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Sunday, October 14, 2012

The Inequality Puzzle in the U.S.

We are in the middle of a heated political season. Candidates are talking about the top 2% of wage earners quite a bit and how they may have to shoulder the burden of tax increases if we are ever to balance the Federal budget. It is all nonsense. There are simply not enough of them to cover the enormous expenditures no matter how confiscatory a tax rate you gave them via new legislation. Tax reform? Absolutely! Cut expenses and reform entitlements? You bet! A blend of the two seems imminent despite the political ravings of both major parties.

Most dub the top 2% as households earning in the range of $250,000-275,000+. That is indeed a nice income but, of course, it depends. If you live in Manhattan and are sending two children to private school and paying local taxes, you may find money tight and live in a cramped apartment. In a small Texas town you would be a leading citizen and living the good life at that salary level. As a statistical wonk of sorts, I decided to do a deep demographic drilldown on the people whom you don’t hear about as much—the top 1%. The results are eye opening and surprised me and I should know better having spent my entire life analyzing demographics.

Here are few factoids that set the tone for what is going on:

--The top 1% has an AFTERTAX INCOME OF approximately $1.3 million while the bottom 20% gets $17,800. Nobel Laureate Joseph Stiglitz expressed in a recent CNBC interview that the top 1% makes more in a week than the bottom 20% does in a year.

--The top 1% of US households has 225 times the wealth of the average US household. This is roughly double where we were in 1983.

--If you look at the INCREASE in capital from 1979 to the present, 88% has gone to the top 1%. The bottom 95%, which includes some upper middle class on down to poverty level folks, has garnered just under 3% of this capital increase. So, the top five percent has 97% of the increase.

In discussions with a few friends, we used this analogy to explain what is going on with the dispersion in the increase in capital. This is hardly original but makes the point:

Suppose there is a room full of 100 hungry people. A few men wheel in the world’s largest pizza cut into 100 perfectly equal slices. One fellow signals to them and he is given 88 of the slices and leaves. Four others step forward and they take nine slices as a group and depart as well. The remaining 95 people split the last three slices with some getting a bite or a few crumbs and most nothing .

Now, let me be clear. In a market economy, there will always be an unequal distribution of wealth. Some people work harder, some are smarter, some are more talented, and, let’s face it, some are just luckier than others. But going back to 1979, things seem to be getting more and more polarized in the US and the middle class is getting hollowed out.  It does not seem to matter if a Democrat or Republican is in the White House or which party controls Congress.  Inequality gets wider and the movement is relentless (see Media Realism, “The Gini Coefficient and the Future”, 1/21/10).

Since I wrote about the Gini Coefficient (level of inequality) 22 months ago, the US inequality had grown wider than in previous decades. If we keep up at this pace, I would forecast that our level of inequality would soon rival that of Iran, Uganda, and Jamaica. I would not want the US to join that foursome!

So, is America still the land of opportunity that lured our ancestors to these rocky shores?  For many of you reading this post, it certainly has been. But what, we might ask, of our children, our neighbors, and the generations to come?

Here are a few observations from my perspective:

--The politicians are fighting the last war. They keep harping on re-establishing the industrial base in the US. It can improve but millions of good paying blue-collar jobs are gone forever.

--Mining firms are now experimenting with robots to do underground digging for various minerals. This is great, as it will lower costs and put far fewer human lives in peril. When this technology is fully viable, thousands of good paying jobs are gone for good.  This is only one minor example. Technology of all kinds, not just robotics, is eliminating all kinds of positions. Think of the communications industry that has supported many of us. Remember paste up men, secretaries, and travel agents? Technology will not stand still so millions more jobs will be eliminated in the next few decades. Can we replace them?

--Our tax code is like a Swiss cheese. A 1% family can hire a top-flight team of lawyers and accountants to minimize IRS exposure. Nothing illegal here but perhaps some form of AMT, Alternative Minimum Tax, for those in the top 1% would require that they pay a flat 25% regardless of their deductions or exotic investments. This would not do much for the deficit at all but would instill a sense of fairness.

--Middle class people have most of their wealth tied up in their homes. As home prices have cratered, their net worth plummeted and some actually went to negative net worth as their money owed exceeded the current value of the house. Conversely, those in the top 1% often have relatively little of their wealth tied up in personal real estate.  Someone worth $100 million could have two $5 million homes but not feel it when the value of each dropped $1.5 million. They make more than that in tax favored annual dividends. So, the real estate bubble and crash of the last decade may have exaggerated things a bit in terms of inequality.

--The Federal Reserve is keeping the big banks afloat and, as a sidebar, is subsidizing the top 1%. High wealth individuals can borrow millions at 1.3% or so, buy high yield stocks, whose dividends can largely pay off the loan, and deduct the interest. The rich generally always live within their means and are the investor class. But, the artificially low interest rates from the Fed almost guarantee that they will get richer as they have access to ridiculously inexpensive money. Compare that to the millions struggling to make minimum payments on their credit cards at 18% interest. No one forced the struggling to use the credit card but the disparity seems out of whack to me.

--Why do you hear so little about inequality? Most people are not doing great but they seem numb to it. Are they too busy having a few beers and watching football? Occupy Wall Street had a brief blip going after investment banks but that died pretty quickly and did not get broad traction with most citizens (See Media Realism “Fado, Fatima and Futbol, 11/14/10).

--The American Dream may have become a nightmare to some but it still lives in the spirit of most people. Unless life has truly broken someone, most still feel that things will be better for them at some point and for their children. This spirit is vital and uniquely American.

If you want to keep on top of this issue and not have to wade through the weeds as I do constantly, you might want to consider occasional visits to Emmanuel Saez’s website—“Striking It Richer: The Evolution of Top Incomes in The United States.”

Over the decade to come, this polarization of wealth and income will affect marketing and communications in a big way. That, my friends, is a topic for another post.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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