How Do We Fix Wealth and Income Inequality? — Part 1

The Problems

It seems more and more people are starting to become aware of a big problem in the United States — income and wealth inequality. The top 5% control most of the income and wealth in the country. Meanwhile, middle and lower classes have seen their incomes stagnate or even decline. There are a few different things to touch on regarding this topic.

Why has this inequality come about?

When looking at the income and wealth gaps, it started to increase quite significantly in the 1980s and that trend has continued to this day. What happened during that period was a decrease in tax rates and reduction in regulations placed on businesses and banks. Productivity continued to increase as it had the previous 50 years but now the extra income generated was going to the people at the top of the company instead of the workers. The gap continued to increase due to the destruction of labor unions, outsourcing, and further deregulation such as the repeal of the Glass-Steagall Act through the Gramm-Leach-Billey Act in 1999.

The role of technology and automation cannot be forgotten either. I actually think that this factor has been overlooked quite a bit and has played a much bigger part than people realize. Jobs can be done more efficiently with less human labor. We may be more productive than ever, but it’s not just because the workers are more productive. Automation gets a lot of that credit. The result of that however is the loss of jobs and total income going to the workers. That extra profit is going right to the executives and higher-ups.

Another way the top 5% or 1% has increased their wealth and income dramatically is through financial investments and such. Stock markets reached record highs before the crash in 2008. Since then, they have recovered and set new records. Almost all of that new wealth created has gone to the top 5%. Many Americans lost everything in the Great Recession. They lost their jobs, lost their houses and lost most of their assets in the stock market. Meanwhile, banks and bankers were bailed out by the Federal Government. The banks acted carelessly for years by providing terrible mortgages and then packaging them and selling them as securities. The government helped them by providing no oversight and allowing banks to police themselves — a horrible idea since bankers are inherently greedy.

What is happening now?

After the financial crisis, you would think that things would have dramatically changed in the United States. You would expect major policy changes in regulations on banks, massive job programs enacted, and a more stable economy. I haven’t seen it. Banks are going right back to what they were doing before the crisis. Sure, there aren’t as many subprime mortgages, but they are still involved in risky derivatives and essentially policing themselves. The Dodd-Frank act still has no teeth and has done nothing to help the situation.

Tax policy has changed only slightly over the last few years. Income tax on higher income Americans reverted to the levels during the Clinton administration and capital gains taxes also increased slightly on some. I understand the decision of policymakers to hold off on increasing taxes due to the recovering economy, but the income tax on high income earner would of not have had a major effect on the economy but would have brought in more revenue, which was sorely needed.

Another important factor is the American culture itself. We love to spend money! It’s what we’re known for. The problem is that we don’t make bring enough money home from our jobs to buy things so instead we borrow the money to do it. Companies outsource jobs to a country like China to make products for us to purchase. Then China will then go and buy U.S. treasury bills so that we owe them money. They are the savers and we are the spenders. This is a terrible cycle to be stuck in. We can’t keep borrowing more and more money and expect everything to be okay. We’ll never be able to repay our debts if they are no jobs created here.

What can be done?

Some of my ideas for fixing this major problem may seem radical but a problem like this is not easy to solve. Changes need to happen in the area of tax policy, jobs, government regulation, social programs, and education. Stay tuned for my suggestions in Part two!

Read Part Two here.