Income Inequality

There can be no doubt the single most blatant gap to be found in this nation of ours is an inequality in the income its citizens receive. It’s true, of course, the CEOs of some major corporations receive phenomenal sums. At the top of the heap you’ll find Elon Musk of Tesla, Inc. who in 2018 received [a 10-year package valued at] $2,284,044,884 – and from an auto company which over the past 15 years consistently operated at a loss.

Other CEOs receiving mammoth incomes included Robert Iger of The Walt Disney Co. with $65,645,214, Leslie Moonves of CBS Corporation at $47,061,688 and Lachlan Murdoch of Fox Corporation who garnered $42,111,103.

Understandably, we needn’t pluck out just the top earners to make our point. In 2018 America’s CEOs earned – if earned is the appropriate word – approximately $14.5 million on average. This compares to the average $39,888 that rank-and-file workers made. And we mustn’t stop here: One-quarter of American workers make less than $10 per hour. If they’re employed a full 40 hours a week and 52 weeks per year, it works out to $20,800 before deductions. Sadly, this constitutes an income substantially below the federal poverty level.

Under rational circumstances these statistics call for a reasoned analysis, followed by a program, as to how this inequity can be corrected with as little disruption of the economy and its participants as possible. However, this is not the way we conduct ourselves in the politicized environment we inhabit. Instead, the first questions we ask are: Who’s to blame and how can we penalize them?

I’m not exactly sure who’s to blame, but I sense what’s causing a portion of the income inequality. Unquestionably, American firms must compete with lower-priced companies in such countries as China, India, and Bangladesh, who pay their workers considerably less. In response, many of our companies outsource their high-tech and manufacturing jobs oversees. You might note the U.S. has lost 20 percent of its factory positions since 2000, many of them higher-paying union jobs.

Another factor which may be partly involved is the massive increase in college enrollment over the past decades. Education increases income, so those with a college diploma earn 84 percent more than those with only a high school degree. A recent study by the McKinsey Global Institute demonstrates this achievement gap cost the economy more than all its recessions over the past 40 years. Quite possibly this is partly responsible for the increased income inequality,

A third ingredient we must consider is the record-low interest rates we’ve (enjoyed?) since the advent of the Great Recession. These were designed to spur the housing market, making homes more affordable – and they did. Even so, although housing prices are leveled off somewhat, the average American is still unable to purchase a home. This is especially so for the younger people who typically form new households … whereupon income inequality further intensifies.

A final cause we cannot ignore is the ever increasing number of low-wage, dead-end jobs generated everywhere. Despite a near five-decade low in unemployment, the economy is not robust. An estimated 53 million Americans are earning wages averaging $10.22 hourly. You may credit this to the effects of job automation and exportation. The occupations remaining, such as retail sales, food preparation, cleaning and janitorial, construction trade, personal care, and a few others, require little expertise and therefore minimal wages. This is confirmed by Donna Gunther, an economist at the University of Kansas, who said “Even though we are at full employment, wages really haven’t gone up much in the recovery.” The result: more income inequality.

As we now better understand why those at the bottom of the income chain are there, what will be the solution to correct the problem? More specifically, what actions will the governmental entities take to assist those in the lower echelons of the economy to improve their station in life, while encouraging those who are prosperous to continue the activities that led to their prosperity?

It appears the political community … and particularly the many persons who aspire to become president … intend to proceed enthusiastically to end income inequality. Vermont Senator Bernie Sanders is advocating policies he contends will get at the root causes of these inequities. He calls for “expanding the social safety net, creating more well-paying jobs.” He neglects to describe exactly how, but claims “the super-rich and large corporations do not pay their fair share in taxes.” He therefore wants to “reform the tax code by raising the tax rates for the wealthiest Americans, taxing the fortunes of 0.2 percent, taxing capital gains and qualified dividends as ordinary income, and taxing Wall Street speculation.”

Quite likely Senator Sanders’ tax plans will pour a lot of money into the hands of the tax collectors, and perhaps some of it will filter down to the poor devils doing their best to survive on ten dollars per hour. But realistically, I don’t see how this will, as he suggests, be effectively “creating more well-paying jobs.” In general, dollars collected by the IRS normally end up in the government’s general fund, to be used for the typical inconsequential projects the bureaucrats dream up as they merely drift along.

Perhaps we’ll get some better ideas by tuning into the proposals of Massachusetts Senator Elizabeth Warren, another presidential hopeful, who formulated a revolutionary plan to reduce income inequality. The program she announced before the National Press Club in Washington on August 22, 2018, titled the “Accountable Capitalism Act,” is designed to reshape the incentive and governance structure for corporations.

It would breathe new life into the movement to restrain corporate power by forcing corporate boards to balance the pursuit of profits with the interests of stakeholder like workers, consumers, suppliers, the general public, and the environment. In short, she wants corporations to become socially responsible, for as she maintains, corporations are governmental institutions existing in some sense beyond the categories of public and private.

I’ll concede Senator Warren’s sentiments certainly convey a commendable ring in their aspirations, much in keeping with such virtuous desires as universal peace among all nations, possibly the resurrection of the lost continent of Atlantis, or perhaps – for those of you attuned to the Gospel of Matthew – the Sermon on the Mount. However, her passions seem to be somewhat lacking as a device to ensure any form of equality among the rich and the poor. Something a little more practical is demanded.

As you might guess, I’ve checked out the programs and policies advocated by a number of other presidential aspirants and found unanimity of intent. Among the particular interests each candidate harbored, one common desire seemed foremost: They all expect the prosperous among us to be subjected to higher taxes, this on the presumption it will help redistribute America’s wealth more equitably. And on this score, I’ll express my sentiments. I admit to lacking enthusiasm when it comes to paying taxes. Nonetheless, I recognize taxation as a necessity. Without it, no government can function … and without a functioning government, anarchy reigns.

This now gets us down to income and wealth inequality. I truly believe at some extreme point this leads to anarchy, with the French Revolution as a most appalling example. Therefore, as imperfect as taxing the well-to-do so to feed money to the destitute may be, it could nonetheless act as a safety value of sorts to keep our nation a viable society.

A final thought: In general, I do not subscribe to the concept of equality. I believe a community is better off when its citizens are a mixture of bright and dull, prosperous and indigent, energetic and lethargic, outgoing and introverted. These individuals then interact with one another to create a more vibrant and vital society.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al can be contacted at al@abjacobs.com.