Is the growing income gap a problem or an opportunity?

IMAGE: Flikr (BY-SA devendramakkar)

RANCHO SANTA FE, Calif., April 21, 2014 – We are a Nation that embraces diversity — at least when it comes to income levels. There is a growing gap between the “haves” and the “have nots” in our Nation. Some choose to ignore it while others choose to exploit it.

The problem is that nothing is being done to address it.

The income gap between middle class families and the wealthy has been widening for nearly 50 years. In addition, the middle class has recently been shrinking into to an ever-expanding welfare-dependent population.

In a 2013 research paper, Emmanuel Saez, an economics professor at UC-Berkeley, examined the problem of income diversity based upon 100 years of IRS data. He did something rather unique in his study: He applied the same definition to income over the entire period so his data would have a baseline for comparison.

It is unfortunate that this small step is considered to be so unusual. However, as our political Parties have routinely changed definitions to critical economic terms to better serve their “messaging,” it is refreshing to view data that is factually accurate rather than politically relevant.

The report showed that, in 1928, the top 1 percent of income earners received 23.9 percent of all pretax income, while the bottom 90 percent received 50.7 percent. Then, the Depression and World War II struck, shaking the very foundation of our economy.

As the end of WWII approached, the income percentages reflected greater parity. The top 1 percent dropped to 11.3 percent of all pre-tax income (less than half the 1928 percentage), while the bottom 90 percent received 67.5 percent (up approximately one-third). This suggests that the middle class had become more accessible and upward mobility was on the rise.

The ratio essentially remained stable for the next 30 years. It wasn’t until the mid-1970s that the gap began to grow. The rich became richer, the poor became poorer, and the middle class began to erode.

The Republican mantra suggests that the scale of the variance is immaterial and only reflects the natural operation of a free market which, in turn, rewards those who work harder. Democratic devotees argue that the trend is bad, disproportionately rewards the rich, and treats less-fortunate individuals unfairly.

In reality, these arguments are seriously flawed. They are little more than obfuscations designed to pander to the stereotypical positions the Parties have conditioned their core constituencies to believe.

The fundamental Republican hypothesis is predicated upon the misconception that we are actually functioning in a free market environment. There are about a million pages of agency regulations that would suggest our markets are far from free. While a significant portion of these rules operate to protect our general welfare, many others are politically based and principally operate to generate income for the Government, provide competitive advantages to certain core constituencies, or assuage other influential groups that provide political support.

The Republican Party also argues that the gap doesn’t matter. For a group that tends to oppose economic subsidization in any form, it’s amazing that an ongoing expansion of the impoverished class doesn’t seem to be of concern. Cutting Government expenditures won’t make the gap go away.

It’s also difficult to reconcile the Party’s anti-subsidization stance with its reluctance to strip away the subsidies it favors in the form of tax credits and deductions for the special interest groups that fund its campaigns.

Similarly, any assertion that the Republican Party is the bastion of fiscal responsibility flies in the face of what transpired by the most recent Bush Administration, which surpassed the National Debt of the prior 42 Presidential Administrations combined.

Of course, the Democratic Party is no more consistent than its counterpart. Its altruistic virtue fails short when compared to reality.

While the Democratic Party may claim to abhor the gap between the middle class and the rich and may allege that they care about the poor, its record is rather sparse on either count. Since the gap began to widen in the mid-1970s, the Democratic Party has controlled the Senate 50 percent more of the intervening years than has the Republican Party and 86 percent more with regard to the House. In addition, it has controlled both chambers of the Legislative Branch as well as the Presidency twice as many terms as has the Republican Party during that period.

If the Democratic Party is so keen on closing the gap, why has it failed so miserably when it has had a dominant control over our Government? Why do minorities and women continue to suffer from lower wages and higher unemployment? Why haven’t educational opportunities in minority communities improved or incarceration rates dropped? How does it justify the “gap” between what it says and what it does?

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  • Eric N Keya Erickson

    This is probably the best summary of the income gap problem, and what to do about it, that I’ve ever read. One thing you didn’t mention was inflation, which further exacerbates the problem of the lower income earners. My father retired in the late 80’s after 30+ years with the same employer. About the most he ever made in a year was $36,000, as mid-level management. We always had plenty, went on vacations regularly, the house was paid off on time with never a missed payment, etc. This last year, with earnings shortened due to an injury, I made slightly more than that amount, but was barely able to make ends meet, and needed some state assistance to make it through the hard times. An online inflation calculator estimates that I would need to make around $69,000 to have the same earning power as my father did 25 years ago. Yet according to the chart at the top of the column, I would have to move from the fourth 20% to the second 20% to achieve that. Something that few people can do.

    As a former small business owner, I can attest to the business killing nature of regulation. After taxes, I could barely afford to run the business some months, and many regulations were never clear to me, so they were ignored. Two years after the business closed, I had to pay several thousands of dollars out of pocket to settle with the IRS, because they finally got around to telling me I had done my taxes wrong. If the taxes hadn’t been so high, maybe I could have hired a tax professional to advise me. In this instance, poor regulation also meant that the corporate veil did not protect me personally from the debts of the business. Something that also resulted in another business pursuing me for money owed by the business.

    I have heard people say that the American Dream is dead. Well, the American Dream means different things to different people, but for many it means upward mobility. The only time I remember feeling upwardly mobile was during my 5 years in the Air Force. Since then, I have been mostly downwardly mobile, despite my best efforts to the contrary. Many people give up. I’ll keep banging my head against the ceiling.

    In the meantime, I like your solution for putting pressure on publicly traded companies to be more fiscally and socially responsible. I’ve never owned more than a few shares in a publicly traded company and am therefore unsure how this plan would unfold. Are the other share holders a matter of public record, or is there another way to solicit the plan to them? Is owning a few shares enough influence to convince others to follow?

    • Thank you for your comment and your kind words, Mr. Erickson.

      Your plight is unfortunately common. As a former small-business owner, you can attest to the impact of legislation that isn’t specifically designed to protect our general welfare. The cost in time and money to comply with politically-motivated regulations can be unduly burdensome. Publicly-traded companies can afford to absorb the cost; privately-held businesses often cannot.

      Due to the complexity surrounding the income gap, I was unable address all of the collateral issues such as inflation. (Some might say the article is already too long… so thank you for having the intellectual interest to read it in its entirety.) However, inflation is certainly another serious consideration.

      In October of 2009, I wrote a satirical article that addressed inflation (entitled “The Ignorance Tax”). It exposed the serious issue of inflation at a time when President Obama had echoed the pledge of the first President Bush (41) about no new taxes.

      The reason I entitled the article “The Ignorance tax” is because I liken inflation to a tax that is imposed on everyone (just as you suggested). Inflation is primarily driven by government or quasi-government action that expands the monetary supply at a rate that exceeds productivity gains. Here’s an excerpt from that article (written in a satirical vein)”

      “So, what’s the impact of the surge in our money supply? Well, there’s this thing call ‘inflation.’ A rough rule of thumb is that the rate of inflation in the following year can be estimated by subtracting the rate of growth in productivity from the rate of growth of the money supply. For example: the current growth rate of our money supply is 16% while our rate of growth in productivity is 1.8%. That’s a projected rate of inflation of 14.2% … and Jimmy Carter isn’t even President!

      “Let’s say that projection is overzealous. Let’s be conservative (or at least less liberal) and cut it in half. Then we’d have a rate of inflation rate equal to 7.1%. For every dollar I presently spend on food, I’ll get to spend a little over $1.07. The same would be true for gasoline, clothing, housing, utilities, etc. In fact, on average, I’ll get to spend 7.1% more on everything.

      “Since the rich and the poor both have to buy products and services, a 7.1% increase in prices essentially impacts them equally … much like a flat tax or value-added tax. Luckily, we don’t call it a “tax” even though it’s driven by government action and is applied against the purchasing power of our income. Sure, it feels like a tax, but it’s not. Trust me! Otherwise, the phrase “no new taxes” would just be political rhetoric that was used to capture votes.

      “I can tell by your expression that you’re not happy. You’re just not buying my argument on behalf of the administration. Okay, you want ‘change’ … you’re going to get ‘change.’ Here’s the truth (… now, that’s what I call ‘change). Sponsoring programs we cannot afford and funding them by increasing the money supply and more aggressively taxing the rich will lead to a pretty hefty rate of inflation for some period of time. So, while the winning party may not directly increase taxes on anyone but ‘those who earn over $250,000,’ the reality is that the other 95% of the population will incur an indirect tax in the form of inflation.

      “Personally, I like the concept of “inflation.” It lets me cling to political rhetoric; cling to the belief that the government can continue to create new programs without having the money to pay for them; and cling to the belief that the “way out” is to print more money and more aggressively tax the rich. Yes, ‘inflation’ is a term with which I’m comfortable. Besides, it’s much better than renaming it ‘The Ignorance Tax.'”

      I hope you enjoyed the excerpt. :o)

      As for my Private Sector suggestion, shareholder rights are generally an issue reserved to the States. Each State may take a different approach to what corporate records may or may not be accessed. However, access is usually liberally bestowed upon shareholders as long as it is reasonable and requested in writing.

      Another possible way to organize such action is to capitalize upon the viral capabilities of social media. It would be interesting to see what shareholders could accomplish if they began to hold the Boards and Compensation Committees of publicly-traded companies to a fiscally-responsible standard when it comes to executive compensation.

      In the meantime, I admire your positive attitude and recommend others follow your lead in that regard. Thank you again for your comment.

  • William Carr

    It’s hard to take anyone seriously when they ignore the profligate War spending and subsequent Economic Crash of the Bush Presidency.

    No rational person would look at the first three years of the FDR Presidency and criticize him for failing to create a booming Economy out of shattered wreckage.

    The Economic Stimulus was 1/3rd smaller than it needed to be, because Republicans insisted it be 1/3rd Tax Cuts.

    Tax Cuts are worthless for Economic Stimulus. At best, they kick in on the following April 15th; that’s too long to wait for results when you’re losing 800,000 jobs per month.

    But the remaining 2/3rds of the Stimulus succeeded. Those devastating job losses stopped abruptly in four months and the “Recession” officially ended in six months.

    The Recovery was slow. The Obama Administration came up with dozens of Jobs projects, and guess what? They were blocked in the House and Filibustered in the Senate.

    You mention the tired canard about Democrats having control over both the House and the Senate for two years.

    Actually, no. We had control of the Senate for about 14 weeks.

    Al Franken was blocked from taking his seat until July 2009 by repeated legal appeals from his erstwhile opponent.

    Then Kennedy was sick, and couldn’t vote.

    Only when his replacement was appointed did Democrats control the Senate, with the aid of two Independents.

    Scott Brown’s execrable victory ended that productive period.

    In hindsight, should the Dems have seized power and pushed Jobs legislation as fast as possible?

    Yes. In that brief amount of time, we could have created millions of permanent jobs and brought relief to Americans who were desperately uncertain about the future.

    But we have a long history of TRYING to compromise; we even discouraged the Progressives in our membership because they rock the boat.

    But the good news is, we’ve given up on trying to compromise with religious fanatics, anti-government wierdos, and Supply Side Laissez Faire “trickle down” economists.

    We’re going to take America back to what worked.

    Strong Unions. High taxes on the VERY rich but with some nice tax breaks for hiring college graduates for Apprenticeship positions.

    Anybody that invests in an American company that hires Americans gets a tax break. We need to get that money back on Main Street rather than seeing it gambled on Wall Street.

    • Amadaun

      Nice Democrat talking points. Entirely different from 1929, the ongoing 2007-until Great Recession was not caused by the Bush effort to fight international terrorism (something the current president has entirely botched). Rather, it was caused by the ongoing and increasing efforts of Congressional Democrats in the post-Nixon era to game the mortgage system by permitting more and more unqualified individuals to “purchase” homes with incredibly high and unsustainable loan packages.

      By 2005, we’d gotten to the point where banks–with Fannie and Freddie backing–were even issuing “liar loans,” whereby completely unqualified individuals could assert large enough amounts of income to get a loan without any documentation. That such loans would start to default en masse at the first signs of individual economic stress was a foregone conclusion, and Bush actually tried to reign this in in 2005. But he got no support in Congress, even from his own party.

      The result, while it occurred near the end of Bush’s watch, was not of his making at all, so why don’t you let go of that convenient myth? (There’s always “global warming” and the Koch Brothers to obsess about.)

      Like the collapsed economy of Venezuela, caused by Hugo Chavez’ reckless give-away programs to buy the votes of the poor, the current U.S. collapse was merely the end point of the slow motion train wreck caused by the socialist giveaway programs always pushed by the Democrats to buy the votes of the clueless.

      Now, the U.S. has no more dollars to “trickle down,” right?

      Meanwhile, while you’re talking about “strong unions,” how strong are they if they can’t beat the enviro-nuts on Keystone XL. They’ve been pushing it for years because it will mean thousands of good, high paying union jobs. Their president has punted every time he had a chance to make those jobs happen, and he did it again this week.

      So don’t lecture me on the stuff you learned in your troll seminars. Most of us have had enough of these lies, and you’ll find out more about it this fall. So enjoy the company of your union and secularist fanatics while it lasts. The triumphalism is starting to ring hollow as the truth about what you and your fellow fanatics represent finally bursts through.

      And good luck to Scott Brown in NH. Because, the Koch Brothers.

      • Thank you for your comment, but please try to honor the name of this column by only providing “A Civil Assessment.”

        You are welcome to argue your factual points, but try to refrain from using terms like “troll seminars,” etc. Personal attacks elicit emotions and serve to terminal any meaningful discussion of the issues. No one learns anything new in that environment.

        Thank you.

    • Thank you for your comment.

      I assume you are not speaking about me when you suggest that “It’s hard to take anyone seriously when they ignore the profligate War spending and subsequent Economic Crash of the Bush Presidency” as I have repeatedly addressed both in the past. Correspondingly, I have addressed the recession that the Bush Administration inherited, the impact of the false economy associated with the Internet Bubble, and the economic impact of the Enrons, WorldComs, etc. of our Nation whose fraudulent practices preceded that Administration … not to mention the catastrophic impact of the 9/11 attack.

      The reality is that every President inherits issues (some more severe than others). The key metric should be whether they take responsibility moving forward and how they address those issues.

      The Bush Administration basically abdicated responsibility in its second term and demonstrated a level of fiscal irresponsibility of epic proportions. Correspondingly, the Obama Administration chose to waste time blaming the former Administration and escalating the profligate spending on the Afghanistan War.

      Our Nation’s issues are not partisan. Unfortunately, our Parties craft solutions that are.

      Article I, Section 8 of the Constitution defines the functions upon which the Legislative Branch may invest on behalf of the people. The Parties have simply chosen to ignore it; preferring to expand upon those limitations in ways that inure to the benefit of their core constituencies. Perhaps if our elected officials honored their Oaths of Office and focused on the best interests of the People rather than their respective Parties, we might see legitimate progress toward solving our Nation’s problems. Until then, we are only like to experience partisan bickering and blame regardless of who is “in power,”

      Thank you for your comment.

  • Jonathan Strackman

    Excellent piece again T.J. I always put the two political parties this way:

    – The Democratic Party uses the poor as pawns to get elected and then sacrifices them. Tricks them with rhetoric such as “soaking the rich” (Huey Long would be thrilled…he used the rhetoric in the 1930s even though his plans were never workable, even in Louisiana, and were used for his own megalomaniac ways) or “the world is racist/stacked against you” to get power. Then they continue the rhetoric to maintain control without do much tangible things to improve the lot of the poor. They need the GOP to have an “enemy” they can attack. Similar to the way Harry Truman continually pushed the “boogeyman” of Communism in the late 1940s to maintain high Keynesian spending. (Yes, the boogeyman existed…but it probably wasn’t as scary of one as we made it out to be.)

    – The Republican Party uses the poor as pawns to be defenders of our freedoms against a Democratic “rights-stealing menace”. They use them as publicity machines to stoke outrage that the Democrats are anti-American and trying to kill G*d in our country. And when in office, the GOP continues this line of rhetoric, meanwhile doing little to maintain the ideals of the Declaration of Independence or the Constitution.

    Meanwhile the middle class get stuffed between a rock and a hard place. Most middle class people (of which I am part of) love our country, love our Constitution, and want to see that passion in pragmatic leaders. We believe in helping hard working people that may still need a little extra boost, but not a wholesale welfare-dependent society. We want government to encourage our hard work, not become an obstacle. And we want government to have faith in the American people, not tell us that we should have faith in the concept of “government knows best”. So us middle class get caught voting for the lesser of two evils in the Democratic and Republican party. I’d say most of us have buyer’s remorse after the election, but we knew we were compromising our principles greatly on election day already (unlike the poor pawns who fall for it all.) Sadly, history has shown, whenever elected officials use the “soak the rich” mantra and then actually pass some sort of legislation to “help society”, it is not the rich that suffer. It is the middle class. I had a professor in college who was very well-versed in 20th century foreign policy (having worked in the State Department under Ike, JFK, and LBJ), but also an expert of the FDR administration both domestically and internationally. He wrote in one of his books that while FDR utilized the “soak the rich” rhetoric to stoke passion, programs like social security and so on were giant taxes on the working class. That’s why so many hard working middle class people aren’t enamored with such things as Obamacare. it’s not a tax on the wealthy to help improve coverage or bring down costs for the rest of us. It is a tax on those of us who already pay a lot.

    Yes, the middle class is shrinking. It reached 60% of the U.S. population during the Presidency of (one of our best) Dwight Eisenhower. It is funny how Eisenhower was bashed in the 1960s and 1970s as a do-nothing grandpa President. But now, both parties look back fondly at Eisenhower. Then they pervert his Presidency for political gain. The GOP use him to describe the military strength that we had in the 1950s to represent U.S. greatness, while ignoring his pragmatic understanding of trying to rein back military spending and warnings against the military-industrial complex. And the Democrats make the mistake of cherry-picking the concept of the highest marginal income tax rates of the 1950s is why the economy did so well. This leap of logic flies in the face of the reality that it had nothing to do with the economic prosperity of the 1950s (a lot of which was predicated on the fact that most of the world was still recovering from WWII and we had a very cheap supply of oil coming from the Middle East). Additionally, while the highest rates were very high, very few paid it. Loopholes were bigger back then and many found ways to get around the high rates. The high rates were window dressing.

    • Thank you for your comment, Mr. Strackman.

      You have articulated the problem we face very well. Both Parties exploit our Nation’s issues for political gain rather than attempt to resolve them. They have developed a uniquely selective sense of history; picking elements that are favorable to their Party or unfavorable to the other and presenting them without proper context.

      May future generations be taught how to discern the difference between reality and the perverted distortion of history we are offered in its place. Then, may those generations embrace their responsibility to become informed and muster the courage to cast their votes in a manner that reflects the best interests of the People rather than merely the best interests of a Party.

      Thank you again for your comment.