The most common mistake people make about economic inequality is to treat it as a single phenomenon or that the issues that lead to it are more important on their own. Many of the modern political debates we face as a country all lead back to, or are because of income and wealth inequality. To better understand this, we need to look back at the issue from a series of questions. The first question is, what is happening in terms of the distribution of income and wealth? Number two, why? Number three, is it a problem?

Whether you consider yourself to be a conservative or liberal, labels such as those become increasingly irrelevant as you get deeper and deeper into this subject. Instead I ask you attempt to test your assumptions if not shake them up a little as to how you believe the system works as it does. Inequality is ultimately inevitable, some people are going to have the proper incentives to produce, to work harder, to be inventive because that is the essence of capitalism. The question is not inequality per se, it’s when does inequality become a problem? How much inequality can we as a democratic society tolerate and still have an economy that works for everyone? Of all developed nations today, the United States currently has the most unequal distribution of income and wealth by far, and we continue to move towards levels of grater inequality. The most common way of measuring inequality is to look at the earnings of those at the top versus the earnings of an average worker in the middle.

Back in 1978 the typical male worker was making $48,000 while the average person in the top 1% earned $390,000. Now if we fast-forward to 2010 that typical male worker is earning even less than he did in 1978, however the person at the top is getting twice as much as before. Today the richest 400 Americans have more wealth than the bottom 150 million of us put together. Meaning 400 people have more wealth than half the population of the United States. This has led to anger increasing over the economic system, leaving some rewarded but many others feeling left behind. After the crash in 2008, inequality was suddenly front-page news. People from both political parties were looking for someone to blame, but most of them had no idea how it got so bad, or even why. It wasn’t until reason years that there wasn’t much known about inequality we knew the top 10% or 20% were moving in one direction while the bottom 10% or 20% was moving in another. However, what many people didn't know what was happening at the very top, to the top 1%. They looked at IRS tax data, from all the way back to 1913, when income tax was instituted. This showed that there were two peak years, 1928 and 2007, for income concentration. Both in which the top 1% is taking home more than 23% of total income. We knew that inequality was increasing in the late '70s and the 1980s,but the issue was we didn't know how dramatically income concentration of the 1% had increased. Leading up to 1928 and 2007 as income became more concentrated in fewer hands the wealthy turned to the financial sector in both periods, and caused the sector to balloon. These individuals focus on a limited number of assets: Housing, hold, speculative instruments, debt instruments which caused a speculative bubble in both events. The middle class in both periods was experiencing incomes that were stagnating, and they went deeper into debt to maintain their usual living standards. Therefore, you see in both periods greater economic instability. What makes an economy stable is a strong middle class, and the most important thing to understand is that consumer spending is 70% of the US economy. The middle class is the heart of that consumer spending, and therefore it is the middle class that keeps the economy going. There is no way to sustain the economy over a long term without a strong, energetic, and growing middle class. 

There is no official definition of the middle class. However, Alan Krueger, chairman of the Council of Economic Advisors claimed the middle class to be households with annual incomes within 50% of the median household, with the median household income of $50,000. To be considered a part of the top 1% you need to earn at least $380,000 a year. The lower end of this group is filled with those at the top levels of professional fields, doctors or lawyers. Higher in the group, earning several million a year are successful entrepreneurs who often start profitable companies. At the highest levels are those earning $10 million a year or more are the CEOs of big corporations, the heads of Wall Street banks, top entertainers and top sports stars. The problem for many of those at the top who earn 1,000 times more than the typical American is that they don’t buy 1,000 more pillows a year. Even the richest people only sleep on one or two pillows, this transcends into other industries as well because fewer and fewer people can afford to buy the products that are made. You can be a part of the 1% and have the nicest Mercedes you can get, but it’s still only one Mercedes. Just because the rich have more money doesn’t mean they eat at five-course $300 a plate meals at fancy restaurants for every meal. You can only go out to eat so many times a year, or get so many haircuts a year. It boils down to the problem being that the rich spend to much of what they earn, its paradoxically that they spend too little. They don’t generate enough economic activity. Someone earning $8 million a year doesn’t spend $8 million, instead they save it. Those savings then can go anywhere around the world. While saving isn’t a bad thing normally, when there is so much unemployment, or underutilized capacity here in the United States we as a country need spending.

How are we going to create jobs if you’re taxing the very successful people in America who provide those jobs? Sometimes this issue is considered to be a debate over facts, figures or data. Do we raise taxes on the job creators in this country? “The people often seen as rich are what I call job creators.” These are common remarks made when discussing this issue however when someone calls themselves a job creator, they’re not describing the economy or how it works even though that is what it sounds like. Instead what they are really doing is making a claim on status, privileges and power. This is then commonly dismissed by those closer to the top by the blanket statement “Well, you don’t understand economics.” However, it isn’t the rich business guys who are the job creators, instead it is actually the customers who are the center of the economic universe.

But how do we solve this? We need to replace trickle-down economics with middle-out economics. If you look at ever place on the planet Earth that has prosperity you find massive investments in the middle class and the poor because they are the true job creators. The most pro-business thing someone can do is help the middle class by assisting them to thrive. Another common misconception is that there is no such thing as a perfectly free market anywhere. Governments are often setting the rules at which the market functions, and while many of these rules are necessary in order to construct the market the question is, who do these rules benefit and who do they hurt? Remember the economy is constantly growing, we as a nation continue to produce more and more and while this sounds like a big success story there remains one major problem to the puzzle. If you look back at average hourly earnings of production workers, they were rising until the late 1970s and then something happened, flattening wages. American manufacturing began to move abroad and the technological revolution was just starting. Financial markets at this time were becoming even more powerful and there was a move to deregulate the system.

You often hear the term “globalization” constantly when discussing economics, however your average person doesn’t fully understand the impact of it. Large numbers of American manufacturing jobs were lost, which lead to the undercutting of wages of a lot of working Americans. Even companies who stayed in the United States get rid of workers as they continue to automate. There is this current fantasy that we can get those manufacturing jobs back. However, you get those manufacturing plants back and they’re filled with robots and computers. There are no assembly lines staffed with works, instead it’s a conveyor belt with robots on either side. These “issues” aren’t the problem, because automation is unavoidable. Instead what is causing such disarray is the pace at which these jobs are disappearing. For example, the transition from a cashier in the checkout line to an automated checkout is advancing faster than imagined, and this leaves the cashier unemployed. By no means am I saying that automation is bad, or that we shouldn’t have it instead I’m stating we should possibly slow it down, or advance the retraining of our workforce.

Against popular belief, globalization and technology hasn’t really reduced the number of jobs offered to Americans. Instead these transformations reduced their pay. It isn’t just that wages are in a state of stagnation, but rather the rising costs of living paired with it. It is basically middle-class families who normally have two wage earners, working harder and harder, pushing themselves and their family along and getting nowhere. People would be less concerned about inequality of income and wealth if everyone had a chance to make it. As long as there is upward mobility and desire to make it in America, they can move up the ladder and we don’t have a problem. However this isn’t the case, 42% of kids born in the United States will not get out. Compare that to Denmark, where only 25% of kids are born into poverty are likely to stay there. The question many people then ask if who does it better? Robert Reich believes the best example is “the United States. In the three decades after World War II, a period that I call “the Great Prosperity” the economy boomed, but not only did the economy boom, but you had very low inequality. We made education a national priority, particularly higher education. By 1940, only 5% of adult Americans had a four-year college degree, but that percentage began to explode. By the late ‘50s, we had the best-educated workforce of any country in the world”.

One of the things we’ve learned about inequality is that it is directly linked to education, including higher education. Education more than anything else has been what has lifted people out of poverty and into the middle class. In the late 1970’s college graduation rates began to flatten out. Countries that focused on higher education dealt with globalization better because they created a highly skilled workforce. Countries like the Netherlands or Germany are invested in education, in skill building of their workforce. It’s what we’re not doing, yet need to be and while we wait to do so we fall even further behind.

Many people who are worried about widening inequality are also worried about another hot topic often seen in the media regarding our political spectrum. It’s not upward mobility, and it is not even trust. People are worried about the undermining of democracy. When so many resources, money, wealth and income accumulates at the very top that with money comes the capacity to control politics. This is actually where the blame can be found, and it is justifiable. It’s not that these people are rich, it’s because they abuse their wealth by lobbying for bailouts, subsidies and taxes that are going to entrench their wealth. If you look at the history inequality and top tax rates have had an inverse relationship. When inequality was lowest, top tax rates were higher. When inequality was highest, tax rates on the wealthy went down. The taxation system has tilted toward the rich and away from the middle class in the last ten years. No one really wants to pay taxes, but they are the way we pay to finance the kinds of things that we can’t do individually and need to do together. There’s kind of a negative trickle-down effect which starts in Washington. If the wealthy are not paying their fair share and if the middle class remains stagnant and aren’t paying much in taxes because they’re not making much money it can lead to a budget crisis. This leads to less revenue sharing with the states which means the states must pull in their belts and cannot support public higher education. As state funding to institutions of higher education goes down, tuitions went up to compensate.

Researchers measure the distance between the median voting patterns of one party, and the other. They found that in times of high inequality, you have the highest degree of polarization. This shows us how integrated and connected the issue of inequality is to our democracy. However it is important that we don’t let any of this stop us from making a difference. You can’t have a great recovery story without defeat before it. Anyone who feels cynical about the possibility of social progress just needs to consider where we have been. It comes down you you, and you don’t necessarily need to be elected president of the United States or some cabinet level position to have a huge impact. You can be a leader in many different spheres, and there are a lot of things we can be doing. The next generation, our generation are the ones that are going to change the community, our society, or maybe even the world. We just need to be filled with passion, and desire to achieve greatness.
