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The paycheck problem

Stephen Tuttle - November 1st, 2010
The paycheck problem
As the campaigns finally, and mercifully, come to an end (and let’s
take a moment here to bow our heads in reverential thanksgiving for
whoever that blessed soul was who invented the “Mute” button on our
remote controls), there is a fairly startling issue politicians of all
stripes chose to ignore. And with good reason – no one has a clue how
to fix it, although most agree it’s a serious and growing problem.
Paul Krugman, a Nobel Prize winner in economics and columnist for the
New York Times, calls it “The Great Divergence.”
The problem here is the growing disparity between the very richest
Americans and the rest of us.
Economists have been keeping statistics on income disparities for a
very long time. Since the financial crash of 1929 and the subsequent
nightmare of the Great Depression, the income of those of us who
occupy the bottom 90% of the financial ladder has been slowly but
surely increasing. In 1950, for example, the bottom 90% earned 64.4%
of the income out there. By 1980, that figure had crept up to 65.4%,
maintaining a trend in which the bottom 90% was actually catching up
to the top 10%. Then it just stopped.
By 2008 that number had plummeted to 51.7%. So the top 10% of income
earners were earning nearly half of all income. And that 10%
controlled even more of the country’s wealth.
The last time we had such a difference between the haves and have-nots
was 1928.
How did such a thing happen?
The temptation is to blame it on Ronald Reagan and his unproven supply
side economics. By restructuring the tax codes Reagan relieved the
tax burden of our richest citizens, anticipating the additional funds
at their disposal would be used for investing, inventing and consumer
spending, all of which would have had a positive “trickle-down” impact
on the rest of us. The first part of the equation worked swell – the
rich got richer. But the only thing that trickled down to the rest of
us was financial woe. The economy did not expand; although,
ironically, the size of government at all levels did.
But there is no straight-line correlation between Reagan and today’s
mess. To the extent he shares some blame, he is certainly not alone.
After eight years of Reagan, we had four years of Bush the Elder,
eight years of Clinton, eight years of Bush the Lesser and now a
couple years of Obama.
During those 30 years we’ve had 20 years of Republicans in the White
House but about the same number of years of Democratic control of
Congress. In all those three decades, the only period during which
the poorest 90% made some small gains versus the top 10% were during
the Clinton administration – a Democratic president and a Republican
Congress.
Capitalism, even the modified and regulated version we now use, will
always have some income disparity. An integral part of the system is
to reward investors, entrepreneurs and risk-takers. The rewards can
be enormous, especially for those already rich.
In fact, the really, really rich have been doing extraordinarily well
the last couple of years while the rest of us hung on, or worse. In,
2008, those at the very top of the income scale in the U.S., who made
$50 million a year or more, averaged $91.2 million a year. Last year,
though the number in the group shrank, their average annual income had
increased to a truly staggering $518.8 million.
Though there are only 74 individuals in that rarefied income air,
they make as much money as the 19 million Americans at the bottom of
the income ladder. That’s right – the top 74 income earners make as
much money -- almost $40 billion -- as the bottom 19 million income
earners.
Most economists agree this is an unsustainable disparity. As the gap
between the very few at the top and growing number of us at or near
the bottom increases, the economy continues to stagnate. Small
business start-ups and expansion, the backbone of the Michigan and
national economies, continue to diminish as what little capital is
available is controlled by a relative handful of our richest
Americans.
The solution? Good luck finding one.
We know that attempting to redistribute the wealth through onerous
taxation will not work. Returning to the higher progressive tax rates
that existed prior to Reagan’s presidency is tempting but a practical
political impossibility. Congress was unwilling to allow the fairly
modest Bush tax cuts to expire on the very rich, so bumping them up
even more seems incredibly unlikely. The very concept of forced
wealth redistribution is antithetical to the entire idea of
capitalism, even our version of it. The truth is we haven’t yet found
that Goldilocks taxation level that isn’t too much or too little but
just right for every income level.
On the other hand, allowing capitalism to run unbridled seems to lead
us to financial calamities over and over. There must be some
reasonable regulation and equitable taxation or the system doesn’t
work for the majority.
We encourage and allow the acquisition of wealth. We accept that some
people are going to be much wealthier than most of us. But we’re not
likely to accept for much longer the reality of one-tenth of the
population making half the income and controlling 80% of the overall
wealth.
We’ll see if our newly elected Congress has an answer. If not, those
of us in the bottom 90% will eventually get tired of sniffing around
under the table looking for scraps and demand a little bit bigger
share of the financial meal for ourselves. That will be a bad day for
the politicians who haven’t bothered to try and figure it out already.

 
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