INCOME INEQUALITY: SOME BASICS

We recently began discussing income inequality in America. We focused our first post on poverty

and who bears the most significant responsibility for attacking the problem of people in our society who don’t have enough for a respectable existence free of want. More recently, we identified and fleshed out barriers to freedom from poverty and income inequality. 

We look now at some of the policy reasons for the divide between those at the top and the rest of the population. A real gap exists between the wealthiest Americans and even the middle class, a circumstance producing anxiety and political instability that feeds our destructive partisan divide. In time, we’ll consider solutions and evaluate proposals offered by the 2020 presidential candidates and others. We think it important we help voters separate real, viable solutions from noise and platitudes.

The Depth of the Problem

We hear much about the “one percent” and how they’ve done better than everyone else.  The numbers tell a disturbing

story of a growing wealth gap in the United States. According to a report by scholars associated with the Roosevelt Institute, since 1980, the share of national income earned by the top 1% doubled, to 20% in 2014, up from 10%. That hasn’t happened in all western democracies. In Denmark, for example, the 1%’s share went up only from 5% to 6%. 

Governmental policies and actions affecting both the top and bottom parts of the economy contribute. At the top, reductions in tax rates gave the wealthy a windfall.  At the bottom, policies negatively affecting wages and job growth suppressed lower income individuals.

Most “tax reform” has benefited upper income tax payers, including the 2017 tax bill the Trump administration touts as its major achievemet. In the

1980s, the top marginal tax rate dropped from 70% to 28% and has remained below 40% since. Capital gains tax changes also heavily favored the wealthy, with 65% of the benefits going to the top 20% of tax payers. More than lower tax rates help the wealthy. Half of tax expenditures – deductions for 401K retirement accounts, mortgages, and the like – go for things from which only the top 20% of tax payers benefit.

Meantime, 80% of job growth has come in low wage service and retail jobs. Worker power through collective bargaining decreased as union membership declined. In 1960, 30% of U.S. workers participated in unions. That dropped to 20% in 1984 and to just over 11 % in 2014. Wages and other compensation stagnated with this development, rising only 19 % between 1973 and 2013, despite a 161% increase in worker productivity. 

 

Government Complicity

Politicians of all ideological stripes like saying government shouldn’t “pick winners and losers” in the economy. Fair enough as a theory, but the idea does not comport with reality or history. In addition to tax policy, government has long been in the business of picking economic winners and losers. Start, for example, with the racially discriminatory housing policies so devastatingly described by Richard Rothstein in his path breaking book The Color of Law: A Forgotten History of How Our Government Segregated America. We exhaustively detailed Professor Rothstein’s findings in a series of posts in 2018 and need not repeat them here in making the point that many governmental agencies frequently pick economic winners and losers. 

The Federal Reserve’s hyper focus on fighting inflation has had the same kind of effect. By tightening the money supply through higher interest rates at the first sign of upward price pressure, the Fed has stopped or reduced the job creating opportunities of large and small businesses and stymied start-up activity by making credit less available. Most progressive economists agree this made returning to full employment slower and more difficult, particularly impacting lower wage earners who have more difficulty insulating themselves from the whims of the business cycle. 

Then there’s the matter of the federal minimum wage. It stands now at $7.25 per hour and hasn’t gone up since July 2009. Opponents of a

higher federal minimum wage, mostly  Republicans, argue raising it kills jobs, despite evidence to the contrary developed by economists like Columbia’s Joseph Stiglitz, a leading income inequality scholar. Whatever the reality on that issue, keeping the minimum wage low disadvantages a large segment of the American economy, giving employers a victory and wage earners a loss. No basis exists for arguing the government hasn’t had a major role in creating our current measure of income inequality.  

Why?

Income inequality exists for many reasons. Some are purely political, like the election of Ronald Reagan and implementation of his tax cuts in the 1980s. Some emanated from fears based on historical events. The inflation of the 1970s, partly sparked by upheavals in international energy markets, helped start the Federal Reserve on its anti-inflation crusade. Some have roots in personal greed, “rent seeking” as economists call the efforts of manipulative players in the economy who extract financial advantage through exploitation.

The reasons for income inequality bring into play a variety of individual and societal factors. The good news is that more people, including some running for president, now think we should do something about the problem. We see paying attention to them in the coming months as a good idea.                    

IDENTIFYING THE BARRIERS TO FREEDOM FROM POVERTY AND INCOME INEQUALITY

We have begun a series of blogs discussing the subjects of poverty and income inequality in  America.  We think that the

subjects are important because freedom from poverty or to change one’s income status is fundamental to American democratic values.  We live in a constitutional democracy where, in theory, every person has a legal right to move through the classifications of the poor, middle class, upper middle class, super rich, and back again.  In other words, we do not operate within a caste system. 

 

While we are a democracy, the system that governs our economic activity is capitalism, and it impacts democratic principles and process.  In America, capitalism has often been tempered with socialism.  Democracy does not guarantee poverty will not exist.  Poverty may occur as a result of a lack of an economic inheritance or the failure to accumulate wealth for a variety of reasons.  Economic inequality can result from a failure to exploit available resources or through a denial of access to such resources.

As we indicated in our earlier blog, Poverty in America:  Where Do We Start and Who Should Address It? income inequality and poverty negatively affect the lives of millions of Americans.  Here we offer two visions that shed some light on the challenges that must be overcome if Americans are to solve this problem.  For those who have visited the countryside, this first vision will likely resonate.  For city dwellers or those who are unfamiliar with the countryside, it might be less effective.  

Imagine for a moment that there exists a beautiful meadow.  In this meadow, the terrain is generally level and the sod is dense and soft.  There are fruit trees and a variety of other

plants and vegetation that serve its inhabitants.  The sun shines on every corner of this meadow, except when it is shielded by the clouds that moderate the sun’s heat.  The wind blows, but not too strongly.  Here Americans work and play and each has a fair opportunity to take advantage of the benefits of this meadow.  Beautiful homes are constructed with well-manicured lawns and safe places of worship.  There are rules governing the behavior of its occupants, but the rules apply equally to all who live there.  In this meadow one lives the American dream.

We now move to a second vision, a jungle.  Many Americans

must traverse this jungle before accessing the meadow.  The

jungle consists of thick underbrush, large trees with low hanging limbs often inhabited by threating reptiles and holes often deceptively dangerous terrain waiting to trip-up the unwary traveler.  In this underbrush are snakes of all varieties and other dangerous animals.  This jungle lacks access to medical services and job training.  There are waters to cross, some navigable others not, and in some locations, rapids.  In other locations, one finds marshes.  For the untrained, unguided, reckless, foolish or poorly equipped, the passage is life threatening.

The second version is intended to highlight the real-life obstacles that one must overcome to reach the meadow, unless, of course, one is born in the meadow.  Those born in the jungle begin in poverty as the descendants of slaves and the heirs of slavery’s legacy.  Those inhabitants were  not

allowed to accumulate wealth, thanks to redlining, sexual discrimination and other barriers.  African Americans were denied the right to vote and deprived of government programs from which other Americans benefited.  Many in this jungle were born with or contracted a disease or suffered a debilitating defeat.  A poor neighborhood with poorly equipped schools and parents who were themselves powerless, due to ignorance and poverty, stopped others.  In this jungle are people reduced to poverty because of calamitous medical bills, from unanticipated illness.  

For some, the jungle was navigable until the jobs left due to globalization, i.e., companies that  once provided jobs left

because of cheap labor in Viet Nam, Pakistan, China, or India.  For others, the companies did not leave the jungle, but many of the jobs did, lost to mechanization and technology.  Fewer workers were needed for the few remaining jobs, because technological advancement reduced the demand for manpower.  For others, the jobs in the jungle remained but wages stagnated because unions were stripped of their capacity to demand of employers a living wage or even an increase in the minimum wage.  Yes, there are people who find themselves in this jungle, though, they did not elect to be there and would leave if shown a way out and the barriers to their exit were removed.

We want every person who wants to reach the meadow to have every opportunity to do so.  In the days and weeks ahead, we will share with you our views on how access to the meadow can be gained i.e., how these barriers might first be identified and then removed.  We hope that you will share with us your views.  We believe America’s life depends on us finding a way through.

POVERTY IN AMERICA: WHERE DO WE START AND WHO SHOULD ADDRESS IT?

We’ve been talking among ourselves and with others about income inequality and poverty in America. Many 2020 Democratic presidential candidates indicate they plan on making income inequality a major part of their campaigns and we see poverty as part of that. We will discuss these issues often in this space in the months ahead.

We begin by laying out some dimensions of the problem and by considering who bears responsibility for attacking it. As we’ve talked about the poverty part of the issue, we’ve realized we must consider the wide divergence in how Americans see what we should do about poverty and who should do it.

Poverty: What is it?

The U.S. Census Bureau’s 2017 estimate put the poverty rate at 12.3 per cent of the population (39.7 million Americans) with the poverty threshold set at an income of $17,330 for a family of two adults and one child. The statistics show the dimensions of a problem affecting all races and ethnic groups . Over 17,000,000 white people, nine

million black people, and nearly 11 million Hispanic people live in poverty. That doesn’t count those living in “near poverty.” Including that metric, some students of the subject say, puts the poverty number at nearly 100 million people, almost one-third of the U.S. population.  

Poverty particularly affects people of color and children. An Annie E. Casey Foundation study reported 33 per cent of African American children, 33 per cent of Native American children, and 26 per cent of Hispanic Children live in poverty. Eleven per cent of white children suffer the same fate. Few would argue this issue does not require attention. But who should address it?  We hear different answers to that question.

A Chorus of Solutions

Deciding who bears the greatest responsibility for reducing or eliminating poverty depends on one’s experience, political orientation, and social outlook.  Consider:

*The religiously focused – Many religious leaders and their faith community followers assign responsibility to individuals and institutions that attack poverty through charitable giving, community outreach, and group action. This philosophy emphasizes making and collecting donations of money, food, clothing, and household goods for distribution through churches, food banks, and private social service organizations. Such organizations deliver goods and services directly to impoverished people. Both liberals and conservatives endorse and support this approach, though many liberals view it as only a partial solution that cannot substitute for governmental action on tough, systemic problems.

*The politically driven – Such individuals, usually, but not

always, progressive in their political orientation, believe we can only reduce poverty through public policy. They favor expansion of entitlement programs like Medicaid and Medicare and believe in a higher government-mandated minimum wage. They argue for a more progressive tax system that puts a greater burden on the rich and reduces in on middle and lower income taxpayers. Better enforcement of civil rights laws and more emphasis on combatting race discrimination attracts significant support among advocates of these approaches.

*The individualists – Often politically conservative, people in this category believe first and foremost that individuals bear responsibility for their own economic circumstances. They advocate limited government intervention in the economy and often resist entitlement programs that directly support low income citizens. Advocacy of income and wealth management training at an early age and a rugged individualism approach to life often characterize the views of many in this group.

No One Best Way

As we’ve contemplated and discussed America’s income inequality and poverty issues, it appears these approaches are not mutually exclusive. We think it unlikely any one of the above orientations – or others—used alone will solve the problem.  For one thing, the problem is too big and involves too many parts of the American economy.

No matter how much charitable giving increases, the structural concerns that go with many elements of America’s poverty problem will eventually overwhelm the contributions. Charitable giving does not, for example, eliminate systemic and institutional racism that condemns people of color to generational poverty and prevents accumulation of wealth.

President Roosevelt signing New Deal

Public policy based solutions also go only so far.Beginning with The New Deal in  the 1930s and continuing through the War on Poverty in the 1960s, we’ve tried government programs as a way of eradicating poverty, yet poverty remains with us. Lots of reasons account for this. Some argue the country

scrapped these programs too soon and they should have been refined, not eliminated. Additionally, other government policies have widened the income and wealth gaps. We also recognize government is a blunt instrument that ill serves people in need of things government isn’t very good at supplying and developing, like individual incentive and work ethic.

Individualists don’t have a monopoly on wisdom on this set of issues either. Learning wealth management, for example, does not address a lack of job skills, or the problems of a family saddled with a mountain of debt and facing poverty because of an illness insurance didn’t cover.

America’s income inequality and poverty problems remain complex issues with no magic bullet solutions.  We’re happy the 2020 candidates talk about them now.  We hope they will make intelligent comments and proposals, rather than just produce noise and platitudes.  A candidate who does that would deserve all our votes.