We Need to Reduce Income Inequality in America. Where Will the Money Come From?

JP Kobel
JP Kobel
Jun 14, 2019 · 12 min read

This is the ‘where’ part of the solution to income inequality.

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Photo by Alistair MacRobert on Unsplash

What is a ‘Redistribution of the Wealth?’

I am not talking about taking people’s businesses or their land and ‘redistributing’ it to the poor and middle class. In some cases, such policies may be necessary for developing economies. This type of ‘redistribution’ policy is not appropriate in our current American economy.

I am talking about changes in the tax law that will transfer a small portion of the wealthiest American’s money to the middle class and the poor. Such policies have been used in America since its founding. Unfortunately, since 1986, we have been transferring too much of the nation’s wealth from the poor and the middle class to the wealthiest Americans. It was no mistake that I used 1986 as the year. Income transfers toward the wealthy began many years before 1986. However, 1985 was when we reached the maximum benefit of transfers to the wealthy. We need to reverse this trend. This reversing of the trend would have a very small impact on the wealthiest Americans, but a huge impact on the quality of life and upward mobility for the poor and the middle class.

Where is the Money?

When the spending power of the middle class is greatly expanded, we will have high inflation if we do not pay attention to our national debt. Failure to pay attention to the debt will negate the benefit of these transfers to the lower income tiers by devaluing their buying power through inflation. We do not want to see America in a position similar to Argentina.

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Consider this debt to equity ratio in a manner similar to your total level of personal debt compared to your net worth.

I am more concerned with the debt to equity ratio since it shows the portion of the nation’s private wealth that would need to be liquidated should the nation’s creditors suddenly demand payment. We would have to sell off over 20% of the national private wealth to pay it. Our debt to equity ratio is the highest it has been since the years following World War II. In those years, America was paying off the costs associated with the New Deal as well as the War.

The graph below shows the national debt as a percentage of Gross Domestic Product (GDP). The idea is that our total public debt equals approximately one years’ aggregate national income. The debt to equity figure concerns me more.

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For an interactive version, follow this link to the Federal Reserve Economic Database (FRED).

Who Has the Money?

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For an interactive version, follow this link to FRED.

The next graph shows the M2 money supply. M2 includes everything that M3 includes except for long term deposits.

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For an interactive version, follow this link to FRED.

Notice how the slope of M3 has been steeper than M2 since before the Great Recession. Long term deposits are for those who can afford to allow their money to stay with the bank. The middle class generally uses short-term deposits.

The key point showing where to find this ‘ocean of money’ is shown in the graph of M2 velocity below:

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For an interactive version, follow this link to FRED.

Velocity is the speed at which money turns over in the economy. If money is just sitting in an account and not being spent velocity is zero. Velocity has been on a downward trend since the 1990s, but the bottom dropped out during the Great Recession. Why are people not spending this huge money supply that we have? Because the money is not reaching the middle class.

The Federal Reserve has been increasing the money supply in an effort to stimulate the economy. These money supply increases have not increased velocity. With the money supply increases disproportionately held in a log jam with the wealthiest Americans, it is not getting spent. The middle class is the great consumption engine that drives the economy due to the greater numbers of people in the middle class. The log jam at the top of the economy that is hindering this money from reaching the middle class has to be broken in order for a true economic recovery to occur. We are going to have to use fiscal policy such as infrastructure projects, supplemental income, and many other programs in order to get this ‘ocean of available money’ to the lower income tiers.

Getting the money to the lower tiered income earners is the relatively easy part. The tricky part is, how are we going to do this without causing inflation? After having increased the money supply so much, inflation is a real concern when the dam finally breaks and these large money supply increases reach the lower income tiers.

How to Transfer this Money to the Lower Income Tiers

We need to correct the impact of this ‘trickle down’ policy by transferring some of the wealth back to the government. Then, the money needs to be used to pay down the government’s debt, to repair and upgrade our failing infrastructure, to fight climate change, to engage in a ‘Modern Trade Policy’, to ensure the health and education of all citizens, and to produce jobs (with a livable wage) for our citizens. By doing these things, we will correct our income inequality problem.

Supplemental Pay — One Example of a Program to Get More of the Nation’s Income to the Lower Income Tiers

For decades farmers have received ‘Payments in Kind’ (PIK) from the federal government for the farmer not to work. See this article from PBS NewsHour. The strategy is to leave certain fields uncultivated in order to maintain minimum prices on the open market. Some of these ‘payments in kind’ have been cut back. See this thread on Quora. There have been some abuses of the PIK program e.g., payments going to people who have never farmed. See this article in the Washington Post for abuses of the PIK Program.

What I am proposing here is for the government to pay a part of the wages for employees in certain industries. Furthermore, I am proposing that the federal government pay a part of the wages to help certain low-paid workers reach a livable wage. This is not something new in America. Currently, both the federal government and many state governments have supplemental wage plans. Examples of current and recent federal wage subsidies are the Work Opportunity Tax Credit, Empowerment Zone Tax Credits, Indian Employment Credit, On-The-Job Training Cash Reimbursement Programs, and the Earned Income Credit. See this article at EmployerIncentives.com for more information on these programs. The government is willing to pay farmers not to farm. Paying a supplemental wage to fast food workers who actually are working seems less like ‘socialism’ than paying farmers not to work.

Supplemental pay, in the form of direct payments to the employer, would be a better way to help certain people earn a livable wage. The minimum wage can not consider matters such as family size. If it did, many people responsible for large families would remain unemployed.

Another problem with only relying only on the minimum wage is that the minimum wage takes a disproportionate amount of money out of the pockets of lower-income consumers. Places like McDonald’s will increase prices to cover the higher cost of labor for their businesses due to a high minimum wage. Supplemental pay would reduce this effect and shift the burden more to those who can easiest afford this higher cost. Imagine the federal government paying $2.00 per hour to a Burger King worker making $10.00 per hour for a total of $12.00 per hour. It may be possible that the price of the Whopper value meal could drop from a $5.00 deal to a $4.00 deal. Supplemental pay, by reducing the cost of labor, is one way to reduce the concern of inflation.

It is important to emphasize, that I am not talking about supplemental pay of $2.00 per hour for every member of the workforce. With a labor force of approximately 150,000,000 persons, that would cost the federal government $300,000,000.00 per hour or about $600,000,000,000.00 per year. I am talking about targeted programs for certain income levels based on household size. This would be an expanded Earned Income Credit. I am also talking about expanded programs that target certain depressed areas as well as certain industries that need special incentives to develop, e.g., renewable energy.

Modern Trade Theory

Understand that we are moving toward an age when cheap foreign labor will not be enough to sustain the cost of imports. This will occur due to increased technological innovation leading to many jobs being automated out of existence. This age of automation is still at least 15–20 years away from having any significant impact. Currently, we need to be engaged in small scale pilot projects involving Universal Basic Income and taxation of robots. These small scale projects will help us know what to do and what not to do in order to make these policies most effective when we do need these policies. Why produce a product 10,000 miles away when it can be produced locally by robots, three-dimensional printers, etc?

Before this age of greatly increased automation, we need to achieve three things in the area of international trade:

1. Ensure that our trading partners meet the same level of environmental regulation, product safety, and worker safety as we do. As a non-trade issue, we need to also use our trade buying power, as the wealthiest nation on Earth, to demand adherence to basic rules of human rights and international law from all our trading partners.

2. We should demand that the employers of all countries that we trade with pay their workers a livable wage for the region in which the employee lives. By doing this, income inequality will be reduced in other countries. Therefore, a larger number of people in other countries will have sufficient incomes to purchase our exports.

3. We should pay our own workers a livable wage through supplemental pay and a reasonable minimum wage law. Supplemental pay will decrease the private sector cost of labor in the United States. Supplemental pay will not reduce these labor costs to a rate that is competitive with parts of the world where the cost of living is much less than in America. However, competition among products depends on more than price alone. Supplemental pay may reduce the cost of labor enough to bring some jobs back to the U.S., or at least, to reduce the attraction of foreign labor for companies considering relocating their plants overseas.

Conclusion

The middle class and the poor is a much larger segment of the population than that of high-income Americans. Money in the pockets of these lower tiered incomes will result in far greater consumption. More consumption leads to more employment. More employment leads to higher tax revenues. By higher tax revenues, I do not only mean in the form of higher income taxes, but also higher sales tax revenue.

More money in the hands of the wealthiest Americans will not result in these so-called ‘job creators’ creating more jobs. We have passed the optimal point with the use of the ‘trickle down’ method. At this point in time, it is more money in the hands of the lower income tiers that will create more jobs. Not only will transfers to the lower incomes create more jobs, but this income along with the proposed programs such as supplemental pay and a reasonable minimum wage will also create ‘living wages’ for all employees.

Where is the money? It is in the hands of the wealthiest Americans and it is just sitting there doing nothing for the economy. Sure, you could say that these savings are being invested back into the economy, yet this is not the case. Much of the money is being invested in companies that are exporting jobs overseas; therefore, this is not an investment in America.

A lot of this money, held by the wealthiest Americans, is being invested in fossil fuels. Regardless of what you may have heard about America being a great ‘oil’ power; the fossil fuel economy no longer benefits anyone when the consequences are considered. With fossil fuels, I am not just talking about climate change — there are many problems with using this ‘scare’ resource for energy. Wanting to be a great oil exporter in the 21st Century is akin to wanting to be a great horse and buggy exporter in the early 20th Century.

America can do a lot better than we have when it comes to our ‘distribution of wealth.’ If the wealthy want tax benefits for being ‘job creators,’ then we need to create tax credit programs for the number of jobs created as opposed to tax cuts for all wealthy Americans.

In the next few stories, I will go into detail about what new taxes should be implemented and what taxes should be cut or eliminated. I do have an LLM (Master of Tax Law) and have worked as a CPA and Tax Attorney, so I do know a little about this subject. I will then show the many necessary programs that could be funded with this money. These programs would not only enrich the poor and the middle class. These programs would enrich all Americans. These programs are how the wealth is redistributed to the lower tiered income sectors. These changes to tax law and these new programs are the ‘how’ of eliminating income inequality.

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JP Kobel

Written by

JP Kobel

I am just your average everyday lawyer/coder/accountant/data scientist/blogger with a left-wing tilt. amazon.com/author/jpkobel

The Startup

Medium's largest active publication, followed by +773K people. Follow to join our community.

JP Kobel

Written by

JP Kobel

I am just your average everyday lawyer/coder/accountant/data scientist/blogger with a left-wing tilt. amazon.com/author/jpkobel

The Startup

Medium's largest active publication, followed by +773K people. Follow to join our community.

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