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Income inequality needs attention
St. Cloud (MN) Times
Feb.2, 2011
Last week’s State of the Union address and the two Republican responses overlooked the problem at the very foundation of our economy: rising income inequality.
One of the complaints heard from crowds of protesters rocking Egypt in recent days is about income inequality, which has reached record levels in recent years. The fact is income distribution is far more balanced in Egypt than in the United States.
Economists and demographers use a measure called the “Gini index” to calculate income inequality. Though easy to understand it is perhaps too complicated to explain in detail here. Suffice it to say that the calculation reflects the proportional distribution of income, with an index of zero indicating total equality (i.e. every individual has an equal share) and a score of 100 indicating total inequality (i.e. one person receives all income.)
Using this method, the CIA has calculated Gini indexes for 134 nations, producing a list in which higher ranking indicates greater inequality. The worst inequality is found in Namibia (No. 1) while the most positive conditions are in Sweden (No. 134). Within this negative ranking the United States appears in 42nd place for most inequality, while Egypt is 90th.
Americans have historically been complacent about income inequality. After all, a central part of our national mythology is the “up from the bootstraps” belief that with hard work anyone can become wealthy.
But that’s simply no longer true.
Real wages — average weekly earnings corrected for inflation — peaked in 1973 and remained 8 percent below that peak in December 2010. Meanwhile, the Consumer Price Index increased 490 percent that period.
Even before the housing crisis and recession rocked our economy, families were struggling to pay their bills, save for college and plan for retirement. The number of Americans living in poverty is higher now than at any time since the Census Bureau started keeping track during the Eisenhower administration. Today the deck is stacked against even the middle class, most of whom can only hope for a winning lottery ticket if they aspire to break into the top 10 percent of income distribution.Extreme income inequality threatens our economic future. Given our consumer-based economy, if the middle and working classes do not have the means to consume the goods they help produce, demand will decline.
The corresponding concentration of income at the top does not help either; even the idle rich can only own so many cars or vacation homes.
The results of steeply declining demand for everything from new homes and cars to clothing and luxury items has had an all-too-real impact on our economy the past two years. Some observers, including former Secretary of Labor Robert Reich, believe underlying income inequality was in fact the root cause of the recession and Wall Street’s gambling simply a symptom.
In any case, income inequality has grown rapidly the past two decades and is at a level last seen in the 1920s, before the Depression, when the richest 1 percent of the population received 23.9 percent of all income.
The income tax is a good place to start a reform program. In the era of “no new taxes” and budget austerity, this is a hard subject to broach. But public investment, funded by higher tax rates on top earners, could dramatically improve the economy and the standard of living for the bottom 99 percent of the income curve. The top marginal income tax rate has been locked at 35 percent since 2003; couples who earn tens of millions annually pay the same tax rate as those who earn $336,550.
Historically the top rates were 50 percent when Ronald Reagan was president, 70 percent under Jimmy Carter, 91 percent under Kennedy and Ike, and 92 percent under Truman. Revenues from those taxes built the interstate highways, paid for the GI Bill, funded the Cold War, landed men on the moon, expanded public education, and subsidized the information infrastructure and engineering innovations that made the modern economy possible.
It’s not that anyone is suggesting our economy should be like Egypt’s. Nor that we should necessarily look to the countries with the highest income equality (Sweden, Norway, Luxembourg) for inspiration. But the company we keep in these rankings — Nigeria, Iran, Uruguay, Uganda and Argentina are near us — should at least give us pause.
If we were to address some of the core causes of income inequality by improving our trade balance, creating disincentives for companies to outsource jobs overseas, increasing wages, investing in education and most importantly returning to a more progressive tax structure, the economy would improve along with our Gini index. But first we need the leaders of both political parties to recognize the inherent problem.-Dr.DRL
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