Where’s the Beef? Income Inequality in America
Of all things, it was this picture of a cute kitty on a Facebook link that spurred a spirited conversation about income inequality and the wealth distribution gap in America. A friend, who is educated in economics and finance, argued that the post was a severely flawed argument. He contended that the consumer price index (CPI) was the most effective measure of inflation. He also noted that there is a “Knowledge, Skills and Abilities” (KSAs) gap in the labor market and the productivity of higher income people is outpacing the lower-income and less-skilled positions. I argued that the labor market is shrinking at a very fast pace and the less-skilled workers are not given the opportunity to gain the KSAs needed to climb the socioeconomic ladder as they once were. There is simply no denying that the structure of job opportunities in the United States has drastically changed and sharply polarized over the past 30 years. The “Occupy Wall Street” movement was born out of this frustration over the lack of equality in opportunity and income inequality. During his 2012 Presidential campaign, Mitt Romney referred to this issue as “bitter politics of envy” and labeled it “class warfare.” Whatever you want to call it, it seems we are stuck in the Orwellian nightmare of 1984 and the struggle between the “Haves” and “Have-Nots” rages on in 2013.
Income inequality is the gap between the rich and the poor. There are numerous factors in income inequality, but the main driver is wages vs. salaries. In the latter, the salaried person earns more because (at least in theory) that person has a higher skill set than the wage earner (just as my friend pointed out). According to research, many people assume that wealth coordinates with talent and hard work—that it is earned and deserved.
Income inequality also involves wealth (as my friend clarified, wealth is another term for savings or equity), equality of the outcome and the equality of opportunity. For a moment, I would like to focus on the equality of opportunity. We live in America, the “land of opportunity”—yet lately it seems opportunity is limited to the wealthy. The problem is a majority of Americans are literally living paycheck to paycheck and can barely afford groceries, medicine and the electric bill—let alone the opportunity to invest. They have nothing left to invest—they are just trying to survive day-to-day. In fact, 14.5% of Americans, including 16.2 million children, struggle to put food on the table. This is not because there is a lack of food in America, but rather because there is a prevalence of poverty.
Other socioeconomic variables of income inequality include: racial inequality, the gender pay gap, wealth concentration, the labor markets, regressive taxation (when the tax rate decreases as the amount subject to tax increases), increasing education costs and the ability to obtain KSAs, computerization and increased technology, corporate consolidations and mergers, corporate tax loop holes and tax shelters and nepotism (favoritism granted by relatives).
There are some who blame income inequality on kleptocracy—a form of political and governmental corruption in which the government exists only to protect the wealth and political power of its officials. As my friend pointed out, asking one group to fund more money for the expense only gives that group more say in how that money is spent. It gives them more power.
Many others blame it on social welfare. They believe that the government reduces the incentive for the recipients to become more productive members of society. In other words, they believe the government fosters an environment for the poor to stay poor. I hear it all of the time in conversations and on conservative “news” channels and talk radio. I’m certain you’ve heard it too (or maybe you’ve even said it), “I work hard so millions of people can sit home and collect welfare”. Certainly more people are apt to seek assistance with growing income equality. The truth is, many of the people seeking social welfare assistance (i.e. food stamps and housing subsidies) do work—they are known as the “working poor” and they are mostly single mothers. This indifference to income inequality has resulted in a change in our societal opinion, moving from the “Greatest Generation’s” notion of “all for one, one for all” to our current creed, “every man for himself.”
The Great Depression basically leveled the playing field of income equality. In the thirty years following WWII, the middle class and the wealthy class grew at a similar pace. In the 1970s, people began to regard the government as bloated and inefficient. This belief led to a grassroots “Tax Revolt.” Supporters of tax cutting measures believed that there was so much fraud, waste and abuse in the government that there was a misconception that cutting revenues (i.e. taxes) would simply cause the government to cut the waste and allow existing services to continue at pre-existing levels. Sound familiar? The 2013 Budget Sequester is attempting the same measures but the cost will outweigh the benefits—just as the 1970s proved. Those who forget history are doomed to repeat it.
Reaganomics and the 1980s
The 1980s Democratic platform emphasized equity of the tax system, highlighting changes in the tax code to help the lower and middle class taxpayers. Contrarily, the Republican platform emphasized a generalized tax cut, with a reduction in top rates—in particular to encourage productivity and saving (i.e. wealth). Ronald Reagan’s 1980 election brought with it conservative policies and changes to the tax code that favored the wealthy and increased income growth for the wealthy only. The economic policies promoted by Ronald Regan was coined “Reaganomics,” which called for wide spread tax cuts, decreased social spending and the deregulation of domestic markets. Sound familiar? It should. It’s the same measures of austerity that the Congressional Republicans are trying to hold us to today. Austerity rarely works; we only have to look to the European financial crisis to understand this.
Research agrees that the 1980s is when the income growth rate began to diverge. The “Economic Recovery Act of 1981” (ERTA) brought the following: a cut in personal income tax with a further cut in capital gains taxes. The number of tax brackets reduced from 14 to 4 and were tied to the consumer price index (CPI). This allowed individuals and businesses to accelerate capital depreciation. Businesses were allowed to “lease” tax credits to other businesses. Estate taxes were lowered. The central theme was its attention to investment, saving and capital formation. It is important to note that spending cuts were never enacted under ERTA. The 1981 changes to the tax code were estimated by the Office of Management and Budget (OMB) to have lost $750 billion to the U.S. Treasury between the fiscal years of 1981 and 1986. As a side note, it is interesting that this is same figure that was repeatedly brought up in the 2012 Presidential campaign.
Another important element of ERTA was that it shifted revenues away from corporations toward personal income, especially wages. Once the rates were cut in 1981, the number of Americans who thought federal taxes were too high dropped and the number of Americans who favored an increase rose, especially if the purpose of the tax proposal was to expand federal programs—the exact opposite of today.
The 1980s debate about taxes de-emphasized macroeconomic policy and focused on microeconomic efficiency. The stagflation of the 1970s and the US’s increasing lack of global competitiveness fostered the “supply side” of economics. This model argued that the pre-1980s tax cut system provided disincentives for work, discouraged entrepreneurship and innovation, discourage capital formation and channeled scarce resources into unproductive sectors of the economy. Sound familiar? Reaganomics maintained that decreases in taxes, especially corporate taxes, was the best way to stimulate a stagnate economy, and that the savings of corporate taxes would “trickle down” to the rest of the economy.
The problem with the 1981 changes to the tax code is that for thirty years, the wealthiest 1% of Americans more than doubled their share of the national income, while the bottom 80% saw their share shrink. The Congressional Budget Office (CBO) recently found that the income of the top 1% of income-earning households grew 275% from 1979-2007. During that same time, the incomes of other working Americans grew just 62%. That 275% vs. 62% income growth is the income growth gap that is the problem.
Wealth Distribution is another problem that has added to income inequality. In 2009, the total wealth of Americans was $59 trillion. According to Harvard professor Michael Norton, the top 1% owns 40% of America’s wealth (i.e. stocks, investments, etc.), while the bottom 80% of Americans owns just 7% of America’s wealth combined. Norton further noted that the top 20% owns 80% of America’s wealth, while the lowest 40% controls just .02% and .01%, respectively. The bottom 40% of Americans have an average income of just $17,300!
Corporate Welfare vs. Social Welfare by the Numbers
Roughly $59 billion is spent on traditional social welfare programs, while $92 billion (approximately 5% of the national budget) is spent on corporate welfare. In 2006, the government spent almost 50% more on corporate welfare than it did on food and housing assistance. Believe it or not, the largest portion of corporate welfare—roughly 40%—goes to the Department of Agriculture, mostly in the form of subsidies. Corporate welfare is the exact opposite of social welfare—so the more money and assets a corporation has, the more government assistance they will get. I learned that the top 7% of corporate farming operations receive 45% of the Department of Agriculture subsidies. This does not help the family farms—it shuts them down and enhances the industrial farming outfits to shut them out of the market. It’s that gap in wealth distribution again—denying opportunity. Another 15% of Corporate Welfare is spent subsidizing coal & oil companies who are reaping record profits.
For a model of how things work in America, we’ll use the Walton Family, the owners of Walmart. The Walton Family (one family!) owns more wealth than the bottom 40% of Americans combined. My friend argued that the Waltons have so much wealth because they earned it, they invest their money, they didn’t blow every dime they made and their KSAs are much more valuable than their employees’. The truth is, Walmart is one of the worst offenders of corporate welfare—they alone collect more than $1.008 billion dollars in nationwide subsidies, and 244 Walmart stores around the country received over $1 billion in government favors (i.e. government-funded recruitment and training of employees, targeted tax breaks, housing subsidies for Walmart employees which allow them to be paid at significantly lower wages). Current research revealed that Walmart drives down wages $4.7 billion every year. The cost of closing “Mom & Pop Shops” that cannot compete with their prices is not factored in this discussion. The Walton Family received a federal tax cut of $91,500 per hour in the 2004 tax year—I’ll wait a minute while you let that sink in. In that same year, they contributed less than 1% of their wealth to charity but spent $3.2 million in political contributions lobbying conservative causes. It is also interesting to note that the two Walton women make $18 billion per year while the Walton men make $18.2 million per year, there is even a gender pay gap in one of the wealthiest families.
Walmart workers and Walmart customers consist of the same demographic—they are overwhelmingly low-income females struggling to make ends meet. The federal poverty rate for a family of three (a single mom and her two children) is $17, 568 per year; the average Walmart employee’s wages are $13,861. They are the working poor and they are no different than the other 79% of working single mothers who head the household. The reliance of a Walmart employee on public health programs cost the US taxpayers $456 million annually and that amount doesn’t include adult dependents that are uninsured. Approximately 19% of Walmart employees lack insurance and the cost of this uncompensated care costs US taxpayers $202 million annually. One would think that a company as wealthy as Walmart, which receives so much in federal assistance annually, would invest in their employees—invest in healthcare to keep them healthy, invest time to boost their knowledge, skills and assets that will benefit the company.
The obvious aversion to social welfare programs is that taxes have to be raised to help fund such programs, which lowers another person’s standard of living. People believe that social welfare programs reduce the incentive for the recipients to be productive members of society. In 1996, with bi-partisan support, President Bill Clinton signed welfare reform into law. This “Work for Welfare” reform required recipients to engage in job searches, on-the-job training, community service work as conditions for receiving assistance. Another huge element to the 1996 Welfare Reform was that a person would only be allowed a lifetime limit of 5 years to receive any federal welfare (i.e. Temporary Aid for Needy Families, or TANF). In 2006, spending for TANF was $26 billion, $25 billion was spent on low-income housing and rental-aid and $8 billion was spent on public housing projects—combined, this accounted for roughly 3% of the national budget, which is less than what was spent on corporate welfare that same year. This figure doesn’t include Medicaid because if we considered any service paid for by the government as social welfare, then we would have to include public roadways built to individuals’ homes too.
I’m not saying there isn’t fraud and abuse going on in social welfare programs, and I believe that every able-bodied individual should work, but I refuse to discount those who are returning from war and can’t find a job or those who work 50-60 hours per week at minimum wage (the working poor) as “users who suck of the government tit.” In fact, I’m more than happy to contribute to their need. What I am against is a large corporation that collects billions in subsidies and favors and passes absolutely nothing on to the employees who work long and hard hours to make the company successful. When I hear people complain about welfare recipients, I usually say, “Don’t worry about them. Worry about the corporate welfare, because, while a person can only collect federal welfare for 5 years, there’s no limit on corporate welfare.”
The more I thought about this subject, the more I realized that people born in the late 1960s and on really know no different. The growing division in income equality and wealth distribution has grown with us into adulthood. However, it has not escaped me that in America, the middle class is barely distinguishable from the working poor. I remember growing up in a middle class, blue-collar town; my 10-year-old daughter, sadly, knows none of this. People are either rich or poor in her eyes, and regardless of which they belong to, they are invaluable because they are her neighbors. Wouldn’t it be wonderful to see a person’s worth through the eyes of a child everyday? My favorite author, F. Scott Fitzgerald, wrote in my favorite book, The Great Gatsby, “Whenever you feel like criticizing any one…just remember that all the people in this world haven’t had the advantages that you’ve had.”