PART
3: Income Disparity and the Decline of the Us Middle Class
Income
disparity between the middle and upper income earners has been on the rise
since the late 1970s, but the 21st century’s economic and financial
crisis starting with the dot.com burst of 1999-2001, followed by the global
recession exacerbated a volatile US economy. These events precipitated anemic employment
catapulting the issue of income disparity and inequality into the center of the
debate.
There is wide agreement across the political spectrum
that high inequality is contributing to detrimental economic conditions. These
include declining median household income and rising poverty rates. Less income by the middle class means less
taxes collected thereby increased borrowing and debt at all levels of
government.
This
has been clearly shown by the US Census bureau in 2011 reporting that that the
bulk of the US middle class has either moved into poverty or near poverty. This
was re-confirmed in their September 2012 report. At the same time, according to the Social Security
Administration Wage Statistics Report for 2010, the number of millionaires
has increased by 20%.
When America was more egalitarian, the US enjoyed strong
growth in the 1950s, in turn, improving and expanding its middle class, even
though the top income tax rate in that decade was more than 90 %.
At the same time, the upper income of the top 1% and 10%
continue to gain a greater percentage of America’s income. The 12th
edition of EIP’s “State of Working America” stated that “between 1979 and
2007 (the last year before the Great Recession) the top 1 percent of households
claimed more of the total income growth generated in the U.S. economy (38.3
percent) than that claimed by the bottom 90 percent of households (36.9
percent), even when including the value of government transfers (such as Social
Security) and employer-provided benefits. In that same period, income of the
top 1 percent of households grew 240.5 percent, compared with 10.8 percent for
the bottom fifth of households and 19.2 percent for the middle fifth of
households.” Chart 11 on the last page of this section based on information
from the US Census and Economists Emmanuel Saez and Thomas Piketty of UC
Berkeley, shows this disparity several ways the decline of the growth of median
income and the rise of upper income categories.
Frank Levy and Peter Temin Economists from MIT reported
in their published paper[1]
that “In the quarter century between 1980 and 2005, business sector
productivity increased by 71 percent. Over the same quarter century, median
weekly earnings of full-time workers rose from $613 to $705, a gain of only 14
percent (figures in 2000 dollars). Median weekly compensation - earnings plus
estimated fringe benefits - rose from $736 to $876, a gain of 19 percent.
Detailed analysis of this period shows that college-educated women are the only
large labor force group for whom median compensation grew in line with labor
productivity.”
Only until 1987 the top income tax rate dropped below 50
% in the United States. The current 15 % rate paid on capital gains tax
reflects reductions in 1978, 1981, 1997 and 2003, the statutory capital gains
tax falling to 15% from about 40%[2]
(see also Chart 4 below). Capital gain taxes are mostly paid by the top 10%
income bracket in the US. Even at the
end of the global recession of 2007-09, 93% of income gains went to the top 1%.
Since 2007,
the decline in the value of middle class assets has been in the trillions. For
most middle class households, most of their wealth is in real estate. Those
assets aren’t returning to pre-crisis levels anytime soon. Retirement plans such as 401 k’s and other
private pensions of many middle income families relied on as an asset also
declined ominously. The net worth of the
median U.S. family fell to $77,300 in 2010 from $126,400 three years earlier,
after adjusting for inflation, the Federal Reserve reported in June 2012.
The PEW Research Center also reported a similar outcome (see
Chart 11 below)
For affluent
households, for the most part their wealth is in financial assets. Those assets
are recovering much more quickly from the global recession due to the breaks
they are given in the US tax code for capital gains. It’s just one of many
reasons why and how the wealthy in the US have all the breaks over the middle
class (see Chart 6 below).
In fact,
according to the Pew Research Center in a report published in April 2013 after an analysis
of US Census data found that:
·
The
upper 7 % of households owned 63 % of the nation’s total household wealth in
2011, up from 56 % in 2009
·
Overall,
the wealth of American households rose by $5 trillion, or 14 %, during the
period to $40.2 trillion in 2011 from $35.2 trillion in 2009. Household wealth
is the sum of all assets such as a home, car and stocks, minus the sum of all
debts.
·
The
average net worth of households in the upper 7 % of the wealth distribution
rose by an estimated 28 %, while that of households in the lower 93 % dropped
by 4 %. That is, the mean wealth of the 8 million households in the more
affluent group rose to an estimated $3.2 million from an estimated $2.5 million
while that of the 111 million households in the less affluent group fell to
roughly $134,000 from $140,000.
·
The
upper 7 % were the households with a net worth above $836,033 and the 93 %
represented households whose worth was at or below that. Not all households
among the 93 % saw a decline in net worth, but the average amount declined for
that group.
·
On an
individual household basis, the average wealth of households in the more
affluent group was almost 24 times that of those in the less affluent group in
2011. At the start of the recovery in 2009, that ratio was less than 18 to 1.
This is
partially shown in Chart 14 below.
What is truly
unequal is that backers of financial institutions (i. e. Bear Sterns, AIG and
others) who could lose most investments in toxic mortgage backed securities
were saved in the big bank bailout of 2008 (otherwise known as Emergency Economic Stabilization Act of
2008). The middle class had nothing of the kind. More
so, while the middle class was going bankrupt those investors of derivatives are afforded special treatment in time of
bankruptcy while credit card and student loan debt are not allowed to be
written off.
To
know how the truly rich live, check out the book written by Michael Gross,
"740 Park: The Story of the
World's Richest Apartment Building," where he examines the waves of rich and richer who
have occupied the building since its construction on the cusp of the Great
Depression. Current occupants include
several of the ultimate .1% such as David H. Koch, or Stephen A. Schwarzman,
CEO of the Blackstone Group, or John Thain former CEO of Merrill Lynch. Another perspective is offered by the PBS
Independent Lens series “One Road, Two Different Worlds” broadcast in November
2012. This end of Park Avenue houses
some of the wealthiest people in the world but at the other end of Park Avenue,
across the East River, houses some of the poorest people in America.
The
consequences of the current large income disparity in the US is that the
turn-around from the 2007-2009 recession has still not happened, a fact
substantiated by a number of studies noted below.
Another
consequence of income inequity is instability.
Studies have shown conclusively that inequality leads to
political instability that may hamper countries’ effectiveness in responding to
external shocks. “We
are paying a high price for our inequality — an economic system that is less
stable and less efficient, with less growth,” Joseph Stiglitz, the
Nobel laureate who was chairman of the Council of Economic Advisers under
President Bill Clinton warns in his in-depth research published in his book
“The Price of Inequality.”[3]
To
understand the trends and information that supports this analysis on income
disparity please go to the website of the Center for Community Futures for specific details supported by authoritative sources along with various graphs
and charts.
[1]
Inequality and Institutions in 20th Century
America, Department of
Urban Studies and Planning. MIT, and Department of Economics, MIT June 27,
2007.
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