The income gap in America

It is not hard to miss an article or news report about the income gap in America. You know, the rich get richer and all that. While it is certain we need a strong middle class, the idea that the top one percent of Americans getting richer somehow is holding back the rest of us is puzzling to me. There are about 400,000 tax returns filed each year showing an income of $1,000,000 or more. I don’t know about you, but I wish I were one of them, I don’t begrudge them their success and I have a hard time blaming any of them for my station in life (although I have no complaints).  Heck, even the robber barons of the 19th century created jobs, museums and libraries.  The problem is that politicians and the media find it a lot easier to blame one group than to tell everyone the truth.  It is a classic strategy used for centuries, find a group or class to blame, divert attention from the real problems, create unrest and implement the changes a narrow group is seeking. 

Is it government’s job to “do something about this ‘problem’?” Should the tax code be changed so that more money can be taken from CEOs, sports stars, celebrities and entrepreneurs to be redistributed to the rest of us? 

Take a look at the excerpt from a recent editorial in the Washington Post.

 The rich get richer

EDITORIAL

Saturday, June 25, 2011; 06:30 PM

THERE’S NOTHING NEW, alas, about the increasing gap between rich and poor in America, where the share of national income, including capital gains, claimed by the top 0.1 percent of earners rose from 2.5 percent in 1975 to 10.4 percent in 2008. Still, the details never cease to amaze. In a recent Post report, Peter Whoriskey documented the fact that the average executive’s annual pay has roughly quadrupled since the early 1970s, while average wage income has crept up only 26 percent. No one who cares about the social cohesion of a society premised on the idea that all men and women are created equal can view such statistics indifferently. 

The question, though, is what to do about it. Some of the growing income disparity results from long-term social changes or market forces that are either inherently benign or practically irreversible. The statistics partly reflect the spiraling rewards to superstar talent in entertainment and sports. The golden age of U.S. income equality — from World War II to the 1973 Middle East oil embargo — stands out as an exceptional time when American wage workers were still mostly shielded from Asian and European competition. 

Corporate executives make up three-fifths of the richest 0.1 percent of U.S. earners, a result of the explosion of executive compensation. Government has a role in fixing this situation, but it’s worth recalling past efforts at regulating pay. In 1993, Congress ended the tax-deductibility of top executives’ compensation above $1 million, except for “performance-based” compensation. The resulting huge shift of executive comp into stock options probably left CEOs better off than before.

Why do we focus on the successful? 

“All men and women are created equal” are you kidding?  All men and women are not created equal and if they were we would have a world of cookie cutter people and still be sitting around trying to create fire.   People have different abilities, different personalities, they grow up in different environments, they have different priorities, IQs, drives, ambitions, they make significantly different life choices and much more.  That is why most people are average, some well below average and a few the highest achievers. 

“Government has a role in fixing this situation.” What situation is that, the one where a private sector corporation decides how much to pay its executives and shareholders don’t care? Why does government have a role as long as nothing illegal is done in the process of paying these people?  

Our current obsession with penalizing the high achievers is as troublesome as ignoring those who need the most help getting through life. 

Some Executives are Overpaid 

I happen to think it wrong that executives earn multi-millions of dollars without accompanying results that benefit all the stakeholders of their organization including employees.  I believe that corporate executives who grant each other million dollar stock awards one month and two months later cut the pension benefits of long time employees to boost earnings is wrong.  I think it is absurd that movie stars and sports stars make what they make.  However, none of that has a lick to do with the status of the middle class.  

The World has Changed-So Must Americans 

Many in the middle class have not adjusted to the new world economy and have gone on with their lives as their parents and grandparents before them.  To put it bluntly, they have their heads up their butts and living standard expectations beyond reality.  

Check the labels on the cloths you buy, or the electronics or even your car, you won’t find “Made in USA” very often.  Is that bad? Not if you want low-cost products to buy it isn’t.  Do you shop in Wal-Mart; do you like the low prices? Those prices cost someone their job or higher wages.  Do you support unions and their union wages and benefits?  Ok, be willing to pay more for your goods and services and your taxes.  The point is this is all connected, there is no free lunch.  The jobs in the US are changing, the skill sets needed are changing, what it takes to be competitive is changing (actually it has all changed already).   

You cannot act average and not expect to be average.  You can obsess over the obscene pay of some CEOs all you want, but what matters is what you do about your own situation.  I am not going to waste time listing all the dumb, irresponsible things people do and then wonder what happened to them years down the road, you know exactly what they are.  There is also no need to list the things the winners in our society do to be winners; you can see that on the History Channel or Biography.  Suffice to say personal choice and behavior has far more to do with the state in which we average folk find ourselves than what a hedge fund manager earns. There should be no surprise that many of our older Americans are low-income.  Even an economist knows that if you earn a very modest wage all your life you are going to have an even more modest income when you are not working. 

Although disputed, it has been reported that 60% of NBA stars go broke. According to Yahoo Sports, within two years of retirement, 78 percent of NFL players are bankrupt or in severe financial distress.  Not even those who get a break in life are always able to make sound life choices.  One in three lottery winners are in serious financial trouble or broke within five years of winning   

So what’s the secret to a strong middle class?  It is creating industries with jobs at which Americans can excel.  That means that Americans need education and training in the broadest sense.  They need the basics in the classroom and the right skill training, but they need much more.  They need exposure to the world that is their competition, to basic financial acumen and to common sense lifestyle smarts.  In other words, we need to help people break from their past and to think beyond their experiences.  We need to instill personal responsibility, accountability and reduce the welfare – entitlement mentality. 

We need to stop whining about the people we wish we could be and instead look in the mirror and ask why we aren’t the people we want to be. 

“We have met the enemy… and he is us,”  Pogo

3 comments

  1. The autobiography of Mark Twain attribues to Disralie a quote of: There are three kinds of lies, a lie, a damned lie and a statistic.

    Your article is great, but it misses the point. There is a concern that, based on all the bleating, Americans are less income mobile than in the past. The bleating crew of progressives conflate the incrased income inequality with a reduction in income mobility.

    The issue has never been about the allocation of income in America at any one snapshot in time, but how income allocation changes over time. Who among us would suggest Bill Gates was overpaid – given how he changed mankind forever.

    Looking for data – see Income Mobility in the United States: New Evidence from Income Tax Data, by Gerald Auten & Geoffrey Gee, National Tax Journal, June 2009.

    There is certainly a long term trend of increasing income inequality in the U.S. economy when measured as any specific date. But, those who would push class warfare never seem to find time to focus on income mobility and worker opportunity. Data from panels of individual income tax returns suggest that there was, is, continues to be considerable income mobility in the U.S.economy – more than in almost every other country in the world. Their data show that over the 1987–1996 and 1996–2005 periods, consistent with prior mobility studies, the data show that over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period. By contrast, those with the very highest incomes in the base year were more likely to drop to a lower income group and the median real income of these taxpayers declined in each period.

    Economic growth resulted in rising incomes for most taxpayers over both time periods.

    The composition of the very top income groups changed dramatically
    over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top
    1 percent in 2005. Less than one–fourth of the individuals in the top
    1/100th percent in 1996 remained in that group in 2005.

    And, over time, despite greater income inequality in the US than in other developed countries, the few studies that have compared mobility in the US against other countries have concluded that, despite significant cross-national differences in labor market structures, mobility rates seem to be quite similar across countries (see Urban Institute http://www.urban.org/publications/406722.html). This is not a new development.

    You are absolutely correct when you conclude: “We need to instill personal responsibility, accountability and reduce the welfare – entitlement mentality.” You just don’t go far enough because we also need fewer bleating voices who suggest our collective failure to progress economically is someone else’s fault.

    Like

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