Uprooting Inequality, Jan 22, 2016

Uprooting Inequality

       Uprooting Inequality     

This essay was published at The Real News Network, see here.

Their "Economy" section provides quality interviews from some of my favorite economists. The INET does so also, The Institute for New Economic Thinking.
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Inequality of income and wealth has set in like a deep rot undermining the foundation of our society and economy. Uprooting it will not be simple. 

I enjoy numbers and think they explain better than anything the problem, so bear with me. “If wages had kept up with productivity over the last three decades your pay would be closer to:” states the Economic Policy Institute web page, and then one types in an income amount.
An income of $20,000 would be $32,576, a 63% increase;
an income of $40,000 would be $61,055, up 53%;
an income of $60,000 would increase 40% to $83,728,
and an income of $80,000 would be $101,782, up 27%.
The median worker income for 2014 was $28,851 states the Social Security Administration (SSA), that would be $44,357 states the EPI. The Congressional Budget Office issued a report on income distribution in 2011, revealing that $93,900 was the average household income, and adjusting for inflation it is now $99,000. And adjusting to find average worker income, each worker contributes $80,379 to the national  income — mean average. The SSA report shows the lower-earning 45% of U.S. workers earn less than $25,000, and the average income for this 45% is $10,523. The lower-earning 45% of workers earn in wage income about 6% of the total national income. Even though this seems unbelievable, you can do the simple math by following the steps in footnote below. 

It’s depressing, isn’t it? The United Nations issued its Human Development Index and found the U.S. ranked 5th among all 187 nations of the world. The U.N. also issued an index adjusted for inequality in which the U.S. drops to the 28th rank. Who would know that 31% of the U.S. population live in households with "zero or negative non-home wealth", or that 50% lived in homes with less than $10,000 in "non-home wealth"? (see Table 1 on page 56)  Especially when the net worth of all households is about $687,000. (See Flow of Funds report, page 2, and divide by 124 million households.) Or that 44% of the adults live in “liquid asset poverty”, or that 44% of U.S. children are being raised in families that are low income or poor? 

As a result, millions of lives are damaged, and a few unfortunate ones are destroyed.

Reversing this baked-in, nearly invisible condition will not be easy, but it is the political imperative of our time. Money is power and our political institutions have been corrupted. It will take education and a collective determination to readjust the flow of monetary resources. 

                      Remedies to Tame Inequality                 

Of the remedies put forth, those that raise wage income are the most promising: 1) create public jobs directly or through infrastructure improvement projects; 2) stronger and clearer labor union rights; 3) increasing the minimum wage and the earned income tax credit. In the late 1990s, during Clinton’s last term, the employment to population ratio reached its historical high, workers became scarce and employers raised wages. The employment to population ratio (E/P ratio) for all workers is at a 31 year low, and for prime working age workers it is at a 29 year low (see here and here). Using this scale, the E/P ratio, indicates a truer picture of the labor market than the usual unemployment rate which varies drastically because of labor non-participation, and the figure misleads the public into thinking the labor market is recovering. It is far from recovered. If we take the norm ratio for E/P to be the 20 year average, from 1986 to 2006, and calculate how far today we are from this norm, then we need perhaps 10 million jobs to come to the normal 20 year average E/P ratio. See below, in this essay, about the labor market. Bernie Sanders' proposal to spend $3.8 trillion over ten years is the only political solution that comes close to restoring and employing our workers. See this article, What Would Bernie Sanders Do?, at Dollars and Sense magazine. 

The Economic Policy Institute (EPI.org) has over the decades become the nation’s strongest advocate for workers, and they present eleven proposals that will raise wages. The renown economist Joseph Stieglitz has just released the book Rewriting the Rules of the American Economy. He details the institutional changes needed to uproot inequality. These deal with corporate governance, tax laws, labor laws, trade, and other concerns. Ellen Dannin has written about reforming the labor laws in Taking Back the Workers’ Law. The American Prospect has a book review of Thomas Geoghegan's book Only One Thing Can Save Us, see here. Geoghegan advocates for renewed labor rights to organize. And Salvator Babones has presented sixteen solutions for 2016 in his book Sixteen for ’16. And my favorite solution is found in Phillip Harvey’s report Back to Work, proposing a government direct employment program. For an investment of $180 billion a year we could raise the employment to population ratio for prime working age workers, age 25 to 54, back to its high of 2000. This  would raise wage income for 80% of workers (who are nonsupervisory workers) in the U.S. 

I do not wish to snow readers under a blizzard of numbers, but two more examples are very telling. The first deals with wealth. The average private household savings now is $691,000, and only 10% of households reach or surpass this level. The second deals with income. The total combined market income of the top-earning 1% of taxpayers is greater (16.7% of all market income) than the market income of 54% of taxpayers (16.4% of all market income). Market income is income before taxes and before government transfers. The 54% who make less than $50,000 a year earn a combined total less than the 1% who earn over $500,000 a year. The average income of the top 1% is 65 times greater than that of the average income of the lower-earning 54%. This is data from the Congressional Joint Committee on Taxation, 2014, see here, page 30. 

The Bureau of Labor statistics says the “median weekly earnings of the nation's 110.4 million full-time wage and salary workers were $803 in the third quarter of 2015,” and that equals $41,756 a year. The EPI web page would convert that amount to $63,259, except that inequality distorted the economy.

I packed a lot of information into this short article. The take-away is: Progress at this point is not necessarily growth of total output, the GDP, but is a fairer distribution of resources. This excessive inequality is a blemish on the nation.

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Notes: calculating 6% of national income.

Determine $12.7 trillion as total national income, at Congressional Joint Committee on Taxation report, page 30.   

Multiply by .06. Answer $762 billion. 

For workers earning below $25,000 a year, see the SSA report. 

Add the “net compensation” figures for the below $25,000 groups. 

It comes to $748,994,000,000. 

Divide national income, $12.7 trillion into $749 billion.  

Answer 6%.  

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I think the essay called Overview, July 2015 is the best summary of this blog. 

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Here is a graphic of Labor's Share of Income. It comes from the University of Texas Inequality Project, see here, page 34.
Note that the lower, dark share represents the lower-earning 90% of workers. The 90% received, between 1943 and 1980, in the range of 56% of total income. In 2013 its share appears at 38%, a drop of 18%. The 2014 total income was $12.7 trillion according to the Congressional Joint Tax Committee, and 18% of that is $2.286 trillion, divided among 112 million households (90% of total households) equals $20,483 per household. All this confirms the first paragraph above, the Economic Policy Institute's estimate of what incomes would be had they matched growth in productivity as they had for 30 years, 1946 to 1976.

                       

To take this a little further, a look at State of Working America's table, Income 2.4, (SWA) shows that 80% of households earned 27.2% of all income in wages, $3.455 trillion. That is an average wage of $34,828 for the 99 million households in the lower-earning 80%. (One must multiply 54.3% by 50.1%, wage share of total income by the share of wage income to the lower-earning 80%.) In an economy with mean average household income at $99,300, when the lower-earning 80% are earning 35% of the average for all, you have gross, excessive inequality, and it's damaging to all. 

    What if Income Were Distributed More                                          
                         Equally?                                  

What if our economy distributed 60% of its income among the middle 60% of households instead of today's 40.5%?

The SWA report distributes 40.5% of income to the middle 60%. 

The CBO report distributes 41.3% as market income distribution. 

The CBO report distributes 44.9% as after-tax income distribution.

The  ideal  per quintile distribution might be
7%, 15%, 20%, 25%, 33%.

-- 60% to the middle 60%. 

But we have in reality the following distribution: 

4%, 8%, 13%, 19%, 56%. 
 -- 40.5% to the middle 60% --
(this array from SWA Income, Table 2.4)
2.2%, 7.3%, 13.0%, 21.0%, 58.1%
-- 41.3% to the middle 60% -- from CBO market income 2011
9.4%, 10.8%, 14.2%, 19.9%, 47.3%
-- 44.9% to the middle 60% -- from CBO after-tax income 2011 (these two last arrays come from this CBO report on after-tax income distribution, Table 7, see "data underlying figures, xls, Table 7)

I think the CBO after-tax income distribution is most meaningful and accurate. I am suggesting that 44.9% to the middle 60% of households should be enlarged to 60% of total income. A 15.1% gain for these households would increase their incomes across the board by $1.9 trillion or $25,775 per household for all 74 million households. The median income for all households would be near $78,000. The EPI web page "How much should you be making?" shows that with an income of $53,000, close to the median, "your pay would be closer to" $77,007.
  This was the norm between 1946 and 1976. 

     A Paradigm Shift   Robert Kuttner has a recent article, "The New Inequality Debate" that offers a paradigm shifting view of the role of inequality. He says, "THIS REVISIONISM HAS HUGE implications for economic theory, for possible remedies, and for politics. If greater inequality does not reflect market efficiencies, then market distributions of income are not efficient. And policies that produce greater equality will, at worst, do no damage to economic growth—and quite possibly will improve it." 

Translation: inequality hinders an economy from reaching full potential. Everyone, especially low-paid workers, are hurt. The policy of full employment, government as the employer of last resort, would "quite possibly improve" economic efficiency. Not to mention providing meaningful work to willing workers whom the private sector has no use for. Kuttner's article offers much food for thought, and if the reader has a burning desire to probe the most advanced thinking on inequality, this is a good beginning.