Implications of Income Disparity

Introduction:

I have been reading articles over several years that warn of the dangers of increasing income disparity in the United States related to economic globalization with an ensuing loss of social mobility. My prejudice says that increasing income disparity is the result of greed and the ability of clever people to figure out how to manipulate the economic system to their own advantage. I subscribe fully to the notion that ingenuity; creativity and hard work must be distinguished and rewarded. It is a matter as to how much reward is necessary and to what extent there actually is a "free market" at work in establishing the reward system. It was Adam Smith's contention that the general interest is best served when each actor seeks personal self-interest. An "invisible hand" then guides the market, shaping these individual claims into a common good. Many argue that while much common good indeed can and does flow from Capitalism, it is a flawed system that requires active intervention by the State to moderate its natural excesses. To Adam Smith the invisible hand was the hand of God. It is interesting that Adam Smith somehow saw Capitalism as a gift from God. I sometimes wonder if rampant American materialism and over-the-top consumption is not the work of the Devil. It certainly is not a requisite for Capitalism. Egalitarianism is also not a requisite of Capitalism but is a requisite for a functioning democracy. Money represents political and social power and too much money in few hands drives out democracy. I believe that increasing concentration of economic power and a notion that equates political speech with unlimited political contributions is giving us a very corrupted political system. American democracy is sorely abused and in serious trouble. Corporations alone contributed over $500 million to the last presidential election. As you might infer I have a very strong commitment to government intervention to balance the distortion created by overly concentrated economic power and to insuring a fair quantity of economic justice. I believe that a fair degree of economic justice is critical to the proper functioning of a democracy. Economic justice in a free market Capitalist system requires a high degree of social intervention at many levels of the economic process and certainly requires a proactive distributive process for both pragmatic and ethical reasons. I believe that I, and many Americans my age, are the creation of the American societies commitment to social and economic mobility and to a social system based on meritocracy rather than economic birthright. As a child of the sixties my prejudices predispose me to believe that increasing class stratification is the natural outcome of decades of Reagonomics destroying the social and political environment that sustained my and my parents generation. In my worldview the excesses of greed and corruption that were manifest in the Wall Street driven corporate scandals of the past decade seem a natural outcome of Reaganomics. I lay the Adelphia, Enron, Tyco, Global Crossing and WorldCom corporate scandals all at the feet of a Reagan inspired glorification of personal greed.

Now if this seems a little like ranting it does give you a clear idea of my prejudice before we get around to any substantive discussion. It is also my way of paying tribute to Jim Hightower who certainly has provided me with considerable stimulus for this paper. I am a bit put off by Hightower's folksy style but he manages to pack his writings with more information than I can ever hold on to. If you have not read his books you really should. As folksy as he is, he is very serious and very careful with his facts. I highly recommend "Thieves in High Places". It is packed with information.

The American Dream

We all know that the founding documents of the United States declare all men (people) to be created equal. A very interesting claim that needs much exposition, which expresses a deeply held American notion that underlies the American Dream. One of my great heroes, Benjamin Franklyn, who as the 15th child of a candle maker, is the archetypical manifestation of this American Dream, the "self-made man". He was so successful as a newspaper printer and author that he retired at age 42 with a comfortable life long income and went on for the next forty something years to accomplish things that actually changed the history of the world. It was his financial independence that allowed him to make a real impact on World history. In today's America he might have gone on just to make more money and would have been just another overly rich American. I draw a line from Ben Franklyn to Bill Clinton, whose father died before he was born, and therefore was raised by a nearly destitute mother. By dint of personal effort Clinton went on to be a Rhodes scholar and eventually President of the United States. This is the American creed writ strong that proclaims that the road to success is open to all. Just get out there and start jogging and you too will make it. A real decline in social mobility runs counter to our deepest held beliefs about our society. Thinking about the changes brought on over the last 25 years starting with the Reagan presidency and accelerating during this President's tenure has clarified much of my personal disquiet about what is happening. It is the shutting down of social mobility that I have been worrying about when I have said that I think the Bushes and their corporate supporters are turning the United States into a banana republic. Latin American societies have been the long time example of rigid class stratified societies and that stratification has been one of the many problems that have slowed their social and economic development. The Progressive Inheritance Tax was proposed by Teddy Roosevelt partly as a means of insuring that wealth was gained in a merit based competition, on a more level playing field for all Americans so as to foster the greatest creativity and productivity. In this new "gilded age" in which we live, George Bush, a child of many generations of inherited privilege and wealth, has all but eliminated the inheritance tax and much of the real progressivity of the income tax system. The progressive income tax was another great social innovation for which we can give much credit to Teddy Roosevelt, a "progressive" Republican.

On Distribution of Wealth and Income

I will now sight some data to emphasize what has transpired economically over the past fifty years. The data has been gleaned from articles in the Economist magazine. I also used a series in the New York Times published over several weeks this past May and June on Class in the United States.

Here comes a small parade of numbers: In the twenty- five years after World War II the percentage increase in income in the bottom fifth of the population matched that of the top fifth. Everybody's income went up in a proportional manner across the economic spectrum. The rich got more but it was proportionately more. Over the past twenty-five years that has change dramatically. The median family income has gone up by 18% in real dollars but the income of the top 1% of families has gone up by 200% in constant dollars. In 1970 according to the Census Bureau the bottom fifth of families received 5.4% of total national income while the riches fifth received 40.9% of total national income. Twenty five years later the bottom fifth's share had fallen to 4.4% (a loss of 1%) while the top fifth had increased to 46.5% (an increase of 5.5%) which came out of the shares of all the rest of the population including out of the share of the bottom fifth. The top fifth managed to grab a bigger piece of a bigger pie. America is different than say France and Britain in distribution of income. Through most of the twentieth century the income of the European super rich (the top .1 %) and the American super rich kept pace. In 1913 this .1% (1/1000) of the population took in 10% of total income. By 1960 that share had dropped to about 2%. (Society had leveled considerably) In 1980 America's super rich began diverging from the rest of the world. In 1998 the super rich in Europe got about 3%, in the US they got about 6%. And this trend has continued its climb, by 2002 in America they were taking in 7.4% while in Europe they were still at 3%. Not quite back to 1917 for Americans yet but left to our current political system we will be back there. In the 1920's the super rich got most of their income from capital investment (from stocks, rents, and interest). Today their money comes from salary and stock options. It says that the super rich include a lot of "working people". Some may work for companies they actually own but many work for corporations. These are pretty special working people. Thirty years ago the average real annual compensation of the top 100 chief executives was $1.3M, that's 39 times the pay of the average worker and very nice compensation, thank you! Today the average compensation of the top 100 CEO is $37.5 M, over 1000 times the pay of the average worker. There has been a corresponding increase in compensation for all top corporate executives. I posit that there is something terribly wrong here, and it has nothing to do with free market forces but rather a seriously broken system of compensation, full of conflict of interest and rampant greed. As a result of this very top-heavy income distribution, by 2001 the top 1% of households earned 20% of all income and held 33.4% of all net worth in America. Now according to the Census Bureau the income of the bottom fifth of households still grew from 1979 to 2000 by 6.4% in inflation adjusted dollars. Of course the top fifth of households grew by 70% and most of those bottom fifth probably had two working people per family. Another important fact to keep in mind is that in 1950s, before the Great Society, 22% of all households were below the poverty line. Today that number is 12%. As the conservative think tanks like to tell us a rising tide lifts up the dinghies as well as the yachts. While it is very good that the percentage of people living in poverty has decreased it is important to compare US performance with the rest of the economically advanced world. The Organization for Economic Cooperation and Development, OECD, prepares statistic for all its 27 members. Those 27 members include all of modern Europe, Canada, Japan, Australia, New Zealand, Turkey and Mexico. According to their most recent study the United States has a larger proportion of its people leaving below the poverty line than any of the other 27 except Mexico so we are not doing all that well on poverty by international standards.

These numbers tell us that there has been a marked and significant realignment of wealth during the past thirty years. Observers on both the right and the left agree with these numbers and they agree that this sort of disparity has not existed in the United States since the so-called "gilded age" from 1880 to about 1910. They disagree in predictable ways as to implications for the future of the society as a result of the shift.

Are there real consequences to this very large income and wealth disparity? Are there major structural problems with the society? Might this be a passing phase that over time may correct its self. Maybe it is actually good for everybody. The economist claims that blue collar workers fair poorly because of the entry of China, Brazil and India into a now global market has more than doubled the worlds available work force in less than ten years. This is therefore the natural process of supply and demand at work. Industry cannot accumulate sufficient capital to put all these workers to work productively thereby also creating in turn more consumers to create the demand for goods they will produce. The same process happened in the US 150 years ago. As more capital investment follows more demand from emerging consumers in the third world, labor markets will tighten and eventually there will be an adjustment leading to more income equality. Surveys actually show that American's really don't care very much about how rich the rich actually get as long as they get some piece of the pie and continue to have faith in social mobility. That is, as long as their lives will get better, and that their children have a real shot at a better life and a chance to reach the top. For many it is the American Dream. We are not like the Europe, or Latin America from which our ancestors came but in fact a society of high social mobility. 68% of Americans believe that their society does a reasonable job of providing opportunity for everybody, including African Americans and women. In Europe majorities of people believe that forces beyond their personal control determine their chances at financial success. As long as we believe in that dream, Americans will continue to work hard and we will achieve a degree of social cohesion. If we lose that belief there will be serious consequences for our sense of who we are and our social stability. The Watts riots were a manifestation of anger about economic and social mobility arising from economic and social injustice.

The Political Class and the Loss of Social Mobility

The reality of America today no longer supports the belief in the "dream". David Sarnov, one time CEO of RCA, started in the mailroom and worked his way through all levels of the company to become CEO. And while I already pointed to Bill Clinton as a serious success story, he is the exception in national politics not the rule. In a country where every child is supposed to dream of becoming President we have produced a political class that is both excessively wealthy and self-perpetuating. George Bush is the son of a president, grandson of a US Senator and the descendent of a wealthy New England business family. John Kerry is the richest man in a Senate full of rich men. He is a Boston Brahmin, educated at St, Paul's, an exclusive private school, and a graduate of Yale University, where like the Bushes he belonged to the Skull and Bones society. Al Gore was the son of a US Senator, was educated at an exclusive private school, St. Albans, and went to college at Harvard. I haven't even mentioned the Kennedy's. I was surprised to learn that Howard Dean, who attended Yale, is a blue blood as well. There are many sites on the web that will explain to what degree Kerry, Bush and Dean are all related through multiple ancestors. They truly are cousins. I find it rather disturbing that there is so little concern that a power elite has captured our political system. The Economist magazine says "Britain would be in high dudgeon if its party leaders all came from Eton and Harrow." They continue by pointing out that "perhaps one reason why the rise of caste politics raises so little comment is that something similar is happening throughout American society." They claim that everywhere you look in American society- in the Hollywood Hills, the canyons of Wall Street, the Nashville recording studios, you see elites mastering the art of perpetuating themselves. America is increasingly looking like imperial Britain, with dynastic ties proliferating, social circles interlocking, mechanisms of social exclusion strengthening and a gap widening between the people who make the decisions and shape the culture and the vast majority of ordinary working people. I remember wondering how it was possible that the sons of corporate CEO became CEO's of the same corporations. Corporations are public entities that function for the benefit of their shareholders. How did daddy manage to get junior into the CEO slot at Motorola or Ford when they didn't own a majority of the stock?

We seem to be emerging as a socially sticky society. According to the NY Times and the Economist a growing body of evidence suggests that mobility is in trouble. Evidence from social scientists suggests that American society is "stickier" than Americans continue to assume. There is research that shows social mobility is on the decline. In 1978 23% of men born into the lowest economic quintile had made it into the top. By 1998 that number was down to 10%. IN 1998 70% of men across the economic spectrum were making the same or less than there fathers. The biggest increase was in the top quintile where already affluent sons made more money than their affluent fathers. The fact is that social mobility in the United States is less than it is in Britain, France, Scandinavia, Switzerland, Japan, and Canada.

The Role of Education

Today most corporations hire their junior managers right out of graduate schools with freshly minted MBA's. When people stayed with companies for most of their professional careers they had a good chance of moving up the corporate ladder. In the 1930's and 1940's only half of American CEO's had a college degree. Today almost all of them do and 70% also have a higher degree such as an MBA or a PhD. Which brings me to education and its relationship to class, money and social mobility. We have all read how important education is in today's highly competitive world. Good quality blue-collar jobs are being shipped overseas. Manual labor can be done in developing countries for $2 a day. Clearly, a degree from a four-year college makes even more difference than it once did. More people are getting those degrees than did a generation ago, but class still plays a role in who does and who does not. Education is a strong determiner of financial success so that our societies stratification is becoming more and more correlated with educational attainment. While from one perspective, that of merit, this is a good thing. After all it was exactly what the major social movers of the middle of the last century were trying to do, base success on meritocracy not birthright. The problem is that educational attainment and class are not easily separable and for some very complex reasons that require careful consideration. Our great Universities are increasingly reinforcing rather than reducing educational inequalities. The stats demonstrate that poorer students are seriously disadvantaged, both when they try to get in and even if they make it in they are seriously under prepared to compete successfully. This disparity is most obvious in the elite colleges that are the keys to the kingdom as it were. According to analysis by the Economist magazine three fourth of the students at the top 146 colleges come from the richest socio-economic fourth of the population, as compared to only 3% who come from the poorest fourth. The median family income for Harvard students is $150,000 per year. We know that the wealthy have always dominated the elite schools, but their representation is actually rising. In 1976 it was only 39%, in 1995 it was 50% and in the last 10 years it has grown to 75%. What makes this even more pernicious is that educational advantages in a way are more cumulative than money alone, though in truth, they have always been somewhat linked. All kinds of statistical surveys demonstrate that college educated people behave very differently on average than the none college educated. First of all they tend to marry later and put of child rearing so that they can pursue careers. On average college educated women have their first child at 30 while none college educated have their first child at 22. College educated people tend to marry college educated people, so their family has the advantage of two college educated people. They have fewer divorces so have a more stable financial life and a more stable environment for child rearing. Because they are educated they pay very close attention to their children's education and can either help them or arrange for tutoring when they are having academic problems. An article I read in the economist had a paragraph title "pushy parents and driven brats". The point of which was that these highly privileged American elite have grown up in a very competitive meritocratic world. As children they are ferried from piano lessons to ballet lessons to early-reading classes. As adolescents, they cram in as much after school coaching as possible. As students, they compete to get into the best colleges and then the best graduate schools. As young professionals, they burn the midnight oil for their employers and then as parents they agonize about getting their kids into the best possible universities. In some ways it is very hard for these people to think about this country as anything but a true meritocracy since their lives are a perpetual competition. The only problem is that they are competing against people like themselves, the offspring of a small piece of the entire society, rather than among the full range of talents the country might have to offer.

The consequences and what to do

I believe that the situation I have just described is a real problem for the continued existence of our democratic institutions and certainly represents a serious cultural change. Stratification of society is real. When I first visited third world countries in Africa and the Caribbean I was surprised to see how the "well to do" had to lock themselves way from the poor behind gates and security guards. Have you noticed how many Americans are living in gated communities with securities guards at every entrance. Did you know that there are now more security guards than police officers in the United States? Just take a drive through Pleasanton or Danville or northern Modesto for that matter. Welcome to the beginnings of our own banana republic.

How we tax ourselves and spend those tax dollars is a reflection of what we value and what sort of nation we are and will be. We are still the riches nation on earth and the most profligate. Our richest people have always been less taxed than the rest of the OECD states and now they are taxed even less than they were as they have become ever wealthier. Here are some interesting statistics I found on the OECD web site. Are these stats the direct result of a distorted system of compensation and excess greed? Infant mortality in the United States is higher than the average of all OECD nations and almost twice that of Japan, Ireland, Sweden, Finland and Norway. Life expectancy is below the average of OECD countries. The US spend twice as much on health as any OECD country per capita and yet has fewer doctors and nurse per capita then the average. Incarceration rates in the US are 680 per 100,000 adult residents while it is only 60 to 130 across the rest of the OECD. There are numerous discouraging statistics like these to be found on their web site.

I am not picking on Capitalism! Extreme income inequality and class rigidity are not requisites of Capitalism as an economic model. I am not saying that capitalism by itself is the villain here but rather the inability of our governmental institutions to respond by correcting the distortion created by that system. Most of us understand that, Capitalism, as manifested by free markets and open competition, provides for the most efficient mechanism for creating goods and setting prices as well as creating wealth that provides the greatest good for all people. I am also firmly committed to a merit based economic system in which all people can equally compete when all have the basic necessities available to foster fair competition. I am convinced that we do not have those basic necessities provided to all of our citizenry. The society is poorer for not taking advantage of the potential talents of all its citizens. A concentration of wealth along with inadequate taxation of the wealthy deprives us of the ability to provide those basic necessities to the citizenry of a modern state. Teddy Roosevelt and the Progressive Republicans of the early 20th century had it right about taxes. Why after a century of demonstrably successful tax policy have we allowed a selfish economic elite to throw away this system? The language of tax relief, as used by the political right in the US, is ludicrous when applied to people making multimillions of dollars a year and who hold a vastly disproportionate share of our National wealth. They have received vast tax reductions but they surely did not require any relief. Tax relief suggests an unbearable burden that strained and stressed their existence. When the left talks about class warfare the right gets quite defensive and yet there is an on going battle between the super haves and everybody else. The wealthiest 10% have gained such a disproportionate share of income over the past 25 years that cutting their taxes is simply unconscionable. How much is enough and how much do they actually deserve anyway?

We do indeed have a broken educational system that badly serves the needs of the poor. We can't seem to get it fixed. The Democrats seem to think that money will cure all the problems and the Republicans think that testing, vouchers and no new money are the answers. We need to find a way to talk to each other about the real problems and stop shouting across a deep chasm of fundamental difference of belief. Political polarization is getting us no place fast. I have lived with a very liberal school teacher who decried the educational and intellectual attainment of many of her colleagues over the years and the unwillingness of teacher's unions to allow merit pay for outstanding performance to keep top notch teachers who were being stolen by industry for three times their salaries as teachers. We need specially trained people of the highest caliber in our most needy schools. Economically stressed out parents have little or no energy left to devote to their needy children.

We have to stand up and be heard on these issues. There are plenty of thing we can actually do to stop the ongoing grab for money and with it the evisceration of our democratic institutions. John Hightower in his book "Thieves in High Places" says that we can't wait for heroes or national leaders. We have to be our own heroes. Everyone can do something. Everyone makes a contribution. Everyone who does some heavy lifting in the democratic cause is a hero. I am now actively seeking the place where I can put a small brake on the stealing of America by a greedy minority. Hopefully I will find it soon and you will do the same.

[David Simons is a member of the Unitarian Universalist Fellowship of Stanislaus County. He earned his Ph.D. in physics from the University of Maryland in 1974. His doctoral thesis concerned the energization mechanisms of electrons in the Aurora Borealis. He lead the atmospheric sciences group at Los Alamos National Laboratory in the 1980's, working on a diverse set of physics and chemistry problems related to nuclear explosions, radio propagation, radiations transport, lightning physics, near earth space plasma dynamics and complex terrain atmospheric circulation. He has worked at the Lawrence Livermore National Laboratory since 2001.]

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