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.                    

An American Political Agenda for 2018 and 2020: Six Suggestions for the Upcoming Election Cycles: Part 5

We’ve suggested four areas on which 2018 and 2020 candidates should focus for bringing America back from its current morass (Read Part 4 here).  We’ve written about restoring the dignity of the Presidency, promoting racial reconciliation, addressing income inequality, and formulating an intelligent foreign policy rooted in our values and the shared interests of the United States and its allies.

Now, we turn to the domestic agenda candidates for Congress and the White House should press if they want to improve the lives Americans lead.  We could propose an endless list of policies and programs, but we’ll limit the discussion to six areas the next few Congresses and the next President have to get right to make America truly great.

Public Education   
The three of us grew up and into the middle class through public education.  A strong America depends on a strong public education system.  Private schools, which not everyone can afford, have their place in American education, but a vibrant economy and a society in which people believe they can improve their lives depends on continuing investment in and a commitment to public education.  For America to remain a world leader the nation must produce a broadly educated citizenry. Public education remains the most proven vehicle for achieving that.  

Infrastructure   
Democrats and Republicans sort of agree on this.  At least both seem to understand the need for rebuilding crumbling roads and bridges and investing in navigation projects, airports, and other transportation facilities.  The disagreement lies in paying for it.  Candidate Trump claimed he would propose an infrastructure package.  His administration floated, but hasn’t pushed in Congress, a tax credit scheme that would mostly benefit Trump’s rich friends.  A meaningful infrastructure program requires putting significant federal dollars into the kinds of projects America once specialized in building.  Trump and Republicans often claim business tax cuts will pay for themselves by spurring economic growth. Historically, tax cut have not had that result.  They just increase the deficit.  Prior experience suggests Infrastructure spending, however, will pay for itself in jobs, lower public and private maintenance costs, and improvements in everyday life.  It’s time to quit talking about this and do something about it.

Affordable Housing   
Recent books like Richard Rothstein’s The Color of Law have emphasized the connection between housing policy and the country’s seemingly intractable economic and racial problems.  It seems important now to develop policies and programs that insure Americans of all races and ethnicities access to quality, affordable public and private housing.  This area of federal policy has stagnated in recent years under Democratic and Republican presidents.  The next group of people in charge, in Congress and in the White House, must renew the conversation about what programs and policies will give more Americans access to affordable housing while stimulating the construction industry.  The next Housing Secretary should understand and appreciate the nation’s history of socioeconomic and racial discrimination in housing and how local, state, and federal government policy, with the help of the building trades, contributed to the problem. Perhaps the next President can involve people like Professor Rothstein in selecting a HUD Secretary.

Immigration Reform   
Perhaps nothing causes as much emotional upset among Americans today as immigration policy. The issue brings to the surface the culture war over who determines domestic policy, illustrating the difference in a world in which people of color have a say in such decisions and the way the world once worked.  This issue divides the country in to red and blue.  Red America, generally, wants to punish undocumented immigrants and favors drastic measures, like a wall, to keep out immigrants from certain countries. Blue America, generally, wants a path to citizenship for undocumented immigrants here and opposes draconian border security measures.  The challenge lies in finding a sensible middle ground between those poles.  We favor a more welcoming policy toward immigrants.  Any comprehensive immigration reform proposal must provide a path to citizenship and border security that controls the flow of illegal immigrants.

Energy and Emissions Policy   
They go hand-in-hand.  We need more, not less, public investment in solar, wind, and other forms of clean, renewable energy.  These industries will produce more good jobs than we can save in the coal fields.  The global movement toward such energy sources won’t stop because of the Trump administration’s obsession with coal.  The clean energy train is pulling out of the station and the United States needs to get on board.     

Tax Policy   
The “tax reform” proposals now being rushed through Congress by Republicans come nowhere near the kind of tax policy we need to move our economy forward, give relief to those who really need it, and insure everyone pays his or her fair share. The “loopholes” being closed – deductions for state and local taxes, reduced ability to deduct interest on student loans, etc. – hurt middle class people, not the wealthy.  Meantime, too many ways still exist for corporations and wealthy individuals to hide taxable income offshore and in other ways that keep the tax system unfair.  The next Congress and the next President need to correct that situation.  Involving scholars and observers like former Labor Secretary Robert Reich and journalists Thomas Friedman and Michael Mandelbaum in the process wouldn’t hurt either.   

We could talk about lots of other things.  But, we think we’ve offered a good starting point.  

What do you think?