“There’s class
warfare alright, but it’s my class, the rich class, that’s making war, and
we’re winning.” Warren Buffet, 3rd richest man on Forbes
Richest Person List
“Let
me tell you about the very rich. They are
different from you and me.” F. Scott
Fitzgerald
Rich and poor America are drifting
further apart, and the standard of living is eroding for the vast majority of
Americans. Not since the pre-Great Depression 1920’s have the very top received
such a large share of the nation’s income. This trend is detrimental to the
long-term stability of this country and all its citizens, including the top 1%
as it reduces opportunities that were previously available. It is not irreversible; however, it requires
an immediate response.
Over
the past thirty years, the average household income of the top 1% (assumed to
earn over $250K/year) compared to the bottom 90% has tripled from 14:1 to 42:1.
The median US family income has grown only at an annual rate of 0.36%
while the top 1% realized a 278% aggregate increase during this period. Joseph Stiglitz, winner of the Nobel Prize in
Economics, notes in his recent book, “The Price of Inequality” (2012), that
“The United States has the highest level of inequality among advanced industrial
countries…[and]…We are now approaching the level of inequality that marks
dysfunctional societies…including Iran, Jamaica, Uganda, and the Philippines.”
As a result, the US middle class has shrunk, and the American tradition of
equal opportunity is becoming a myth. As
income inequality increases, the ability to improve upon ones economic
condition decreases. Stiglitz concludes that in America, a person’s success
depends more on parental income than in other economically developed countries.
Economists
have identified numerous causes of America’s increasing inequality. The
increasing regressive nature of the US tax system has benefited the top 1%
disproportionately. Taxes are now the
smallest percentage of US GDP since 1950 due to the Reagan and Bush tax
cuts. Current tax rates are
significantly less progressive, impacting those with lower incomes more. For example, the top 1% benefit from 71% of
all capital gains (because the lower economic classes have few capital assets,
if any) which are taxed at only 15% (compared to the top marginal rate of 35%
for salaries and wages which is virtually all of the lower class income). Lower wages over the past thirty years have
caused greater inequality. The minimum
wage has declined by almost 30% (in constant dollars), and union membership
(which has the effect of raising wages of both union and non-union members) has
dropped 40% to less than 12%.
Globalization has often been a “race to the bottom”. Industry often relocates to the lowest cost
producer, leaving low-paying “service” jobs behind. Deregulation and less supervision have
allowed the financial sector to increase the economic inequality through
predatory lending, excessive credit card fees, and complex and high-risk
“financial innovations” that few understand.
Historically,
the economic meltdowns in 1929 and 2008 and the economic calamity that followed
were preceded by sharp increases in inequality.
In contrast, from the 1950’s through the 1970’s, a period of economic
stability and growth, inequality declined.
Stiglitz argues that “inequality
gives rise to instability, the instability itself gives rise to more
inequality.” Economic inequality causes money to go from those who will spend
it (the lower economic classes) and create further economic demand to those who
are well off (the top 1%) and cannot spend it all. As the cycle progresses, the lack of demand
causes increased unemployment and those without go further into debt to obtain
necessities.
Economic
instability leads to social instability.
As income inequality increases, there is reduced contact among all
Americans, and there are fewer shared experiences. The 1% may live in gated communities and send
their children to private schools. The
wealthy become less willing to spend on common needs; they do not depend upon public parks, schools, medical care,
research, or security. They can purchase
their own. Consequently, government
investment declines. Studies have also
shown that increasing income inequality correlates with increasing crime rates,
and decreasing trust, health care, and community involvement, such as voting
and volunteerism.
Further
challenges to social stability arise from the erosion of the United States’
tradition of fairness and equal opportunity for all. A very small segment of our community has
growing and disproportionate power that benefits them and adversely impacts the
vast majority. Americans are realizing
that they were duped by those advocated the Bush and Reagan tax cuts. Contrary to the continued assertions of
some, Alan Krueger, Chairman of the Council of Economic Affairs, confirms “that
there is little empirical evidence that reduced tax rates increased income
growth, jobs or business formation.”
They were successful, however, in turning budget surpluses into
record-breaking deficits that add to the national debt. The decade after passage of the Bush tax cuts
exhibited the lowest average annual growth after WWII – even if the years after
2007 (when the economy imploded) are omitted.
For the GOP presidential nominee to identify the top 1% as “job
creators” who need even greater tax cuts is sophistry and ignores history. In response to the 2008 financial crisis, the
US spent far more to bail out banks and maintain banker bonuses than to help the
unemployed – people who lost their jobs because of financial institution
irresponsibility.
America
needs a vibrant middle class. It is the
purchases of goods and services by this group that stimulates demand and
investment, thus increasing employment and wages. The tax cut for those earning over $250,000
should not be extended again. There
needs to be shared-sacrifice. The lower
classes have seen incomes remain flat, at best, while government programs that
directly affect them have been slashed; yet, the top 1% has escaped economic
decline. It is absurd to argue that a
tax rate increase to 39.6% from 35% will provide a disincentive for the high
income wage earners. The United States
economy did extremely well with less inequality and debt when the top rate was
70% as it was before Reagan took office, and as noted above, the tax cuts have
not yielded the economic cornucopia that was promised (and is still being
promised) to promote their adoption.
Research shows that the top save approximately 20% of their income and
the bottom economic classes spend all their income and more for
necessities. Consequently, economic
demand is lower and employment is reduced than if the bottom had more to spend. Stiglitz estimates that if the top saved only
15% instead of 20%, the unemployment rate would be just over 6%, instead of the
current 8+%. The current capital gains
taxation structure requires change, as well.
Think about it; is it in society’s interest to tax the income of
investors and speculators at a lower rate (15%) than a wage earner (up to
35%)?
Just
as was done in the Progressive Era and after the Great Depression, we need to
temper financial markets, and increase social and economic stability through a
strengthened Social Security program, minimum wage laws, and affordable health
care. Privatization is not always the
answer. Unlike government employees,
corporate executives are paid to generate profits; the private sector should
not be relied upon to regulate themselves or handle certain activities when
their profit-maximization incentives are not aligned with the public
interest. The increasing wage gap
between those with a college education and those without and the migration of off-shore
of technical jobs, provide ample evidence that greater efforts must be made to
provide affordable education. Globalization
is here to stay, but it has to be managed better. Operating unchecked, the prevailing wage for
an unskilled worker in the US would be that of a similar worker in China. Finally, the political system must be made
more responsive to the concerns of all citizens, not just those with the
largest bank accounts
Horatio
Alger with his rags to riches story is not dead; however, he needs immediate
and heroic efforts to get off life support.
