsibility. AIG alone got a $182.5 billion bailout, more than was spent on welfare from 1990 – 2006. The unfair playing field appears to remain even after the outcry regarding the 2008 financial firm bailouts. In June 2012, the US government had “smoking gun” emails demonstrating Barclays Bank culpability in rigging an international interest rate (LIBOR) that effected over $800 trillion in financial products, yet the bank was able to settle the matter with just a fine (less than 1% of Barclays 2011 revenue).
Common sense and our history offer solutions to our current problems. America needs a vibrant middle class. It is the purchases of goods and services by this group that stimulates demand and investment, thus increasing employment and wages. The tax cut for those earning over $250,000 should not be extended again. There needs to be a sense of shared-sacrifice. The lower classes have seen incomes remain flat, at best, while government programs that directly affect them have been slashed; yet, the top 1% has escaped economic decline. It is absurd to argue that a tax rate increase to 39.6% from 35% will provide a disincentive for the high income wage earners. The United States economy did extremely well with less inequality and debt when the top rate was 70% as it was before Reagan took office, and as noted above, the tax cuts have not yielded the economic cornucopia that was promised (and is still being promised) to promote their adoption. Research shows that the top save approximately 20% of their income and the bottom economic classes spend all their income and more for necessities. Consequently, economic demand is lower and employment is reduced than if the bottom had more to spend. Stiglitz estimates that if the top saved only 15% instead of 20%, the unemployment rate would be just over 6%, instead of the current 8+%. The current capital gains taxation structure requires change, as well. Think about it; is it in society’s interest to tax the income of investors and speculators at a lower rate (15%) than a wage earner (up to 35%)? A change in the Bush tax cuts, the winding down of our armed intervention in Iraq and Afghanistan, and the increased economic activity and employment from less inequality will begin to address the deficit and national debt concerns. As Stiglitz notes, “[T]he recession caused the deficits, not the other way around.”
Just as was done in the Progressive Era and after the Great Depression, we need to temper financial markets, and increase social and economic stability through a strengthened Social Security program, minimum wage laws, and affordable health care. Banks should focus on lending. If they are going to engage in risky financial activities, their investors, and not the taxpayers, should bear any costs – it is they who can profit from such endeavors. Privatization is not always the answer. Private health and life insurance companies are much less efficient than the government-run Medicare and Social Security programs, respectively. Unlike government employees, corporate executives are paid to generate profits; the private sector should not be relied upon to regulate themselves or handle certain activities when their profit-maximization incentives are not aligned with the public interest. The increasing wage gap between those with a college education and those without and the migration off-shore of technical jobs, provide ample evidence that greater efforts must be made to provide affordable education.
Globalization is here to stay, but it has to be managed better. Operating unchecked, the prevailing wage for an unskilled worker in the US would be that of a similar worker in China. Finally, the political system must be made more responsive to the concerns of all citizens, not just those with the largest bank accounts. Efforts must be undertaken to overturn or minimize the impact of the Supreme Court’s Citizens United decision which effectively implemented unlimited corporate campaign spending. When all citizens feel they have the opportunity to be heard, disillusionment will decline.
Horatio Alger with his rags to riches story is not dead; however, he needs immediate and heroic efforts to get off life support.