By Mark Blessington
Economies allocate income and wealth, which creates winners and losers. That's OK; that's what economies do. The challenge is finding the right balance.
At one extreme is excessive equality. Exceptional personal effort and results are matched with little to no economic gain. The incentive to excel is destroyed. At the other extreme is excessive inequality. Exceptional output is matched with colossal gains. The winners take such a large chunk of the economic pie that common workers are left with crumbs. Most lives are dominated by financial struggle, and the incentive to contribute disappears.
How Bad Is It?
Clearly neither extreme applies outright to the U.S. economy. But we are flirting with disaster.
The statistics are clear: Income inequality has reached epic proportions. It has been on the rise for decades. According to the U.S. Census Bureau inequality increased 24% from 1968 to 2012. We now have more inequality than any other affluent democracy in the developed world.
Then there are personal views. Some think our economic balance is just fine. They are entitled to their opinion, but they are in the minority. Most Americans think wealthy individuals are too greedy and we want far more equality in the U.S. than we actually have. This does not mean we want socialism; it means we want the economic pie to be split more equitably. Watch this video on income inequality.
What Creates Inequality?
Every economy has rules. The notion of "free markets" is a myth. Lobbyists are always helping businesses gain special advantages. For example, our tariffs block cheap sugar imports to help sugar plantation owners. If we have excessive inequality, it's because our economic rules allow or encourage it. If we want to shift the balance of winners and losers, then the rules must change.
Some rules are preventative and others are corrective. Progressive tax schedules are corrective and redistribute excessive economic gains. Safety nets and social welfare programs are also corrective: they support those who suffer financially.
Every nation has preventative rules that govern economic fairness. During and after the Great Depression a wide variety of regulations were established around the world to prevent excessive imbalance. Yet many of these rules were later weakened or removed, especially in the 80s and 90s. The result was an avalanche of deregulation and excess, culminating in the Great Recession.
The recent struggle to complete the specific Dodd-Frank regulations to highlight CEO pay in relation to median employee's pay is instructive. The original intent was to prevent CEO pay excess. This purpose was opposed by special interest groups representing the wealthy few. The final compromise is now nothing more than a mere glimmer of the original aspiration. The lesson is clear: if we want more economic balance, we must compromise less and win regulatory struggles more decisively.
The question of who suffers from income inequality is an insult to many Americans. They say: "Just open your eyes!" Suffering Americans want to be seen by a system that ignores them. So much media attention is placed on the trivial that presenting real struggle and hardship is uncouth.
Income inequality fosters an infinite spectrum of suffering. Over the last four decades, as CEO pay skyrocketed, corporations defunded their retirement benefits and pension plans. Then personal retirement accounts and housing equity were devastated by market crashes. Now, as baby boomers enter the senior citizen ranks, many can't afford to retire. They take low wage jobs to supplement insufficient Social Security benefits. Others who can't work land in low income housing projects that reek of urine and teem with predators.
While the middle class gets smaller, the lower class swells. A major cause of middle class shrinkage is fewer additions from young adults. As a baby boomer, virtually all of my college classmates quickly moved into the middle class. Too many of today's graduates stay behind in the lower class. They live off of their parents, which shatters their self-esteem. Many see no hope of finding interesting, fulfilling work, let alone paying off their massive student loans.
After entering the workforce in earnest during World War II, women are still paid less than men. A recent Supreme Court case protesting such discrimination (Wall-Mart v. Dukes) was rejected, implying that women still don't deserve fair pay.
Pay inequality is worst for minorities. Black men and women are paid less than white men and women for the same job. Conventional jobs for black men are often far less compelling than illegal ones, so their central struggle often involves avoiding or surviving prison. The U.S. incarcerates more of its citizens than any other country in the world--one of our ugliest signs of severe economic inequality.
What Can Be Done About It?
We can't fix inequality without changing the rules. Decades of regressive legislation has built the current mountain of inequality. The sales tax itself is regressive, hitting lower income earners with a higher tax rate on their income.
Some of the most popular proposals include:
- Raise the minimum wage.
- Increase taxes on super-high incomes.
- Remove tax loopholes.
- Cap CEO pay.
- Penalize companies for shipping jobs overseas.
- Provide strong incentives for inner-city job creation.
- Strengthen laws on nondiscriminatory hiring, compensation, and promotion practices for women and minorities.
What do you think? Join the debate. Tell us what you think in the comments section below.
Mark Blessington is a sales and marketing consultant and has worked with many of the world's largest corporations. He has written four books, ranging from Deep Economics to Sales Forecasting (due later this year).