Is the growing income gap a problem or an opportunity?

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Communities Digital News
By: TJ Ohara
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?

If you need further evidence, according to Saez's study, the Obama Administration's "economic recovery" has accomplished the following:

"Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover."

This was accomplished by an Administration that held the Presidency as well as majorities in both Legislative Branches its first two years; a time during which it managed to exceed the profligate spending of the prior Bush Administration. It accomplished this while having access to $475 billion in TARP funds, $860 billion in the "shovel ready" Economic Stimulus funds, a $600 per capita tax rebate in 2008, the "Cash for Clunkers" Program, the Fannie Mae and Freddie Mac bailouts and additional mortgage relief subsidies. It ale had the Federal Reserve's various "Quantitative Easing's" and Maiden Lane Transactions that propped-up certain banks and other businesses that were deemed "Too Big to Fail" but not "too poorly run to preclude executive bonuses" (you see, the rich donate to Democratic campaigns as well).

Where was the "recovery" for poor and middle class individuals?

As emotionally appealing as the "Robin Hood Strategy" may be, taking money from the rich only closes the income gap if you give it to the poor. When you spend it on ineffective programs, it does nothing to solve the problem. The reality is that the Democratic Party needs issues of "inequality" to remain intact. They are critical to its ability to manipulate and control the political dependencies and votes of minorities and women.

For the rest of us, the "gap" demands a reasonable solution. As Saez did in his research, let's begin with a definitional understanding.

"Income inequality" is a misnomer. It implies that income equality is a laudable goal while that may not be the case (i.e., consider the importance of a meritocracy from a behavioral perspective). Conversely, "income disparity" is a legitimate issue with wide-spread social impact.

If the more pathological proponents of the Republican and Democratic Parties could recognize the difference between the two terms, we might be able make progress toward addressing the issue. Rather than hold our breath until that happens, perhaps we should examine the issue and determine how we might resolve it without Government intervention.

If we segment our economy into two principle sectors, Public and Private, we can begin to make headway.

We can begin to control the Public Sector if we ever learn to embrace our responsibility to become informed citizens and to cast informed votes. If we elect individuals on a basis of merit rather than personality or the amount of money they can raise and spend to procure our votes, positive change can occur.

However, the Private Sector offers a more immediate opportunity. First, let's separate it into its two principle components: Privately-held businesses and publicly-traded companies.

Even the Parties agree that small, privately-held businesses are the lifeblood of our economy. Rather than restricting that economic engine, let's celebrate it by following these three rules:
1.Get out of the way! Do not layer costs on these businesses by way of non-essential regulatory control. When licensing and regulation is appropriate, administer it responsibly (i.e., processing should not be monetarily burdensome nor should it be subject to undue delays). A business should be able to file the forms, pay the fees, and get a response in a timely manner.
2.If the Government is going to attempt to stimulate job growth and economic expansion, do it here where access to capital is disproportionately restricted as compared to what is available to publicly-traded companies that are well-established and politically-favored.
3.Do not tamper with the income of those who have taken all the risks and personally sacrificed significant aspects of their lives to build successful companies. Success in privately-held businesses usually reflects meritocracy at its finest.

Now, let's consider publicly-traded companies and level the playing field. If legislative mistakes have permitted some industries to become "Too Big to Fail," correct those mistakes so that every company competes under the same rules. Don't reward failure in one case and punish it in another.

As an aside: Research which publically-traded companies (or their related unions) donate the most to political campaigns through their PACs or senior leadership. Then, compare that list to those entities that have been deemed "Too Big to Fail" or have benefited from stimulus money, subsidies, tax abatement, Quantitative Easings, or waivers from programs like the Affordable Care Act. If you find a correlation, you should at least be suspicious.

This brings us to an element that has gotten out of control within many publicly-traded companies: Executive compensation.

Boards have fallen prey to the same misplaced fear that paralyzes professional sports franchises (i.e., that salaries have to be escalated to retain "talent"). However, unlike owners of privately-held companies, executives at publicly-traded companies rarely, if ever, participated directly in the risk and sacrifice that led to the company's success. So, consider the following scenario.

Let's assume that a large publicly-traded company needed to replace its CEO, who was being paid $55 million a year. What would happen if the company found another talented individual for a still-generous $4 million a year, who could perform equally well?

The company would have freed $51 million, which could be used to hire 1,000 new employees (at the national median income level of $51,000) to improve productivity and service or to accelerate development. Each new employee would be accretive to the tax base and immediately contribute to economic expansion as a consumer.

Conversely, what if the company instead chose to spend the $51 million on state-of-the-art equipment instead of people? All things being equal: Profits go up or prices go down, either of which serves to stimulate the economy.

What if the company decided not to reinvest the $51 million and instead distributed it as a dividend? Shareholders would be taxed on the proceeds and have three options with regard to the balance:

1.Spend it, which would stimulate the economy;
2.Save it, which would bring capital into the banking industry to loan to others, which in turn would stimulate the economy; or
3. Reinvest it in other companies, which would stimulate the economy.

If you want to help close the income gap, become a shareholder of a publicly-traded company. Then, organize other shareholders to bring pressure to bear on the company's Board (or Compensation Committee) to bring executive compensation into alignment.

CEOs of publically-traded companies currently earn about 360 times the income of the average American. Yet, few have the impact of 360 additional employees or other investment options. Democrats should like this strategy because it conforms to the "kumbayah" sense of society they pretend to support. Republicans should endorse it because it leads to an increased return-on-investment, so there's an element of "greed" attached to it.

The other benefit is that you don't have to wait for an election to assert your influence. As a shareholder, you have the power today, and you can affect change without spending taxpayer dollars or creating a Government program.

Why don't you hear these types of recommendations from the Parties?

It could be because their leadership lacks the private-sector experience to even recognize that such solutions exist. Then again, it is probably because absolutely no political benefit can be derived from fixing the problem without injecting the Government into the issue.

Our Nation is facing serious challenges that require serious solutions. Income disparity is one of them.

The Democratic and Republican Parties have enormous resources they've chosen to use to craft perpetual campaigns. As Albert Einstein once said, "We can't solve problems by using the same kind of thinking we used when we created them." It's time to start thinking about solutions that don't directly involve our elected officials... at least until we develop the courage to cast the informed votes that will be necessary to replace those who are responsible for the problems we are trying to solve.

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About this Entry

This page contains a single entry by CFED published on April 23, 2014 4:22 PM.

Income tax inequality: Who pays their fair share? was the previous entry in this blog.

When Entrepreneurship Feeds Income Inequality And How It Can Change is the next entry in this blog.

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