INCOME INEQUALITY GROWS, JOB CREATION LAGS AND GOVERNMENT DEPENDENCE ON TOP EARNERS INCREASES

Three trends that threaten the fabric of our society

Colleagues:

I am increasingly concerned about three somewhat disparate yet interrelated issues that threaten the very fabric of our society.

The first is growing income disparity; the second relates to the lack of job creation and the disappearance of opportunities for productive work; the third addresses the increasing dependence of governments at every level on a select few taxpayers.

Today, the first in this 3-part series, the rapidly expanding disparity between incomes earned by the very wealthy and the rest of American society.

The Rapidly Growing Income Inequality in the United States

There is a rapidly growing income disparity in the United States that threatens the fabric of our society. The gap between those with the highest incomes and everyone else is widening, and it is reaching levels not seen since the Great Depression. In 2008, the last year for which data is available, the top 0.1% of earners took in more than 10% of the personal income in the United States! The top 1% took in more than 20%. Further, executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970’s (Peter Whoriskey, “With executive pay, the rich pull away from the rest of America”, Washington Post, June 18, 2011).

In 1975 the top 0.1% of earners garnered about 2.5% of the nation’s income. By 2008 that share had quadrupled and stood at 10.4%. Whoriskey notes that this phenomenon is even more pronounced at higher levels of income. The share of income commanded by the top 0.01% rose from 0.85% of the nation’s income to over 5% now! For the 15,000 families in the group, average income now stands at $27 million!

In world rankings of income equality, the United States now falls among some of the world’s less developed economies. The U.S. ranks as far more unequal than the E.U. or the U.K., lying just behind Cameroon and Ivory Coast and just ahead of Uganda and Jamaica!

Who are these top earners? About 40% are executives, managers, and increasingly, financial professionals. They are followed by lawyers (6.2%), and real estate professionals (4.7%), with media and sports figures, surprisingly, making up only 3%.

No one is sure why but there is almost no relationship between the fortunes of the average American and the richest American. What does seem to be the case is that the real driver of gains among the very rich is money from the financial sector. Experts are at a loss to explain precisely why – perhaps deregulation, the financial industry’s growing influence in Washington, the revolving door between high government jobs and Wall St. for financial executives—what we do know for sure is that this sector has seen the most rapid rise in compensation.

More worrisome is that while compensation for the very wealthy has exploded, pay for 90% of Americans has stalled. While wages for top CEOs, financial managers, lawyers, and sports/entertainment moguls have risen by a factor of 10 since the 1970’s, wages for unionized workers have actually declined slightly. The graph below illustrates this disturbing trend well.

That represents a turnaround from earlier times. From just after WWII to 1970, times were good for the average American, but not as good for the average rich American. In the 1970’s median household income began stagnating, but around 1987 the income share of the top 1% skyrocketed. In the 1990’s median household incomes rose sharply, but the inequality continued to grow. Then in the last decade median household incomes have stagnated, the income of the top earners has risen, and inequality has soared (Ezra Klein, “Some thoughts—and graphs—on inequality and income”, the Washington Post, February 10, 2011). Whatever is driving the gains for the rich isn’t doing much for the rest of us.

The nation now faces serious wage stagnation and inequality problems that are only likely to be exacerbated. As Klein points out, the rest of the world has a huge supply of excess labor, workers who are increasingly talented and driven. As long as developing countries continue to produce excess and highly qualified labor, there will be little pressure for wages to rise here and workers in the U.S. will continue to struggle.

(The New York Times “Sunday Business” section for April 10, 2011, has two excellent articles analyzing executive compensation and charts depicting CEO pay at more than 200 companies).

The sputtering recovery now under way is producing few, if any, jobs to replace those that have been lost. Sadly, we are likely to emerge from this downturn with even greater disparity in income, wealth, and effective tax rates. Tim Rutten notes that these trends are particularly apparent in Los Angeles, where 15% of the county’s residents are living in poverty (which means an annual income of $22,000 for a family of four). Close to 100,000 of those families are getting by on $10,000 a year!

Rutten notes that 30% of the county’s full-time workers earn less than $25,000 a year. Consequently the percentages of county residents who live in poverty or are among the living poor markedly exceed the national averages. Sadly, reflecting national trends, Rutten observes that over the last two decades, only the top 1% have experienced significant income growth in Southern California (Tim Rutten, “A Snapshot of Income Disparity”, the Los Angeles Times, February 24, 2010)

Who gained, who lost? Financial managers have enjoyed the largest occupational gains in income, while the wages of secretaries, admin assistants, sales clerks, preschool teachers, etc. have experienced declining annual incomes. The L.A. area has lost not only more than 36% of traditional manufacturing jobs, but also 16% of positions in film, television, radio, and publishing – positions that are a part of the crucial “knowledge based economy”.

So what do we do about this growing income disparity? Redistribution of income by government policy will be an attractive mechanism, but that is unlikely to do much to insure the workers who contribute to our growing productively also share in this economic growth.

Brazil may have a model that needs to be examined. As Tina Rosenberg points out, Brazil’s level of economic inequality is dropping at a faster rate than that of almost any country. In just the last seven years the income of poor Brazilians has grown 7 times as much as rich Brazilians. Poverty has fallen during that time from 20% of the population to 7%. The mechanism? According to Rosenberg, it is the “Bolsa Familia” program, the core of which are cash transfers to those living in poverty. To be eligible for the transfers, recipients must agree to many conditions, including mandatory school attendance for children, maintaining health standards, and attending workshops of vocational and health topics. (See Tina Rosenberg, “To beat poverty, pay the poor”, the New York Times, January 3, 2011).

The payments are ridiculously low, maybe $13 a month for each child, but that amount seems to move families out of extreme poverty and appears to be a major contributor to reducing income inequality. Would it work it the U.S.? Given the high level of welfare abuse and lax enforcement of standards here, a conditionality-based cash grant program to the poor would not seem to be feasible.

If inequality continues to grow, it could reach the point where it becomes a moral imperative to effect change as well as becoming an igniter of mass political protest. Those in the middle class, seeing little hope for advancement, will lose the incentive to try to improve their lives. We have given capitalism writ large and the market economy decades to demonstrate that “a rising tide will lift all boats” somewhat equally. It appears that the system is not working,that markets themselves are unable to solve this dilemma.

Let me know if you agree that this growing income inequality really is a serious problem. If so, what do you recommend we do about it? (One word of caution – I’ve spent months gathering material and analyzing this issue and would most appreciate responses that are realistic and well thought out!)

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