Monday, August 22, 2011

A Guest Post--A Widening Gap of Rich and Poor

A very good friend of mine wrote the following post which explains in a calm reasoned way the widening gap between rich and poor in the United States. Please read it in that light. Maybe have Molly playing in the background

I keep thinking about the stuffwe’ve been discussing, and I think I’m beginning to understandwhat’s going on. I will try to lay out my ideas with language thatI hope will appear as apolitical as possible. Here goes.

Throughout all the national back andforth about “taxing rich,” and having them “pay their fairshare,” some facts have emerged that I think are incontrovertible byanyone on either side. The wages, and therefore disposable income, of themiddle class and below have remained stagnant or are declining. The wagesand disposable income of people at the top have increased. Here’sthe data from the Census Bureau on share of aggregate US income between 1967 and 2009:

Bottom quintile—down 18%
Second quintile—down 26%
Middle quintile—down 18%
Fourth quintile—down 4%
Top quintile—up 15%
Top 5%--up 26%

Understand that I’m not makingjudgments here. The right would say that the big earners should have morewealth, and the left would say it’s unfair. I’m not making ajudgment either way.

What I see here, however, does explain tome the lack of demand in the economy. The overall economy is driven bythe purchases of individuals and households. All households in the firstfour quintiles have experienced a decline in wealth over the last 42 years. This means that for the vast majority of things bought and sold in themacro economy, there is less disposable wealth to spend on them. Yes,there are probably more yachts, and luxury automobiles and second and thirdhomes being sold to the top quintile, but those, in aggregate, make up but asmall portion of the big economy. They’re niche markets you mightsay.

I remember, in a discussion with my son,saying that I don’t think many people in business have the vision ofHenry Ford. Henry Ford dramatically raised his workers’ wages and broughtdown the wrath of his fellow businessmen when he instituted the “fivedollar day,” but replied that he knew that if his employees made a betterwage, more of them would buy his cars, and they obviously did.

The engine that drives the economy is thatbottom 80%, who buy groceries, and IPads, and flat screen TVs, and cars, andclothing and all the rest. When it has less money to spend, the economystagnates. Many conservatives are fond of comparing the overall economyto a household budget, pointing out the wrongheadedness of spending more thanyou take in. Well, this bottom 80% have household budgets that have beentaking in less each year. So they’re doing the natural and rightthing. They’re adjusting spending to match income.

So it’s not just an issue of jobsand hiring, although those things are clearly very important. It’sthat the people who drive the economy have less gas in the tank to drive itwith than they ever had, and so demand begins to dry up. I think that youcan cut taxes to zero on the supplier side, and get rid of every regulationthat costs them money, and it won’t change the fundamental fact that thebuyers of what those suppliers supply simply have less money to spend.

The people in the top quintile have donea marvelous job of maximizing their earnings. But, to the degree thattheir earnings require that the bottom four quintiles have the income to helpthem earn more money things are trending toward the precarious. This iswhat I see in our economy right now. The drivers of the economy areslowly being marginalized, and it was their ability to buy all the crazyvariety of products and services that built the economy in the first place.

Understand that I am no preaching“class warfare” here, but merely observing the facts. Thereis less disposable money out there to buy things, and this to me is the core ofthe problem. Now, I don’t have a solution. But I do believethat unless we do something—and believe me, I don’t know what thatsomething is—to get to a state where the buyers can buy, the economy willremain stagnant. This is why I feel that what Eric Cantor is suggestingwon’t work. In fact, one might suggest that, rather than this beinga new solution, it is something we have already been doing for the last 40years or so. Our taxes on everyone are at the lowest level in 50 years,yet that reduced tax load does not appear to be making the buyers able to buymore. And even if it should somehow lead to hiring as Cantor claims (andwhich I, as you know, don’t believe), it is highly unlikely to increasewages overall and rectify our bottom 80% problem.

I am fearful that we have perhaps killedthe goose that laid the golden egg—the vast American middle class whogrew the economy. As I said, I don’t know what we should, or evencould, do at this point. There’s no way we’re going to justhand the bottom 80 money to spend. But I am convinced that getting thebottom 80 back to the level of wealth that they had just a few decades ago iswhat will change things for the better. Leaving this as it is, in thispolitical climate, is a recipe for economic disaster.


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