Even
though the United States has the largest total gross domestic product (GDP) in
the world, this does not guarantee the highest level of social wellbeing that
is believed to depend primarily on economic equality nor does the GDP address
the income distribution issue . Income inequality
in the U.S. is rampant and counterproductive. It is an economic problem that
has been in the making for over the last three decades, since 1980. Many researchers
have observed a parallel between income concentration before the Great Depression
of 1929 and income inequality before the 2008 recession (see chart below ).
Accordingly, they have blamed excessive inequality as the principal source of 2008
Great Recession and the lackluster recovery afterward. Left untreated,
inequality may force the U.S. economy into another tailspin; this is according
to many leading economists, some of whom consider it to be not only an economic
dilemma but also a political problem. "Inequality
is cause and consequence of the failure of the political system and it
contributes to the instability of our economic system" says Dr Joseph Stiglitz.
In his newly published book, The Price of
Inequality.
Dr.
Joseph Stiglitz, a Nobel Prize-winning economist, offers an in-depth
examination of the causes and the consequences of income/wealth inequality in
America in this book. He begins with an allusion to the popular uprisings in a
few countries that were similar to the Occupy Movement in the U.S. The
occupiers rightfully realized that there was something deeply wrong with the
political and the economic system, that capitalism is no longer a fair game,
that government is no longer serious about the plight of 99% of the population,
that excessive greed is derailing capitalism from its rightful path, and that
we are no longer in it together. Further inquiry shows that inequality in the
United States, as measured by the income gap
between the haves and have-nots , is not subsiding; rather, it is on the rise. According to the author, the top 1% of income
earners is steadily getting a larger and larger share of the national income
and wealth. "By 2007, the year before the crisis, the top 0.1 percent of
America's households had an income that was 220 times larger than the average
of the bottom 90 percent" (p. 2). In addition, the top 1% has managed to
acquire more than 93% of the additional income generated by the U.S. economy in
2010, leaving only 7% for the rest of us. Before 1980, income distribution was
more equal, it has gotten worse since then, thanks to insufficient government policy
and the symbiotic ties between the rich and the politicians. The author claims
that historical evidence does not show that greater equality is an obstacle to
economic growth; instead it may well be a major contributor to it. For example,
during many years after World War II, the U.S. economy grew at a much healthier
rate while the income distribution was more evenhanded. The key reason for this
greater equality was partially the growth-oriented, pro-middle class,
government policies that not only stimulated the economy but also improved the access
to public education and other vital public services.
Throughout
his book, Dr. Stiglitz maintains that market forces do not bring about equality;
government and other factors play a role when it comes to income distribution.
Unfortunately, during the years prior to the Great Recession, government did
not do much to assuage economic inequality because to do so seemed be costly
economically and politically. Consequently, not only inequality persisted but
also uneven access to the outcome of economic prosperity. Dr. Stiglitz explains
in detail how the top 1% of the population continues to cunningly grab a bigger
slice of the national output. Accordingly, inequality in the United States has
been increasing not only in absolute terms but also in relative terms. Compared
to other countries, the United States is "approaching the limit of inequality
that marks dysfunctional societies--it is a club that we would distinctly not
want to join, including Iran, Jamaica, Uganda, and the Philippines" (p. 22). ? A well-known measure of income inequality is
the Gini coefficient; the closer this number is to 1, the higher the level of income
inequality. This coefficient has been deteriorating for the United States in
recent decades and is presently at 0.47, up from 0.4 in the early 1980s.
First
and foremost, the author talks about the fatal consequences of excessive income
inequality which include: economic and political polarization, meager economic
growth, diminution of the middle class, insecurity, declining standard of
living, and particularly the growth of poverty rate--currently at more than 15%
according to the U.S. Census Bureau. Increasing poverty leads to further
inequality because of the inadequate access to good education by the children
of the poor and thus their inability to attain gainful employment later in
life, creating what the author calls the "poverty trap". Dr. Joseph
Stiglitz argues that the American right does not want to even admit the
inconvenient truths about inequality. They would like to deny the problematic facts
related to income inequality and poverty in the United States. Consequently,
they offer retorts such as poverty in America is relative and not real, or the
wealthy are job creators and attempts to reverse income distribution through
taxation are equivalent to killing the goose that lays the golden eggs. He
rightfully reminds us that inequality is more than just an economic problem; it
is a social, moral, and political problem so grave now that we have no choice
but to confront it. However, we cannot alleviate inequality unless we examine
the reasons behind it.
There
is a wide range of factors that contribute to income inequality. Historically,
income inequality existed even in pre-capitalist societies and was sanctioned
by religion, which was protective of the ruling elite. Later, there emerged a
popular theory, the marginal productivity theory, which justified income
inequality and suggested that "those with higher productivities earned higher
incomes that reflected their greater contribution to society" (p. 30). In
modern time, however, other factors such as technology and distribution of financial
resources also contribute to income inequality. As well, Dr. Stiglitz
persistently blames certain government policies as being a leading cause of
income inequality in the United States; among these are the "programs that give
away the country's resources to the rich and well-connected increase the
inequality" (p. 31). He argues that our political system is controlled by big
corporations that have the power to shape or change the rules of the game in
their favor thus creating a situation in which rent seeking becomes a way of life for the rich. Economists
describe rent seeking as an attempt by certain individuals or corporations to
gain a larger and larger share of national income without proper contribution
to the economy. In other words, becoming wealthy not by creating wealth but by
taking it away from others. The rent seeking ability of the rich, which is
sanctioned by politicians, is mainly responsible for continuation of inequality
according to the author.
Rent seeking is also facilitated by monopoly power.
Under the competitive market, there is neither sustained abnormal profit nor an
ability to extract the consumer surplus. Thus, economic profit approaches zero
in the long run and the return moves toward the normal level according to
economic theory. Monopoly, however, can exploit consumers by controlling supply
and prices, by
circumventing anti-monopoly laws and regulations, and making its business complicated
and less transparent. As an example, commercial banks can make loan contracts
so complicated that ordinary borrowers have no way to fully find out if they
are getting a good deal. One of the most egregious f orms of rent seeking "has been that ability of those in
the financial sector to take advantage of the poor and uninformed, as they made
enormous amounts of money by preying upon those groups with predatory lending
and abusive credit card practices" (p. 37). In modern time, a new kind of
phenomenon is strengthening the monopoly power; this is called network
externalities. Good examples of this are the computer operating system and the
cell phone. The super interconnectedness across the globe has necessitated
standardization that further brings economic power to those having control over
the standards and the technology. Government has also facilitated rent seeking
through protectionist policies such as imposing barriers to market entry, imposing
tariffs against imports, by regulatory forbearance, and by granting too many patent
rights. Dr. Stiglitz argues that even though such policies are intended to promote
innovations, researches and creativity, or serve other useful purposes, they
also increase rent seeking.
Likewise,
giving country's natural resources to wealthy corporations at a minuscule price
reinforces rent seeking so does the asymmetric information problem. For instance,
prior to the recent financial crisis, a number of ? financial institutions created and sold
securities they knew were risky and would fail; however, they withheld this crucial
information from investors. He argues that government, knowingly or
unknowingly, strengthen rent seeking scheme by handing cash to companies like
pharmaceutical companies through the Medicare drug benefit. "A provision in the
law that prohibited government from bargaining for prices on drugs was, in
effect, a gift of some $50 billion or more per year to pharmaceutical
companies" (p. 49). Similarly, when the Federal Reserve lends money to
commercial banks at an almost zero percent interest rate, this allows banks to
profit handsomely from free money. The same holds true for generous subsidies extended
to a number of other industries. "Sadly, government munificence does not end
with a few examples we have given, but to describe each and every instances of
government approved rent seeking would require another book" (p. 51). The
author claims that the United States differs from other countries at a similar
stage of economic development when it comes to income and wealth distribution
simply because its market forces are shaped by a political process that is
protective of the rich. Rich companies are also able to win by changing the
rules of the game to suit their purpose. "They use their political influence to
get people appointed to the regulatory agencies who are sympathetic to their
perspectives" (p. 47).
In
addition to government, there are some other forces that contribute to
inequality; these include discrimination in various forms, globalization, and
advancing technology. Mismanaged globalization benefits only certain
corporations and the increased use of technology leads to elimination of
low-skilled jobs. As the supply of unskilled workers increases, their wage
rates keep falling causing wage disparity and exacerbating inequality. Too,
technology has increased the availability of advanced capital tools and higher
productivity of labor, especially in the manufacturing sector. Thus, business
firms can produce a given amount of output with a smaller number of workers
giving rise to higher unemployment and lower overall wage rates. Unemployed
workers may not be able find jobs because their inadequate education and lack
of progressive skills make them unemployable in modern industries. Again,
government could play a positive role in ameliorating the situation. "The most
important role of government, however, is setting the basic rules of the game,
through laws such as those that encourage or discourage unionization, corporate
governance laws that determine the discretion of management, and competition
laws that should limit the extent of monopoly rents" (p. 57).
Globalization has not helped either since the increased competition in the
labor market has stripped workers of their bargaining power. Frictionless
mobility of capital resources and labor throughout the world has created
circumstances in which the wage rate for ordinary workers continues to
deteriorate. Dr. Stiglitz argues that globalization has neither increased the
overall output of countries nor facilitated an even distribution of dividends
of liberalized international trade. "In effect, globalization hurts those
at the bottom not only directly but also indirectly because of the induced
cutbacks in social expenditures and progressive taxation" (p. 63). In a nutshell,
globalization has led to further inequality and unleveled playing fields.
Meanwhile,
despite dwindling wage rates for ordinary workers, top corporate managers have
been able to seize a larger share of corporate earnings thanks to the flawed
corporate governance system. According to the Economic Policy Institute, the
ratio of CEO pay to the average worker wage rate was 231 times greater for
about 350 of the largest corporations in the U.S. in 2011. Even after all
the post Great Recession backlash and public outcry against high CEO pay, it
still remained high--$9.6 million in 2011 according to a report by Associated
Press. Between 1990 and 2005, the cumulative surge in average CEO pay was
nearly 300%, while corporate profit rose by only 106% and the average wage rate
for workers rose by only 4.3% during the same period.
Discrimination
is another source of inequality in the United States. Despite the significant
strides made in fighting discrimination, it still persists not only overtly but
also implicitly in its new form. Especially after the Great Recession,
discrimination has intensified against defenseless minorities who are usually
easier targets of unfair treatments; the same is true for low-income borrowers.
Prior to the Great Recession era, "the banks saw them as easy targets, because
they had aspiration of upward mobility; owning a home was a sign that they ? were making it into America's middle class"
(p. 70). Unfortunately, however, they lost massively after the price bubble
burst in the housing market which resulted in the loss of their savings,
especially in African American households.
Government
not only did not do enough to reverse the course of deteriorating income
distribution, it even contributed to it by requiring a lesser amount in taxes
from the top income earners as well as lowering the tax rate on capital gains.
"The top marginal tax rate was lowered from 70% under Carter to 28% under
Reagan: it went up to 39.6% under Clinton and down finally to 35% under George
W. Bush" (p. 71). Given that the rich gain a major share of their income
through capital gains, 57% currently, a lower tax on capital gains provides
them with significant benefits. "Lowering the tax on capital gains from the
ordinary rate of 35% to 15% thus gave each of these 400 [highest-income
individuals], on average, a gift of $30 million in 2008 and $45 million in 2007
and lowered overall tax revenues by $12 billion in 2008 and $18 billion in
2007" (p. 72). In addition, the "loopholes and special provisions have eviscerated
the [income] tax to such a degree that it has gone from providing 30% of
federal revenues in mid-1950s to less than 9% today" (p. 73). The existence of
such loopholes enables the rich to minimize their tax liabilities especially by
hiring skilled tax lawyers. ?
Part 2 soon
Source: http://www.opednews.com/articles/Rising-Economic-Inequality-by-Reza-varjavand-130124-222.html
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[Editor's Note: This is a weekly series. If your company is doing something amazing to help a charitable cause or doing some good in your community, please reach out.] What if just by buying a t-shirt that spreads a message for a charitable cause, you could help fund that cause? What if there was a website that highlighted a specific cause and t-shirt every week? And what if that website donated $7 from each sale to that cause? You’d have Sevenly.org, and a pretty amazing startup with the sole purpose of helping to raise both money and awareness, all with fashion, e-commerce and you of course. By highlighting one cause a week, Sevenly puts all of its focus on promoting that cause, who benefits from it, and gives you a simple call to action…buy a t-shirt. I spoke to Ryan Wood from Sevenly and here’s how he describes his startup’s mission: The way that our model works is that for every single product purchased from our website, Sevenly donates $7 to that weeks cause on behalf of the supporter. For example, if our supporters purchase 1,000 products during the 7 day campaign, Sevenly will write a check for $7,000 and donate it directly to the cause (charity partner) for that week. Through this model we’re also able to do some pretty exciting things. Often times we’re able to quantify our purchases to say, for example, for every item purchased an orphaned child in Thailand will be provided with daily meals for an entire month. Or, for every item purchased a child struggling with cancer will be given a jar full of toys that will bring joy and happiness to their lives. In addition to being able to quantify these purchases, we are able to introduce match donors occassionaly for our campaigns, raising the donation amount from $7 to $14 per item purchased, and in some cases, a full $21 donated per item purchased. This week’s shirt benefits Child Help, which is dedicated to helping victims of child abuse and neglect. The company has already raised $1,554,040 for various causes since its launch, with its items being shared on various social networks 4,018,721 times. That’s quite a network effect, and pretty good for a company that started less than two years ago. While I’m not a fan of infographics, Sevenly has put one together that shows you why their model works
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