Income Inequality a Growing Problem in America

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The French economist Thomas Piketty, who teaches at the Paris School of Economics, has published a book that is generating a lot of attention.

In this latest work, “Capital in the Twenty-First Century,” Piketty puts forward a theory of capitalism that tries to explain its uneven distribution of rewards in the United States and elsewhere.

An article Piketty co-authored with University of California at Berkeley economist Emmanuel Saez in 2003, “Income Inequality in the United States, 1913–1998,” detailed how the share of U.S. national income taken by households at the top of the income distribution had risen sharply during the early decades of the twentieth century, then fallen back during and after the Second World War, but began to escalate again beginning in the 1980s.

Their findings are backed by other research. “Fiscal Policy and Income Inequality,” a report prepared by the International Monetary Fund earlier this year, revealed that in the U.S., the share of market income captured by the richest 10 per cent surged from around 30 per cent in 1980 to 48 per cent by 2012, while the share of the richest one per cent increased from eight per cent to 19 per cent.

 “One observes in the recent period an unprecedented rise of top managerial compensation in the United States” as well, Piketty told the New York Times in an interview last month. “This is a new form of inequality, which I attempt to explain in terms of the particular U.S. history of the social and fiscal norms over the past century.”

While the average American chief executive was paid about 20 times as much as the typical employee of his firm in the 1950s, today the pay ratio at major corporations is more than two hundred to one, and many executives do even better.

According to Deborah Hargreaves, director of the campaign group the High Pay Centre, the compensation received by chief executives of companies in the S&P 500 index in 2012 was 354 times that of rank-and-file staff.

Last year, the 10 highest-paid chief executives in the U.S. received more than $100 million in compensation, according to the Governance Metrics International Ratings annual poll of executive compensation.

A typical worker at Walmart earns less than twenty-five thousand dollars a year; Michael Duke, the retailer’s former chief executive, was paid more than $23 million in 2012. We see soaring profits and bonuses even as employment and wages stagnate.

Nor do these oligarchs have to give much of it back to society. The single most scandalous tax loophole in America, which allows people with the highest earnings to pay an insignificant amount in taxes, is the one on capital gains, because that carries a lower tax rate (a maximum of 23.8 per cent) than that on earned income (with a maximum of 39.6 per cent).

As billionaire Warren Buffet has famously remarked, his tax rate is lower than that of his secretary.

The result? The richest 10 per cent of American households now own some 70 per cent of all the country’s wealth while the entire bottom half of households own just five per cent. And the gap keeps widening.

A Gallup Poll conducted last September reported that 20 per cent of American said that they had, at times, lacked enough money to buy the food that they or their families needed during the year.

How will this inequality affect the very future of the American political system? Most people have assumed that capitalism and democracy are bound together in a symbiotic relationship. Is this no longer the case? Might there come to be a divergence between capitalism and democracy?

The poor won’t get much help from Congress – more than half of its members have an average net worth of $1 million or more.

A 2012 poll released by the Pew Research Center, “Rising Share of Americans See Conflict Between Rich and Poor,” is not encouraging. It revealed that young Americans were 14 per cent more likely than older Americans to say that the wealthy in America got there mainly because “they know the right people or were born into wealthy families” rather than because of their “hard work, ambition, and education.”

Is social mobility, the heart of the “American Dream,” becoming a thing of the past? President Barack Obama has called rising income inequality and lack of economic mobility “the defining challenge of our time.” He’s right.

 

Henry Srebrnik is a professor of political science at the University of Prince Edward Island.

Organizations: University of California at Berkeley, International Monetary Fund, New York Times Governance Metrics International Ratings Walmart Pew Research Center American Dream University of Prince Edward Island

Geographic location: United States

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