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Income Inequality in the US: Green Bucks of Wrath

Category: Financial News

Income inequality refers to an income distribution in which a smaller group’s share of the total income is larger than the share of the larger population. For instance, in the United States where income inequality persists, the top 20% of U.S. households accounted for more than 50% of the total US household income in 2011.

Although income inequality varies from state to state (Texas having the biggest gap while Maine registered the lowest gap), one thing is certain – the disparity of income between the wealthiest Americans (the top 1 to 5 percent in economic status) and the rest of the nation’s population persists, and is becoming wider.

As of 2006, the United States had one of the highest levels of income inequality among similar developed or high income countries. And how does the US fare compared to its immediate neighbors? The landscape is even worse. The 2013 income inequality report by the UN Economic Commission for Latin America and the Caribbean shows that income inequality in the United States exceeds the rate of Latin America, long viewed as region with the worst wealth inequality in the world.

The explicit scenario is that the wealthiest 20% in the U.S. earn 16 times more than the poorest 20%, or a 16.0 gap. Countries who were often hit for unsound economic policies like Nicaragua and Argentina now fare better than the U.S. where income disparity among the population is concerned.

FACTS AT A GLANCE:

  • The rich have gotten much richer in the US, while just about everyone else has had very modest income growth.
  • Most of the growth has been between the middle class and top earners, with the disparity becoming more extreme the further one goes up in the income distribution.
  • It appears that going “from rags to riches” is relatively rare among Americans today; and instead, where one starts in the U.S. income distribution greatly influences where one ends up.

WHAT IS HAPPENING

Though economists and scholars differ on the root of income inequality, one factor always crops up in cause-effect discussions: wage stagnation for American laborers, beginning in the 1980s (a period of successive financial crises) and persisting up to this day.

The 1980s was a challenging decade for the U.S., with severe recession hitting the nation in 1981 due to tightening of the money supply to counteract the very high inflation rate at 13.5 percent. Unemployment hit a historic 7.5 percent in 1980 and rose to an all-time high of 10.8%, the highest since the Great Depression. While savings, loans, banks, and other financial institutions recovered after the dark decade, the gloomy employment scenario in the US would become a persistent problem.

Fast forward to the present, the U.S. unemployment rate remains the Waterloo of every U.S. administration since the Reagan era of the 1980s.

In the words of Forbes‘ Robert Lenzner, “The current job-creation numbers are meaningfully below the level we might expect during a period of record corporate earnings and the reaching of new peaks in the major stock market indices.” Statements such as this simply underline the worsening income inequality in the U.S., which seems to thrive behind rosy economic developments like stock market gains and foreign direct investments.

EMPLOYMENT

Poor and middle class wages in the U.S. stagnated from 1980-2011, with the periods between  2007 to 2009 among the painful blows to the American working class. This shows that even though there is some kind of recovery that took place after every crisis, employment never rebounded in full.

The US employment sector is unable to make a full rebound after the economic crisis in the 80’s.

The U.S. employment sector is unable to make a full rebound after the economic crisis in the 80’s.

New businesses may have created 95,000 new jobs in March 2013 but many people believe that most of those are part-time jobs. Data showed that about half a million Americans still left the workforce in March, most of whom were  unable to get full-time employment.

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This fact supports the observation that old economy jobs are disappearing. The new and additional jobs heralded by labor agencies mostly refer to lowly paid service jobs like wait crew, retail clerks, bartending and social assistance works, with little impact to the “new economy.”

To make matters worse, the very recent controversy involving the “beautification” of unemployment rate by the Obama administration, who released a 7.6 percent data as opposed to 14.3 (or almost double) “real unemployment rate” as revealed by Forbes, prompted public outcry especially among  the American working class.

TAXATION SYSTEM

Another factor in the intricate income inequality web is the U.S. taxation system. To clarify things beforehand, tax, for all what’s said about it, is the bloodline of an economy. Everybody should and must pay their fair share of tax to the community (government), rich or poor. Many rights, from exercising leadership and fellowship to engaging even in bickering about governance (and income inequality) is tied to the responsibility of paying one’s taxes.

Suffice to say that tax payments do not select based on amount of wealth, but the minimum qualification to give back based on a standard calculation of income. However, in the case of the U.S., the taxation system, though exhibiting the standard taxation procedure, seems to favor the wealthier Americans, and with this, we mean those that own businesses and manage capital and employment.

In the recent U.S. budget cuts, taxes are not raised but spending is reduced. This means high-income families and business owners continue to enjoy the 2001 tax cuts granted by the Bush administration, to avoid entrepreneurial de-motivation, pulling out of investments, and slowing down of businesses.

A recent study by the World Bank has analyzed the effect of U.S. tax reforms on income distribution from 1978 to 2009 and found out that the Bush-era tax cuts had an inequality-increasing effect. The research further recommends that if these tax cuts are not withdrawn and growth that should have been transferred to the poor do not materialize, income inequality will significantly increase putting at risk “the solidarity among U.S. citizens.”

SHIFT IN VALUES

Inequality imposed by greed and materialism and a culture that allows the few to suck money out of the working public is also a factor in the worsening wealth gap. Shifts in values that promotes aggressive commercialism especially in media encourages new norms in money outlooks and views, perpetrating avarice by those who have so much already. Those in the financial bottom display a willingness to succumb to financial re-engineering (easy credit, instant loans, pay-later plans and the like).

The “heinous” gap in income between Wall Street executives and the ordinary laboring American prompted the series of Occupy Wall Street (OWS) protests across the US in 2011, organized by those against the culture of financial greed and corruption in the U.S. Although the protests turned low key, it helped bring the issue of income inequality and fairness forward to international consciousness and American political agenda.

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EFFECTS

There are those who pronounced that income inequality has no clear relationship with national prosperity. Some U.S. policy makers outwardly dismiss inequality and focus instead on overall growth. They say some income inequality is necessary to encourage innovation and entrepreneurship, and people work harder in response to some government policy incentives. But big, shameful income gaps cannot justify national economic agenda.

  1. Threat to upward mobility and the old American dream. Imagine talented, energetic youths struggling with access to education with their labor-weary parents resenting the meager items in their grocery bags, huddled in a cramped social housing complex. When the future is compromised and the very physical bodies are threatened, GDP and national economic indicators do not matter one bit.
  2. General discontent and dissatisfaction. Income inequality is damaging to a person’s sense of justice. Those who do backbreaking work without feeling the benefit of gradual, fair-paced growth is now doubting the old American Dream. For them, the adage “opportunity lies before everyone who works hard” is far removed from reality.
  3. Damage to health and lifespan. Richer (and better-educated) people live healthier and longer than poorer people. Based from the National Longitudinal Mortality Survey, people whose family income in 1980 was greater than $50,000 (top 5 percent of incomes in that period) had a life-expectancy at all ages that was 25 percent longer than those in the bottom 5 percent (family income was less than $5,000).
  4. Damage to national economy’s stability and growth. Professor Raghuram Rajan of the University of Chicago’s Booth School of Business said that in a democratic economy like the US, people don’t really accept weaker spending power and compensate by easing credit standards and encouraging the poor to borrow. With loan payment failures and the like, it will then become a cycle of recession all over again.
Social housing programs reflect the low living standards and dissatisfaction of America’s poorest 20 percent.

Social housing programs reflect the low living standards and dissatisfaction of America’s poorest 20 percent.

WHAT CAN WE DO

Policy reforms is high on the solutions list, but how can inequality reforms take place when some policy makers themselves continue to espouse the national benefit of income inequality and its motivating effect on labor, savings and business? There is a need to recognize income inequality for what it really is, especially in the national political level.

Where inequality hurts the most, meaning taxes and employment, various solutions have also been proposed. The U.S. may well take a look at how developed countries tax their rich. French president François Hollande advocates for a top income-tax rate of 75% for the wealthy, while in Portugal and Spain, new surcharges on the rich are just part of the national austerity programs.

Some retrospection may also be in place, especially the lessons from previous crises of the 1980s, where sustainable economic reform is possible only when the benefits are widely shared.

Finally, remembering, thinking, and planning are not any good unless the next step is undertaken: for a firmer and more decisive hands to take the responsibility and enforce the iron-clad reforms as soon as possible.

Conclusion

While income inequality is not confined to the U.S., with rich countries like Britain, Canada, Sweden and even China exhibiting wide inequality gaps as well, the American income inequality stands out for its chronic, continuing, and worsening negative effects. There is a need to act fast on the solutions proposed as every tick of the clock may mean another frustrated and disheartened American losing the faith in the great American dream, succumbing to slack, non-productivity and apathy for their fellow Americans and for the nation.

By Nestor Gilbert

Senior writer for FinancesOnline. If he is not writing about the booming SaaS and B2B industry, with special focus on developments in CRM and business intelligence software spaces, he is editing manuscripts for aspiring and veteran authors. He has compiled years of experience editing book titles and writing for popular marketing and technical publications.

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