Category Archives: income ladder

Too Much Income Inequality is Harmful to Society

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It is well understood that income inequality is increasing in the U.S. and that there are lots of reasons for it.  Globalization provides low cost goods from around the world and thus puts pressure on low-wage workers in our own country.  Rapid technological advancement puts a high premium on educational attainment and skill acquisition and thus helps individuals who are highly motivated to succeed.  The Great Recession and our slow recovery from it have held back the growth of employment and wages increases for middle- and lower-income workers.
CaptureIncreasing income inequality is a pernicious social condition and has lots of unpleasant consequences.  A new study of U.S. counties has shown that there is a strong correlation between more inequality in a particular geographical area and shorter average live spans.  It is quite reasonable to expect that higher-income people will be more health conscious than lower- income people. Excessive inequality is bad for lots of reasons.
The question is what we can do about it.  Here are two good ways to address it:

  • Faster economic growth would help a lot. The American Enterprise Institute’s Michael Strain has recently proposed a fairly modest plan for increasing employment by cutting tax deductions for the wealthy, increasing the Earned Income Tax Credit for the poor and at the same time decreasing deficit spending. I have made a more substantial proposal along the same lines.
  • Boost educational performance across the board. College-ready middle class kids will take care of themselves so the emphasis should be on the 70% of young adults who will not go to a four year college. There are lots of good jobs available for the highly skilled and so we need more career education in high school. We also need more early childhood education to prepare kids from low-income families to get off to a good start in elementary school.

Increasing economic growth and expanding educational opportunities for the non-college bound will require little, if any, new federal spending.  Such policies as above are simply common sense ways to reduce income inequality and achieve a more inclusive society.

The Resurrection of Karl Marx

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The French economist Thomas Piketty is creating a huge stir with the publication in English of his new book “Capital in the 21st Century.”  Mr. Piketty develops a very simple idea, with reams and reams of data.  Namely that income from wealth, i.e. investment income, typically grows faster than income from wages and GDP.  This means that the value of private capital is growing steadily as a percentage of national income.  This trend has been occurring ever since 1950, at the end of WWII, and is likely to continue indefinitely absent new mega shocks to the global economy such as another world war.
CaptureIn other words, wealth inequality is rapidly increasing just as is income inequality.  Today’s New York Times has an interesting article “Taking on Adam Smith (and Karl Marx)”  discussing Mr. Piketty’s background and how it has influenced his research.  “No revolutionary, Mr. Piketty says that inequality by itself is acceptable to the extent it spurs individual initiative and the generation of wealth.  But extreme economic inequality, he contends, will have a deep and deleterious impact on democratic values,” says the reporter.
Now that income inequality and wealth inequality are clearly well documented, the question is how our democratic society will respond through the political process.  First of all, we need to agree to take the problem seriously.  Equality of opportunity and economic mobility still exist but it is getting harder and harder to move up the income ladder. What our country badly needs right now is an economic program that will get our economy growing faster in order to create more jobs as well as bringing in more tax revenue to pay for government.
One way to accomplish this is with

  • Broad-based tax reform to lower rates in order to put more money in the hands of people who will spend it on basic necessities as well as business expansion. Lower rates can be paid for by closing loopholes and deductions which primarily affect the wealthy.
  • A low percentage (1% or 2%) tax on wealth (i.e. financial assets) with a fairly high personal exemption of perhaps $10 million in order to only include the most wealthy. This would raise about $200 billion per year which could be used to fund a wide scale infrastructure renovation program which would provide employment to millions of people.

Such a wealth tax would be a highly visible means of addressing economic inequality in a way which would greatly benefit to the economy at the same time.

Conservatives Need to Take Income Inequality More Seriously

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Americans are currently having a lengthy discussion about income and wealth inequality. A contribution by the Manhattan Institute’s Diana Furchtgott-Roth, “The Myth of Increasing Income Inequality”, points out, for example, that

  • The lowest 20% income quintile only has 1.7 persons per family unit while the highest quintile has 3.1 persons per family unit.
  • In 1970, 18% of households had only one person as compared with 27% of households in 2012.
  • In 1970 62% of women were married compared with 52% of women in 2012.

Clearly each of these factors will increase income disparities between households. Another recent study, from the National Bureau of Economic Research “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility”, concludes that, although the rungs of the income ladder have grown further apart, the chances of climbing from lower to higher rungs has not changed.
CaptureBut from a public perception point of view the Pew Research Center’s recent report, “Most See Inequality Growing, but Partisans Differ over Solutions”, is much more significant. It points out that:

  • 54% of all Americans say that taxes should be raised on the wealthy and corporations in order to expand programs for the poor.
  • Only 35% believe that lowering taxes on the wealthy to encourage investment and economic growth would be a better approach.
  • Unfavorable opinions of the Tea Party have increased from 25% in 2010 to 49% today.
  • The public has more confidence in Democrat’s handling of healthcare by a 45% to 37% margin.
  • Just 42% to 38% favor Republicans in handling the economy.

My conclusion from all of this data is that fiscal conservatives need to do a much better job of showing sympathy and concern for those who are struggling at the lower ends of the income scale. Success in implementing the sound policies which are needed to turn things around depends on accomplishing this!