Income Inequality

To date, I have listened to all forms of social commentary on this topic, controversial and politically sensitive as it is, and decided to address it as a historical perspective from three angles.

(i) Definition, Causes and Statistics

(ii) Rising Costs

(iii) Obama: does he have a solution?

(i)Warren Buffett says humbly: “There’s class warfare all right, but it’s my class, the rich, and we’re winning.”

The top 1% of earners, in 1973, collected 7.7% of all US income; by 2013, that percentage had grown to 19.3%. Even more astounding, the top 10% of earners collected almost half the national income (48.2%), the greatest disparity between the rich and the rest of the American population since the Roaring Twenties. Note: this disparity does NOT include liquidable wealth/assets.

Harlan Green, editor of PopularEconomics.com, wrote that “we are returning to a society of violence and deprivation and record inequality that are the earmarks of a broken social contract.” Paul Krugman, NY Times columnist calls this gap the “great divergence.” Nobel Prize-winning economist Joseph Stigletz says that Americans underestimate:

*The rate at which it has occurred

*It’s economic effects upon society

*The ability of government to affect it (see comments on Obama further on)

Stigletz also remarks that this inequality has become less noticeable, probably because the “haves” and the “have-nots” do not regularly mix. (socially) US income inequality in developed world contexts trails only Chile, Mexico and Turkey.

Even the wealthiest Americans are concerned about the fairness of the income disparity in the US, 62% thinking (in a 2012 poll) that the “differences in income in America are too large.” They favored cutting compensation of mutual fund managers and CEOs while raising salaries for both skilled and unskilled factory workers. Buffett dogma speaks to tax credits for all businesses, private sector, of course.

Computerization, outsourcing and automation have eliminated many of the jobs upon which Americans have historically relied. In the 1960’s, the largest employers were US Steel, GE, and Firestone. By 2010, retailers like Walmart, Target and Kroger were on top, Walmart employing as many as all three 1960 firms combined. Service industries have exploded, union memberships have dwindled, and personal incomes and tenure lowered. More people are making less money.

Shareholders in multinational corporations are demanding better profits..(historically). One source of extra margin is labor costs, those typically found offshore. CEOs and CFOs are thus under pressure to react. Our mutual fund performance, ironically, can reflect such manoeuvers, and yet we complain, in patriotic context, about keeping jobs here.

(ii) The cost for this anemia in our system is both financially measurable and societal. Bipartisan agreement appears to be even re: tax reduction, infrastructure investment, technical training, and modification of healthcare systems, the latter continually under fire. Education remains a thorny issue for all; the US System rank behind such countries as Finland, South Korea and Germany when comparing student performance on math, science and reading. The same Pearson report also links higher scores with future economic growth. Republicans rant about States control over curriculum..see Jeb.

The costs we don’t see lurk under the employee/boss surface. The CEO’s salary goes through the roof and workers get pay cuts, what will happen? They need to work, but can they reject pay cuts by working less hard and not caring about the quality of what they are producing? Then the whole efficiency of the firm is affected. Enlarge this scenario 10x, and the nation’s industrial product output is compromised.

(iii)Obama; what’s he doing about this? It appears these problems are compounded by his inability to address them.

There seems to be a growing anger and alienation among Americans who are becoming convinced that the American dream is a mirage. It is no longer this article of faith that anyone who works hard and plays by the rules can get ahead, according to Mort Zuckerman, editor in chief US News and World Report.

Millions were exhilarated by the rhetoric of candidate Obama. “Yes, we can!” (Si, podemos.) This exclamation mark has been supplanted by the question mark, “can we?” Today, roughly 50 million people, or 1 in 6 Americans, live at or below the poverty line, while median annual household income has virtually not budged in the last decade.

What has happened has no single explanation. Lower and middle jobs have evaporated within globalization, and technical innovation, comparable to the industrial revolution in the late 1800’s. We have regressed in social mobility and income equality. Obama seems to have lost enthusiasm for the “race-to-the-top” ideology, one that pre-existed in the 40’s and 50’s in prideful states to tackle teacher quality, stimulate experimentation, and to reduce union restrictions….he only has the appetite, given his inability to create relationships in Congress, to do what he can via executive order.

He missed the opportunity in 7 years to tackle baby boomer retiree pressure on the economy, simply hoping the problem would pass like a bowel movement. Jon Cowan from the Think Tank “Third Way” wrote in the Wall Street Journal last year:

“In 2030, a typical couple reaching the eligibility age of 65 will have paid $180,000 in lifetime Medicare taxes, but will get back $664,000 in benefits.”

Conclusion: we can’t solve our puzzle simply by taxing the wealthy; you don’t want to punish success. We will have to protect Social Security by raising the payroll tax, or the age-cap..or something similar, allowing those in the lower half of the economy to become members of the middle class. Can this formula succeed with minority neighborhoods, where family dysfunction can trump legislative and communal effort? That’s another article.

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