Our Record Income Inequality Needs Fixing

Financial FAQs

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FRED

In an earlier column I imagined what could have been accomplished if the $2 trillion given to corporations in the 2017 Tax Cuts and Jobs Act had been put into upgrading our infrastructure, instead of given to corporations and used to boost their stock prices and executive incomes. We might have avoided what will become another severe, maybe Great Recession lasting years.

This downturn could be as disastrous for the US economy with upwards of 30 million applicants filing initial unemployment claims, and an unemployment rate that approaches 20 percent, if the $ trillions just raised in support of a revival is not put to better use.

The COVID-19 pandemic offers a once is a lifetime opportunity to make drastic changes in American capitalism that would level the playing field for salaried workers most affected with the loss of jobs. Most of the $$ must be spent in the public sector for infrastructure, education, healthcare, R&D, and environmental protection, it the US is to recover from this any future pandemic.

This encapsulates in a few words why America still has record income inequality equaling that of the Great Depression. Most economists agree it has been the underlying cause of most recessions, including the Great Depression and Great Recession that must be corrected if there is to be a robust recovery.

And we are dependent on those salaried workers to generate 70 percent of U.S. economic activity, yet at least 80 percent are earning no more than in the 1970s with inflation factored in.

I say this because we have always been a fragmented country with a weak federal system, a system of red and blue states still fighting over the same issues that prevailed during the civil war, resulting in the least regulated capital and labor markets in the developed world with no universal health care.

The record decline of the American worker’s income and labor organizations that supported it since World War II is a long story, though I will attempt to condense its history without too much simplification.

First a fact. The most recognized measure of income inequality is the Gini inequality coefficient, that calculates the percentage of income earned by different segments of a country’s populace. The U.S. ranks 118th in the list of 157 countries compiled by the CIA World Factbook, which is below every other developed country in the equal distribution of national income—between Peru and Cameroon.

We also know about our record income inequality from countless stories of rising poverty levels, homelessness, and the Occupy Wall Street movement that first focused attention on the extreme wealth of the top one percent of income earners. French economist Thomas Piketty and UC Berkeley economist Emmanuel Saenz were the first to plough through 100 years of tax returns that measured income differences of the wealthy and poor.

The rise in income inequality and poverty levels was partly due to the decline in progressive tax rates. The maximum income tax rate topped out at 92 percent during Eisenhower administration, uniting Republicans and Democrats to build our modern post-WWII public infrastructure, before declining to 36 percent today.

But after the 1973 Arab oil embargo that boosted oil prices and inflation to unacceptable levels, a new kind of economics was born. Some called it trickle-down economics, others supply-side economics. The idea was to shift most profits to the side of business owners so they would produce more by cutting taxes and regulations.

They used an old French economic theory as the justification for such a shift in economic thinking—Says Law named after an earlier French economist. It said that producers should maximize their profits, and enough would trickle down to the workers that produced their increased profits. Everyone would then be happy, there would be enough to go around, a rising tide would lift all boats, etc., etc.

However, lowered taxes did not raise all boats, but it did create soaring federal debt. And labor had lost its clout as higher-paid manufacturing jobs went overseas, leaving the U.S. with lower-paying, service jobs at warehouses and transportation hubs.

The end result was that most industries were deregulated creating today’s dog-eat-dog capitalism that has starved government of public services and rules that would mitigate the predatory behavior of modern capitalism.

All public sector investment consequently declined—in education, Research and Development (that created the Internet and sent us to the moon), and modern infrastructure that would boost our declining labor productivity.

There is really no other choice but reform of the economic system Americans live with. A country that unites behind the support of its workers by giving them a greater of our national wealth—with better healthcare, education, while fixing our infrastructure—and raising taxes enough to keep social security and Medicare financially sound—will put US on the road to a better recovery.

Harlan Green © 2020

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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