Banana Road

 

October 5, 2012

During the first presidential debate on October 3, 2012, the question of income inequality should have been front and center. It’s the nation’s biggest domestic issue (Income Inequality is America’s Biggest Challenge: United Nations Economist). And it links to just about every other issue that is on the table: health, education, economic growth, even democracy and the competition that is necessary to a free market (The American Dream Is a Myth: Joseph Stiglitz on the Price of Inequality). But even though the debate focused on the economy, neither candidate mentioned the issue.

Perhaps neither candidate wanted the debate to turn into another round of name calling about moochers and takers. Regardless, the issue remains: inequality has been increasing since 1970 and the gap between the top 20 percent and everyone else has been getting wider. Here’s a very good picture of the data from the West Coast Poverty Center at the University of Washington.

banana road Fig1

The top 20 percent have about 50 percent of income, while the other 80 percent of us share the rest. And the top 20 percent’s share has been steadily increasing since the late 1960s, while the share of the other four quintiles has been steady or decreasing slightly.

The story for wealth is similar. In 2007, the top 1 percent held about 43 percent of the nation’s financial wealth (richer-rich-and-poorer-poor).

To say that people outside the top 1 percent are pretty unhappy about this income and wealth inequality is an understatement. Most of us are working hard, but are not getting the same rewards that other hard-working people—those in the top 1 percent—get. In fact, our productivity at work has been increasing, but for people outside that top 1 percent, wages and income have stayed pretty much the same (“You Have Nothing to Lose But Your Gains available at http://www.motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph).

Discussion about income inequality veers off in several directions. The liberal side tends to talk about redistributing income so that we end up with an outcome that looks fairer. The conservative side says that people in the top 1 percent have earned their large share of income and wealth because they work harder, are more productive, and create jobs that produce economic growth. In fact, they say that some of the wealth the top 1 percent generates will eventually trickle down and improve the economic circumstances of the middle and lower economic groups. No evidence from the income distribution data supports this idea, which has been around since the Reagan administration in the 1980s. The evidence is clear: the wealthy are staying wealthy and becoming more so, the middle class is getting poorer, and the poor are staying poor (http://economix.blogs.nytimes.com/2012/07/10/richer-rich-and-poorer-poor/). A lot of finger-pointing and more name-calling goes on.

Both sides look at federal taxes to either support their position or construct a solution. But a look at federal taxes doesn’t help that much.

The highest income quintile has the largest share of income, but also pays the largest share of taxes. When you break that highest quartile into smaller groups, though, a different picture emerges.

Still, in 2009 the top 1 percent paid almost 39 percent of individual federal income taxes (that’s 39 percent of the taxes collected, not 39 percent of their income) and 47 percent of corporate income taxes—more than any other group. This is consistent with the income picture: greater share of income, greater share of taxes. But it isn’t consistent with actual tax rates. For example, the federal income tax rate in 2009 for married individuals filing jointly and earning more than $357,700 was 35 percent. So  people in the top 1 percent (about 1.1 million households) paid a little more than the top income tax rate, but no one else in the highest income share quintile came close (about 22.5 million households).

Our social insurance programs and tax programs really don’t appear to be redistributing wealth or income from those at the top to those at the bottom or in the middle—an argument that is often made.

Can we pin responsibility for unequal income distribution on one political party or the other? No such luck. Between 1969 and 2012, we’ve had eight different presidents, five of them Republican and three of them Democrat. We’ve had 22 different Congresses, with sometimes one or the other party seemingly in charge. But the Senate and House must work together, and no party has had enough votes in recent years to enact legislation on its own.

So, which political party is responsible for the increasingly unequal income distribution in the United States? Conservative or Democrat, Republican or liberal, the outcome seems to be the same. Not incidentally, the salary of most members of Congress is $174,000. The average before tax income of people in the 81st – 90th percentile of income shares was $131,700 in 2009; for people in the 91st – 95th percentile of income shares, it was $175,800.

I suspect that the income inequality we are observing is the end of a long process that is a bit like the card game war. The player holding most of the cards from 10 through the face cards is likely to win.

But life is not a card game. In a card game, the players either agree to play another game, or they find something else to do—eat, watch TV, go outside, or go their separate ways. And in life, the winner makes the rules. And the rules that are being made (or unmade) are resulting in an ever greater concentration of wealth and power among a small group of people. For an example, look no further than the financial crisis of 2007 and the resulting recession, the effects of which are still being felt by most people—well, with the exception of the top 1 percent of the income distribution. They are doing just fine.

Whatever the short term result, the long term result won’t be good for anyone. One of the factors that promotes a country’s general welfare is economic growth. When the economy is growing, everyone’s prospects are better. Economic growth relies on productivity, which depends on physical capital, human capital, and technology. Human capital and technology are both affected by the workforce’s quality of education. Without a well-educated workforce, it’s unlikely that we can keep research & development, innovation, and technology advancing at the pace we’ve been experiencing. Growth also relies on political stability and property rights. And it is affected by how well the financial system functions. We’ve already seen cracks in the edifice of our financial system. As income and wealth become increasingly concentrated and higher education becomes increasingly more expensive, the quality of our workforce’s human capital is bound to deteriorate; deteriorating health will also have a negative impact on the quality of our workforce. Even without social unrest, a loss in our capacity for economic growth is likely to follow.

Countries that have a pattern of unequal income distribution that is similar to the trend in the United States are Guatemala and Honduras, both commonly referred to as banana republics. A small group of very wealthy people are in charge in these countries, and the majority of their citizens are poor—an economic underclass or peasantry, if you will.

Banana Road Fig2

Banana Road Fig3

If we allow the political process to carry on as it has been, is our fate to become a banana republic? Maybe we’re already there, and we just don’t want to admit it. I’m not the only one who speculates in this direction. New York Times columnist Nicholas Kristoff made this same comparison in 2010 the day after midterm elections.  And Christopher Hitchens, writing in Vanity Fair, made the observation in 2008 in the wake of the financial crisis.

So, what comes next? I don’t have a concrete answer to that question, only a metaphor. If you’re on Banana Road and you don’t like where it leads, find a new road. And if none of the other roads are appealing, build a new one.

Someone needs to ask Republican presidential candidate Mitt Romney if he and his party can even acknowledge that the problem exists. And if they can, what they have to offer as a constructive plan for the future, without resorting to failed ideas like supply-side economics and trickle down or name-calling like socialism. President Obama also needs to be asked some hard questions about addressing income inequality. Does he have a constructive plan for the future that does not distort (or not too much) the incentives that drive activity in a market economy? And if the current distribution of power in Congress remains as it currently is, how does he plan to get things done with a group of people who don’t believe in compromise and refuse to be led?

 

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