America’s Disturbing Wealth Gap

This muse is more of a lament.    It is no secret that America  (as with most western and emerging countries) are suffering from a disparity of inincomegapcome growth.   In the U.S.,  95% of income gains have gone to the top 1% of its citizens.   America’s median household income has dropped by more than $4,000 since 2000, after adjusting for inflation.   President Obama has labeled it an “Income Gap”, although it has worsened during his tenure despite his concern about it.    He describes it as “morally wrong” and it “undermines the very essence of America.”   And Federal Reserve Chair Janet Yellen dedicated an entire speech to the issue.  This is no secret;  Professor Thomas Piketty has written a best-selling book describing this wealth inequality phenomenon.    Even Wall Street insider  and MSNBC analyst Steven Rattner has warned about it.  But now, in a development that is the economic equivalent of the fat lady singing,  the Harvard Business School has weighed in.   And it is shouting at the top of its lungs:  “such divergence is unsustainable, but unavoidable if the business community fails to act.”

It recently released a study called “An Economy Doing Half its Job”, said American companies – particularly big ones – were showing some signs of recovering their competitive edge on the world stage since the financial crisis, but that workers would likely keep struggling to demand better pay and benefits.   The study is based upon a survey of 1,947 of Harvard Business School alumni  — a group of relatively bright people.   Most of the respondents were much more hopeful about the future competitive success of America’s firms than they were about the future pay of America’s workers.

The study calls upon corporate leaders to help solve America’s wealth gap by working to buttress the kindergarten-to-12th-grade education system, skills-training programs, and transportation infrastructure, among other things.   It stated:  “Shortsighted executives may be satisfied with an American economy whose firms win in global markets without lifting U.S. living standards. But any leader with a long view understands that business has a profound stake in the prosperity of the average American….Thriving citizens become more productive employees, more willing consumers, and stronger supporters of pro-business policies.”  It continues:  “Struggling citizens are disgruntled at work, frugal at the cash register, and anti-business at the ballot box.”

Federal Reserve Chair Yellen, in her October 2014 speech noted that: …..the past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years..”   She talked about how Congress’ continued refusal to craft a fiscal policy to deal with the 2008 recession forced the Fed to intervene.  But the limited tools available to it inadvertently widened the inequality gap.   The Federal Reserve used quantitative easing and ultralow interest rate policies to try to shock the economy into speedier expansion.  But the result of the Fed’s bond buying have been to drive up the stock market and to help lower mortgage rates. Because stocks are disproportionately owned by the wealthy and the upper middle class have been in best position to refinance their mortgages, the wealthier classes directly benefitted from the Fed policy.  Yellen also decried the  role of rising debt loads poor students must incur to get a college education, a slowdown in small-business formation, and trends in inheritances that are all worrisome for America’s economic future.

The Harvard study fails to mention the use of a progressive tax, favored by Piketty, Paul Krugman and other economists.    But the bottom line is that the Harvard study is merely focusing its formidable spotlight upon a very serious social challenge facing this and other countries.   Krugman calls it the “defining challenge of our time”.   I view it as the socioeconomic economic analog to  “global climate change”.   It is characterized by a debate with two competing points of view.  The conservative approach holds that only people with big fortunes can afford to take the big risks that keep innovation going.   So while investors reap most of the income gain, most of the rewards are widely dispersed among the  remaining 99 percent through the investments of the 1%.   The other side holds that unless governments use heavy taxes to break up concentrations of wealth, economies will become increasingly unbalanced, with only a few people inheriting massive fortunes.   Piketty, in particular, argues that rather than take investment risks and innovate, the hereditary elite will become complacent monopolists who try to hang on to the status quo. And average people will become discouraged. It will make more sense to focus on marrying into wealth rather than on working hard.

Steven Rattner has weighed in with his concerns.   In an NY Times op-ed, he noted that Inflation-adjusted earnings of the bottom 90 percent of Americans fell between 2010 and 2013, with those near the bottom dropping the most. Meanwhile, incomes in the top decile rose.  Among most wealthy nations, the U.S. is the most inequitable of all because our taxes, while progressive, are low by international standards and our social welfare programs — ranging from unemployment benefits to disability insurance to retirement payments — are consequently less generous.  He argues that the U.S. needs to raise the minimum wage nationwide and expand the earned-income tax credit.   But helping the squeezed middle-class will be tougher, he warns.  He cites a recent paper, in which the International Monetary Fund (hardly a liberal think tank) dismissed concerns that redistributing income would hurt economic growth.  Just the opposite;  its report showed how  a more equal distribution of income could instead raise the growth rate because of the added access to education, health care and other opportunities.

The Harvard study gets it right:  just as with climate change,  the most appropriate solution is not as urgent as recognition of the problem.   It is heartening that Harvard is joining the chorus of observers sounding the alarm.   The fix will likely be multi-faceted and involve a combination of tax, education and infrastructure development strategies.   Hopefully, the “other side” will not engage in denial as much as honest exploration of best solutions.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.