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The Real Story on the Income Gap

Cynthia Tucker, a Pulitzer prize winner in 2007 for commentary, and visiting professor at the University of Georgia, recently published an opinion piece titled “Growing Income Gap is Ripping the Social Fabric.”  The premise of the article is that a growing income inequality resulting from global mega-trends presents us with one of our biggest challenges (I presume she means “us” as a country) but that it’s neither the fault of Congress or the president.  Of course, the dysfunctional Republicans aren’t helping because they are busy enabling the rich.  And those Democrats, while they recognize the problem, seem to have few real solutions. However, Tucker to the rescue.  Her cure, to start addressing the problem, is “raising the minimum wage…, an overhaul of (our) educational system, cheaper college costs and a public works program that pays a decent wage.”

To seriously discuss the growing income gap you have to ask two critical questions.  First, why is the income gap growing?  According to Cynthia, it is the result of mega-trends that began in the 1980s “as globalization and technology starting stealing the factory jobs that paid good wages and gave average workers a toehold in the middle class.”  She cites the elimination of bank teller jobs as people are replaced by smart ATMs.  I’ll agree.  Automation has eliminated jobs.  But it has also created jobs that never existed previously.  ATMs have created a host of new jobs including software engineers (most ATMs worldwide operate using a Microsoft operating system), ATM manufacturing jobs, the people who repair broken ATMs, the people who stock ATMs with cash and the people who now provide phone banking support as in-bank tellers have been reduced.  I don’t know if anyone has performed a specific study, but a pretty good guess would be software engineers at Microsoft, production personnel at ATM manufacturing companies (many manufactured in the US), ATM repair men, and security guards who stock ATMs with money, all make more than traditional bank tellers (salary.com says that 50% of basic bank tellers make less than $23,000 a year). 

Well then, what about those good manufacturing jobs being shifted overseas?  Is that responsible for the income gap?  If it were, then you would have to assume that most of the people employed in the US in manufacturing jobs, who lost their manufacturing jobs due to globalization, subsequently took non-manufacturing jobs, at significantly lower wages.  Further you would have to agree that those manufacturing jobs accounted for a significant portion of this country’s middle class. Since the mid 1970s (about 40 years) we’ve lost about 5 million manufacturing jobs.  However the job loss has occurred over many years, and further, as a percentage of the total number of people employed in the US (about 150 million) the annual job loss is relatively small (less than a tenth of a percent per year).  Further, even though we have lost manufacturing jobs, we have gained a significant number of jobs in high paying occupations such as software engineering and development, healthcare, insurance, financial services, oil and gas, solar energy and other fields. Certainly many of the lost jobs in manufacturing were replaced with equally or even better paying jobs in other fields.  For the jobs that were shifted overseas, many replaced archaic, outdated and inefficient manufacturers, causing everyone to pay the price to support businesses that were no longer viable.  The average American’s standard of living has increased substantially (over that same 40 years) due to access to goods at reasonable cost manufactured overseas (not to mention the help from logistics and supply wizards at companies like Walmart and Target who can provide us goods cheaper in the US than those goods cost in their own countries of manufacture).

Cynthia puts up a typical “straw man” argument.  The income gap has nothing to do with jobs being shifted overseas or automation.  The income gap has occurred almost entirely due to government economic policy.  There are five economic policies of our government that are primarily responsible for the income gap.  The first one is monetary policy.  The government continues to print money, borrow money and spend more than it generates in taxes, which results in a substantial decrease in the value of what anyone earns.  In the mid-1970s ten dollars would take me out for a Saturday evening.  I could put gas in my mom’s Toyota station wagon, drink beer all night, and buy a burger and fries on the way home.  An inflation calculator will tell you that the purchasing power of $10 in 1970 is about the same as $50 today, but those inflation calculators take into account a whole cross section of goods and services.  Today in Los Angeles to fill up my car with gas, to drink beer all night and to buy a burger and fries will cost me closer to $100.  Why?  Primarily because the value of each dollar has decreased, as a result of the government printing more money and excessive government spending.

The second government policy that has created the income gap is taxation.  If a wage earner wants to create wealth, he or she must save and invest part of what he or she earns.  As an individual’s wealth increases, so does his or her income, as dividends, interest and rents accrue on the principal.  In 1914 if you made $20,000 a year, you paid Uncle Sam 2% of your income.  98% of your income was yours to spend and invest.  In 2014, if you earn the equivalent of $17,000 in 1914, you’ll be paying 33% of your income, and maybe another 10% depending upon which state you live in, not including a host of hidden taxes that did not exist in 1914 (by some estimates as much as 60% of our income now goes to pay taxes).  This taxation has made it every more difficult for the wage earner to set aside funds to save and invest, thus increasingly the income gap, as people who already have significant asset bases, can readily invest those dollars.  Recently the Ferguson city manager was taken to task for funding the city’s budget from traffic violation fines.  However Ferguson is not unique-virtually every city in America, including Beverly Hills, includes a significant revenue line item for victimless crimes.

The third government policy that has created the income gap is our collective government social policies.  On the one hand, we have made great strides in providing protection for those in society who have bad luck and/or who make bad decisions.  We have social policies that provide healthcare, education, housing, and food for people who need help.  We could argue that in some areas that help could be better than what it is, and we could argue that in other areas it may be unnecessarily generous.  But for the income gap argument, those discussion are irrelevant.  Human nature is such that every person has a point of resistance, at which for that person it is easier to accept the status quo, than to make the effort to change personal circumstances. For each of us, that point is different. Patrick Henry could not conceive of any life but one of freedom, and was willing to give up his life for it.  Millions of other British subjects were more than happy to live under King George, and didn’t think having a greater say in their own destiny was worth the risk of being shot. 

I contend that for a significant portion of the US population, the effort to improve their financial lot is more than they are willing to commit in order to improve their economic circumstances.  This is true not only for someone earning $200,000 per year, but for someone earning $20,000 per year.   Each of us has a point at which it is just easier to live with what we have, than to put in the effort to achieve more.  Today, someone on social assistance can earn close to the average wage (now about $50,000) in the United States.  While that would not suffice for Donald Trump or Bill Gates (or me) it will suffice for many of our citizens.  Therefore, unlike 100 years ago when it was work or starve, the incentive for many is no longer there to put in the extra effort and personal sacrifice to improve their situation.

The fourth government policy that has created the income gap is the government’s war on business, particularly small business.  Through restrictions on capital formation (the fuel that funds new enterprise) from the Securities and Exchange Commission, the regulations and compliance requirements on business (from all levels of government), and the Gestapo like tactics of the IRS, it has become increasingly difficult to fund and operate profitable businesses. The result?  Businesses are not being created at a fast enough pace to provide employment for the people who need jobs.  Even small businesses with a handful of employees are today making decisions to open in other countries. The laws of supply and demand are at work in the labor market—when you have more workers than good jobs, wages will stagnant.  When that occurs while the government is devaluing its currency through its monetary policy, you will see a real reduction in the relative wealth of citizens.  That is exactly what is happening right now.

The fifth government policy is immigration.  The United States has always been a country of immigrants.  Throughout our history people from other countries came to America seeking a better life—a life without kings and tyrants, a life with rule of law, a life where hard work was rewarded and a life where people could live out the American Dream—that if you worked hard your children could do better than you, not held back by a class system that favored certain types of people.  But just like a sponge can only absorb so much water, a country can only absorb so many immigrants.  Today estimates are we have from 11 million illegal immigrations to as many as 20 million (the more probably number).  If we have a work force of 150 million, that means illegals are close to 15% of the workforce.  Simply economics will tell you what happens when you increase supply buy 15%--prices will drop.  If economic growth cannot keep up with the increase in the labor force, you will have stagnant wages. Further, as wages are the bottom are kept down, so will wages throughout the wage chain.  As we recover from the recession this law of supply and demand of labor has been proven in the marketplace.  Many large corporations have begun increasing wages, as the supply of ready labor is drying up, as more people are back working.  However, this trend will only hold if we don’t see another wave of millions of illegals into the country.
 
The second question you have to ask about the income gap is how important is it, really?  Cynthia thinks it’s one of our biggest challenges—bigger than gang violence, the erosion of our dollar, single moms, illegal immigrants, disease, healthcare, the drop in our standard of living, the limitations being put on our freedoms, over spending by the government and Islamic terrorism.  I disagree. We have many issues that are more important than the income gap. However, the real test of the importance of the income gap is not the size of the gap, but the comparative lifestyles of those at the bottom of the economic spectrum, as compared to those same people in years past. Bill Gates can afford to charter a mega-yacht for $5 million a week. I managed to go on a Royal Caribbean cruise costing about $2,000 a week.  Clearly the ability of Bill Gates to charter a yacht for $5 million and my ability to only pay $2,000 is due to our income gaps.  Am I really that hard done by because I can’t afford Bill Gate’s cruise?  I have been on about 15 cruises in my life.  My parents went on one cruise, and it was their vacation of a lifetime.  Isn’t that a better barometer of how well we are off today, as opposed to the size of the gap between my income and that of Bill Gates?

Any student of history recognizes the life of those at the bottom economic levels of society have historically been grim.  Today, someone on welfare has access to better food that I did when in my teens.  Even people of modest incomes have access to housing, good food, clothing, education, healthcare, entertainment, communications and so much more.  Isn’t that the best barometer of how people are doing, as opposed to comparing the income of someone making $15 an hour to Bill Gates? 

Also, it is important to recognize that while some of this improvement in the lifestyle of those at the lower end of the spectrum is due to government programs, much of it is due to the very technological advancement, gains in productivity, and sophisticated distribution systems of the free enterprise system that according to Cynthia have created the income gap to begin with. Isn’t it interesting that the costs of consumer products (subject to limited government intervention) continue to drop while the costs of healthcare and college (subject to tremendous government intervention) continue to rise?

In my college years I packed a lunch box with a tuna sandwich and a thermos with coffee.  College students today drink gourmet coffee and eat at Panda Express, Subway, Taco Bell, A & W, and more.  There is absolutely no question that most people are better off today than their equivalents 50 years ago and more so than ever for those at the bottom of the economic spectrum.
       
So what is Cynthia’s solution to this problem that she sees as one of our nation’s biggest challenges? Tucker’s solution is a bunch of government programs and intervention.  Great.  Now we are going to get the very people who caused the problem, to fix it?  The income gap and the associated (and more important) reduction in wealth of the average person is a direct result of government policy. 

She suggests raising the minimum wage.  That’s a temporary fix for those at the lowest level of the economic stratum and it doesn’t create jobs or improve the economy, and further, it is both discriminatory and infringes on our personal freedoms  (see my article on minimum wages).

She also suggests an overhaul of our educational system.  Sound great but our educational system is a complex array of federal, state, county and city government bodies, private and public institutions, special interests such as unions and huge lobbies.  Any such overhaul could take decades, and if good paying jobs are the problem, how is fixing the educational system going to help?

She also suggests cheaper college costs.  Again, how does that fix the problem?  More educated people who don’t have jobs?  Besides, through grants, subsidies and government backed loans, anyone who really wants an education can get one, and further, we are now spending money trying to educate people who either don’t have the intellect for it, or don’t have the desire to apply themselves to the task.

Finally she suggests a government works program that pays a decent wage.  So that’s the way to create a healthy middle class?  Where does government get the money for this program?  Who does it take the money from?  How does the government sustain the expenditures for this program?  We can’t afford the programs the government has now.

The real issue is not the income gap.  It is the erosion on the value of our earnings and savings due directly to government monetary policy and the lack of new jobs and the opportunity for wealth accumulation due to government tax policy and government regulation over business operations and capital formation.  Until you begin to address these issues, the rich will keep getting richer, and the rest of us will become increasingly reliant upon the government.  It doesn’t sound like a good scenario, but you never know, maybe that’s the plan.

SMALL BUSINESS IMPACT:

The issue of the income gap discussion is significant for small business. The income gap is not the real problem. As we have discussed, the real problem is stagnant economic growth and the eroding value of our dollar.  But the media and government have colluded to present the income gap as a problem because it is easier to blame rich people than to take responsibility for failed economic policy.  The concern is that the ideas being fostered to fix the income gap issue (such as Cynthia’s increase in minimum wages, government work programs and cheaper college) all require the government to generate more taxes and fees to pay for these programs.  Where does that money come from?  As rich as they are, Bill Gates, Warren Buffet and Oprah Winfrey don’t have enough money to pay for all of these fix-it programs.  The fix-its will come from increasing the tax burden and the regulatory burden on small businesses, making it increasingly difficult for small businesses and entrepreneurs to operate profitably and create wealth for their owners.

Author:  Michael Manahan

Copyright 2015

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