Income inequality worsens under current administration

Since 2009, the President has vowed to reduce income inequality. Exactly the opposite has happened.  Here’s why. Photo: AP Photo/Mark Lennihan

WASHINGTON, November 14, 2013 — Despite the desires of the current administration, income inequality in the United States is getting worse.

When President Obama ran for office in 2008, he said he wanted to reduce income inequality and “share the wealth” so that the top income earners would receive a smaller share of the income and the bottom income earners would receive more. To accomplish this, he increased aid to the lowest income earners by extending unemployment benefits, dramatically increasing the food stamp program and eliminating the work requirement for welfare recipients so that they could receive benefits easier and for longer time periods.

In addition, he raised the taxes and eliminated some deductions for the top income earners.

This massive transfer of income away from those who have earned it and toward those, who for whatever reason, have not earned it, was supposed to reduce income inequality. In fact the results were exactly opposite to Obama’s intention.

Certainly no one argues that we should eliminate all inequality and go toward a system where all workers receive an equal income. This would be the theoretical basis for a communistic system, where people are paid according to need rather than our system where an individual is paid according to the value of their output. But many learned scholars advocate a more balance distribution of income.

Nobel laureate Joseph Stiglitz says that unequal societies are inefficient and tend to have unstable, unsustainable economies. He further argues that income inequality hinders consumption spending and therefore causes “a shortfall in aggregate demand.” To fix this he says that higher taxes, particularly for the upper-middle class and up, will help even things out, thereby “unlocking the U.S. economy’s growth potential in a sustainable way.”

That view seems a bit baffling since higher taxes on the wealthy will tend to reduce investment and therefore slow the economy. This reduces the number of jobs, particularly at the entry level, which will make income inequality worse.

Others like Nobel laureate Paul Krugman say that “extreme inequality is destructive.” He further notes that “(because of) the growing concentration of income at the top, the effect of that concentration is to undermine all the values that define America.”  So he too advocates that the government adopt the “Robin Hood Principle” and over-tax those who have earned the income in order to give the funds to those who have not earned it. The reality is that this will worsen income inequality by reducing investment capital that is needed for growth in new job opportunities.

The other side of the argument is that because people are paid according to the value of their output, lessening of income inequality should be accomplished by providing opportunity for lower income earners to make greater contributions and increase their earnings rather than just giving them something for nothing.  It is, in fact, this something for nothing program of the current administration that has caused the problem to worsen.

As an individual receives payments without contributing, there is no incentive to contribute, so these individuals stay on welfare or continue to receive food stamps or claim unemployment benefits for as long as possible. The increase in income from working a 30 hour per week job (the administration’s definition of a full-time employee) is negligible and therefore the person stays on the government payment program as long as possible, keeping their income relatively low.

The other part of the problem lies with the policies of the Federal Reserve. In order to finance the government’s huge deficit spending and keep interest rates at near zero levels, the Fed has been buying $85 billion per month of treasury bonds. This amounts to about $1 trillion of new reserves injected into the system annually.

When this happens, investors who would have normally purchased these bonds seek other investment opportunities, usually in equity markets. This huge increase in demand for stocks causes prices to rise.  Because the capital gain tax rates were increased for the wealthy in 2013 (another attempt to reduce income inequality that backfired) investors sold the stocks before the end of 2012, when the income inequality figures were calculated.  This sell-off lead to vast increases in income for the wealthy investors making the inequality figures even more skewed.

So what is the solution? First off, we should realize that there will always be inequality of income because there is inequality in the value of the contribution.  To reduce this gap, we should concentrate on increasing the income of those at the bottom, not by taking away from those on top. This is done by growing the private sector of the economy. As the economy grows, jobs are added.  Workers who prepare themselves for these jobs can then find the opportunity to contribute.

While there continues to be a debate about the actual effects of income inequality, we would all agree that raising the incomes of those on the bottom will benefit all of us. Our policies should be geared to expanding the business sector, perhaps by reducing their income tax rates and reducing capital gains tax rates, so there is more investment capital as well as more incentives to invest and by reducing regulations that tend to hinder growth.  Unfortunately we are doing just the opposite, so income inequality is likely to worsen.

 


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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and an Associate professor at Richard Stockton College teaching Finance, Financial Institutions, Introduction to Financial Management, Game Theory, Graduate Managerial Economics, Graduate Financial Management. 

 

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