Income: Too Many Degrees of Separation

The U.S. government should take steps to address the widening income gap, as the top tier of Americans gain additional wealth while those on the lower rungs stagnate or lose ground

Pro: Not Even Bush Can Deny the Disparity

Over the past three decades, the U.S. has steadily grown into a society defined by inequality in income and inequity in opportunity. A populist campaign against widening inequality helped propel Democrats to power in Washington in the last election. The nation’s chief economist, Federal Reserve Board Chairman Ben Bernanke, highlighted the troubling distribution of income and opportunity in a Feb. 6 speech. A week earlier, President Bush remarked on the trend and acknowledged it as "real," noting that inequality "has been rising for 25 years."

The traditional promise that the rising tide of a strong economy and rapid productivity growth will lift all boats isn’t proving true. Throughout much of U.S. history, citizens didn’t concern themselves if the rich got richer so long as most everyone else prospered, too. Higher productivity has served as the foundation for raising the living standard of most Americans. And for the past decade, productivity has grown robustly.

Yet waiting for the income payoff has been like waiting for Godot. For example, from 2001 to 2005, productivity rose at a strong 3.1% average annual rate while real compensation per hour expanded at a mere 1.4% pace, calculates Stephen Roach, chief economist at Morgan Stanley (MS).

These figures are disturbing on their own. Yet their social and economic effects are magnified by another trend: the rise in economic insecurity. Evidence is mounting that more and more workers are frustrated about the economy, worried about prospects for their children and themselves, and fearful that the economy is evolving in ways that make life increasingly capricious and unfair, leaving the mass of Americans behind no matter how hard they toil.

Fortunately, the policy prescriptions are finally gaining attention. Education reform, for one, is paramount. Too many schools are failing to prepare their students for a college education, the ticket to a good job in our intensely competitive economy. Equally important is creating a social safety net, as job stability has declined.

If policymakers don’t address inequality and insecurity, they risk ending up with an economy that will lose its flexibility, dynamism, and openness. Clearly the economy is malfunctioning, because the fruits of productivity aren’t being broadly shared. And that’s not the American way.—by Chris Farrell (For a fuller version of Farrell’s thoughts on this subject, please see "Inequality for All?")

Con: Forget Tampering. Higher Salaries Will Come

Schemes to right alleged wrongs over the income gap will fail to yield whatever vision of equality the perceived do-gooder aims to achieve. When government decides to veto the marketplace and shift funds from one group to another, it cannot avoid "interfering with people’s incentives to work, to invest, and to save," as S&P’s chief economist, David Wyss, puts it. It becomes an experiment in social tinkering that typically disappoints, with the best proof no farther than the decades of dismal economic growth across much of Europe.

Productivity gains account for only part of the tale. In the late 1990s, amid the tech boom, numerous respected economists bought into the idea that we were witnessing a fundamental paradigm shift in productivity fueled by an Internet-based economy. Worker productivity seemed to advance inexorably. Recent experience has shown this is not the case, that hiccups will occur along the way. Still, our economy has indeed experienced a fundamental shift because of the Web, and as we learn to exploit and fully integrate these new technologies and processes, workers will benefit.

Evidence exists that the income gap also results in some measure from corporate governance practices, specifically from hefty executive compensation packages. In recent years, payments to top executives have ballooned to 250 times the take-home income of the average employee.

In essence, a finite resource—corporate capital—is being allocated in a radical new fashion at many companies, with a growing share of that lucre awarded to the very top via the acquiescence (and folly) of complicit directors and once-meek shareholders. Nonetheless, this, too, is an arena in which government should steer clear and allow capitalism to render its remedies.

The real issue is not so much what government ought to, or can, do about compensatory gaps but how it can help give everyone equal opportunity for higher income. To this end, we should encourage a far better education than many Americans now receive.

Wyss maintains that as reading and writing once served as the prerequisites for proper participation in our democratic U.S., we now all need a post-high school education for that same role. Numerous studies have established the case incontrovertibly: the deeper one’s journey into scholarship, the greater one’s earning potential. As Fed Chairman Bernanke noted in his Feb. 6 speech, median weekly earnings differ by 75% between people with only a high school education and those with higher degrees.

We should concentrate on giving every American the same tools and opportunities to achieve income, not devising methods to transfer disadvantage toward those who have overcome the income gap.

Reader Comments

anonymous

Why does the "con" article not have an author? Too ashamed to reveal that he is full of baloney? Let the markets fix themselves (aka let the rich people who control the markets keep their money)? There is no market incentive to close the inequality gap. Overcoming the income gap is hardly an accomplishment if you were born into a rich family and got into a good school, because your parents happened to make a "timely donation." It's time they were told to give their money back to the poor and exploited people they stole it from—unlikely to happen from any current politician who's entire campaign is funded by private wealth and corporations. Whose interests are they really going to represent? Oh yeah, and the dismal economic growth in Europe means that everyone has health care and a higher standard of living...

mike

The reader has signed his message "anonymous," yet complains that the con article is unsigned—hypocritical or just drinking too much Kool-Aid.

Bridgett

Once again the sycophants for corporate greed can't get the message that wanting to reign in "unfettered capitalism" by a government seeking to create a balanced society is not only sound public policy but also the American way. We have never been a nation of unfettered completely free-market capitalism, and that is due to the need for a strong government to check and balance the power of Corporate America.

TraderJay

Yes, doing something about people with high incomes is a great idea if you want those people to move to other parts of the world where the higher productivity and entrepreneurial spirit that resulted in that income will be better treated.

Yes, we can raise up those at the bottom by smashing hammers on the heads of those at the top.

Cool-Aid

I'm rich and happy, so leave it be.

çhîçô

I think the income levels are seperated so much because some people work to get money, and others don't.

Most wealthy people studied hard in school and worked their way up through companies. Of course many inherited the money, but somewhere in their family the money was earned.

As I see students that don't care about their work and studies, I suspect they will end up in a less happy situation. They fool around in life and expect to get the same rewards as the people that worked hard.

The solution to closing the income gap is not to make the rich pay for the poor, but to make the poor work.

tscham

Agreed. Better education and the resulting productivity increases are the only way to sustain a continuously improving standard of living for the country overall. It's not possible to maintain sustained growth via capital investment or population growth alone, so "working smarter" is the key. This particularly affects the less privileged and middle class whose jobs are under pressure from foreigners who earn a small fraction and deliver the same results. (This is fair enough: Should we not support a meritocracy? Shouldn't we be working on a converging world?) Outsourcing is here and is not going away, so it's all down to education, education, education, guys, so tell your politicians.

ps

The problem with unfettered capitalism is the Darwinian result of winners and losers, which really is human nature. But even this is now distorted by the existence of working poor who can't get ahead while executive failures receive nine-digit departure packages. It's hard to sell the present economic environment as "rosy" when there seems to be an oligarchy that protects its own, winners and losers alike. Unfortunately if the marketplace and corporate governance does not address these imbalances, they will be addressed in the voting booth, which means a swing from unfettered capitalism to an even worse scenario—unfettered liberal income redistributionism with a likely smattering of protectionist trade barriers. What ever happened to the moderate approach?

kumar

There should be an upper ceiling on what CEOs can earn in their salary and bonuses. Most of the average CEO pay hikes are in the millions, whereas a good employee who is an asset gets less than a $12,000 to $14,000 increment in his or her lifetime. That is why GM and Ford lost to their rivals; they lost quality workers and quality in vehicles to Toyota and Honda and now Hyundai. These companies don't need stupid CEOs. They need quality engineers with medium salaries.

frustrated and MORE poor

If you want to talk about inequality, look at what the politicians of Indiana have done for themselves: an 18% raise and a cost of living increase for them, but not the rest of the state employees—smaller staff, more work, more stress, less money. How do you rationalize that?

Philip Livingston

Everybody is missing the rampant deflation apparent in the U.S. economy. So much so that BusinessWeek's "The 25 Best Affordable Suburbs in the U.S." from November 16, 2006 only had 24 places listed. It's like the Katrina of wealth stories; we lost an entire American city.

Going Up like Bob Dole

I'm 33, and I'm on my way up. I started at the bottom making minimum wage (and sometimes less than minimum wage) while putting myself through school, finally earning a master's degree and a doctorate. My parents gave me nothing, which is also what the government and my school gave me.

I've started at least 10 businesses and failed at at least 7 of them. There were times when I couldn't make rent or buy new clothes.

Finally, this year, I'm making about 11 times what the average person makes. Next year, I'll make about 20 times that. I have a long way to go until I'm making 250 times what the average worker makes, but one day I will be there. That's part of the motivation for working as hard as I do.

While I, too, have lamented the widening gap between the richest and poorest Americans (mostly because I was in the latter group), I'm doing something about it for myself. So, if I top out at 20x, 250x or 8,000x the average worker, I will deserve it. And that's the way things should be.

Ramesh

I think the real issue is not income but net worth. While the income disparity between the highest-paid and lowest-paid U.S. workers is high, the net worth disparity is even more dramatic.

As the average baby boomer moves to retirement and has to draw upon very limited savings or depend on social security, we are entering into a period of reckoning. This will become a major political issue in the next ten years. The U.S. tax code, which taxes earned income but has many loopholes for returns on capital, will be challenged. It would be wise for us to recognize that the current system is untenable and work towards a more equitable solution quickly.

One impediment to change is that politicians are protected with secure health insurance and defined pension plans and don't feel the pinch themselves. However, at some point, they will be made by the public to challenge why there are so many handouts to corporations, which benefit wealthy shareholders, while we don't have national health access or secure retirement for working poor in this country.

Filip

History is rich with examples of societies that did not address their income disparities. Wealth should naturally flow to those who are productive. Nonetheless, that same group has earned the right to prevent the type of crisis the income gap could eventually become.

s perkins

Here we go again....social engineering and the righting of perceived injustices make the liberal day!

Anjalika

The problem with this country is that corporations are getting greedier by the day and taking jobs overseas to make big profits and exploit poor labor.

Business school teaches that cutting costs or lowering costs keeps a business afloat. What we see are not good business practices but exploitation at the cost of American workers. We don't pay any less for manufactured goods made in China. The corporations get it cheaper and sell it as if it were manufactured by higher-paid American labor. The gap widens, and profits soar. The consumer does not benefit. In fact, most of the consumers lose jobs, and their buying power goes with it.

When in reality, one is supposed to work hard, get educated, and find a good job. Doing all that, I have failed to get a job because of other reasons--age not being equated to experience. I am 57 years old, but have a recent master's degree, excellent skills, and a good record and a strong resume. How come I can't get a job? The rich are getting richer by getting cheap workers who are lazy and come for lower wages. As a result, quality of service, accuracy, and other standards are dropping. Not knowing Spanish has cost me many jobs. When I immigrated to this country, I came with good English, which is the language of this country. Now knowing English but not knowing Spanish is a disadvantage. Spanish speaking people are considered more employable. What about other immigrants to this country? Only Spanish-speaking immigrants are considered special. Sad but true.

Corporations are selfish--especially those that serve the public. Due to cheap labor, the quality of staff results in errors in bills and lack of interest in the job, but companies don't care to hire quality people--they want the cheap workers.

As an immigrant who lived here 23 years, I have seen standards go down and watched this country slide when compared with other places that are thriving. Money is the bottom line but not necessarily for the good of this country.

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