It’s a fact: Broad wealth in America is declining.
Instead, wealth is being concentrated into the hands of a few. Former Labor Secretary Robert Reich said recently that “The 400 richest people in the United States have more wealth than the bottom 150 million put together”. For a reality check on just how bad the situation has become, please watch this revealing video:
In the 1970s, the share earned by the country’s top 10 percent of the income distribution was about 33 percent of total national income. According to a 2013 analysis by economics professor Emmanuel Saez, by 2011 that share had grown to a little more than 48 percent. Much of this movement is explained by shifts in incomes of the top 1 percent.
Meanwhile, according to recent statistics, the median wage earner in America took home 9% less pay in 2012 than they did in 1999.
Wealth inequality impacts more than just the bank account. Here are some examples:
The wealthy live longer.
According to the Department of Health and Human Services, people with wealth tended to live more than four years longer than those who are considered of “average” wealth. A 2008 study by the Congressional Budget Office makes nearly the same claim. Both indicate that this gap is growing.
And medical science is backing up the claim. According to researchers from the University College London, they found clear evidence that biological aging is slower among people with better socio-economic circumstances.
Dehydroepiandrosterone sulfate or DHEAS is produced by the brain, adrenal glands, and sexual organs. These researchers found that this hormone is a guide to life expectancy and that wealthy people tended to have higher levels of DHEAS.
The wealthy also tend to have access to better healthcare and food options while also drinking less, smoking less, and not being as obese as their poorer counterparts. These factors all weigh on longevity.
The wealthy have access to better educations.
As wealth inequality has increased, the number of wealthy going to college has also increased dramatically over the last 30 years – by about 20%. Over the same period of time, the number of poor people taking advantage of higher education has only increased by around 3%.
This is caused (at least in part) by the fact that as real income growth skews toward higher-income families, those people are able and willing to pay the full cost for tuition. Schools compete for these students by supplying the services they desire pushing costs even higher. Restraining tuition and spending in the face of this demand is difficult. These “wealthy” students will go to the schools that meet their demands.
Meanwhile, the lack of access to higher education typically locks the poor into lower paying jobs as so-called “middle-class” jobs are requiring greater education with many demanding Master’s degrees that only a decade ago would have been open to those with Bachelors degrees-even in “white collar” sales positions.
The economic divide has huge social implications.
Richard Wilkinson is Professor Emeritus of Social Epidemiology at the University of Nottingham, having retired in 2008. He’s done groundbreaking research into the societal impact of Economic disparity and is the founder of The Equality Trust. He summarized the problems society faces (crime, health, lost trust, lifespan, etc.) with regard to the Wealth Gap at TED:
New bias against “upward mobility” exposed:
Over the last 40 years, society has become “locked”, preventing the poor from improving their lives relative to their parents while insulating the rich from the risks of losing their fortunes. The bottom line for much of society is that mobility has become more limited.
The middle-class is being wiped out…
During the “recovery” something notable happened. Of all income increases, the vast majority went to the top 1% of all earners. As established earlier, even the gain shown by the bottom 99% was so far offset by inflation that true income for the bottom 99% and primarily the middle-class has declined. For the middle-class, there’s been no recovery!
Add to that the fact that somewhere over the last 30 to 40 years we shifted from a society that invested to a society that consumes. Make no mistake: “Big business” wants people to consume more and they encourage this by making it easy to “buy now and pay later”. Between decreasing real income and rampant consumerism through high interest debt, we’ve created a society that has become locked into a perverse form of indentured servitude.
What’s amazing is that many in the middle-class have indeed cut back by spending less on credit and saving a bit more, but the rates are not as substantial as they should be. The average American has $6200 in credit card debt in spite of recent gains made in personal debt reduction. At an average interest rate of 27% (The average American’s credit score is around 637) it will take 312 months to pay off that bill at the minimum payment. Meanwhile, that minimum payment represents 5% of the gross monthly median income. It’s no wonder people have such a hard time saving.
Many in our society work just to pay the bills and without any real savings, there’s no chance for people to invest in their future. People who live on the edge are fearful about losing what little they have and so they avoid the stock market because they don’t understand it. It is no surprise that the top 1% of Americans own 50% of all the available stocks, bonds, and mutual funds while the bottom 50% of Americans own just a half of one percent of these investment vehicles.
So while the poor and much of the middle-class continue to struggle, the rich and super-rich add to their wealth hour-by-hour, and day-by-day. In fact the average worker needs to work one month to earn what the top corporate CEO’s earn in one hour.
Who is to blame and what to do about it?
Are the wealthy to be blamed for their ability to generate and maintain multigenerational wealth? Is government to blamed for not doing enough to help spread the wealth around as a caretaker state? Or is there another, deeper cause (and solution) to the issue of wealth inequality? To understand the answer we need to first understand each of the different elements that feed into the answer.
Understanding the wealthy as consumers
There is a notion that the wealthy have more money to spend and do so liberally. Yet as a percentage of their income, it is a proven fact that the wealthy “consume” far less than the middle-class and poor.
For example, the median household income is around $50,000. The average new car costs around $30,000. Assuming a 5 year loan and 10% down, one would carry a payment of $535 per month to pay off the car. That works out to be about 13% of annual income consumed by a car payment.
If a wealthy person earns $1,000,000 per year and they spend $100,000 on a “luxury” car, with a 5 year loan and 10% down, their payment would be $1,782 per month which is just 2% of their annual income dedicated to making that car payment.
It is doubtful that a wealthy person will buy a fleet of cars for themselves. Most are “normal” consumers and only buy what they perceive they need. While what they choose to buy will likely be more expensive, the wealthy cannot outspend the middle-class in buying “things” that would provide jobs to the economy such as cars, clothing, computers, etc.
Understanding the wealthy as job creators
Certainly some entrepreneurs do invest in novel ideas that do create jobs, most wealthy are not necessarily serial entrepreneurs and so they invest their money into things like stocks, bonds, mutual funds, etc.
Someone like Elon Musk has created jobs with PayPal, Tesla, and SpaceX. However, many others with wealth have simply purchased more stock in the best performing companies of the S&P 500. This simple act of investing does not create jobs.
The next chart provides a great “view” of the Average American versus the top 1% as a basis of comparison. Note the section detailing “investments & inheritance” as this is specifically related.
A recent TED talk given by Nick Hanauer (serial entrepreneur and an early investor in Amazon.com) sheds light on the idea that the wealthy don’t consume nearly as much as we think nor do they create as many jobs as we think. The talk was so controversial, it is not available directly from TEDs web site. However, here is a transcript of his presentation:
A TED talk on Income Inequality by Nick Hanauer
It is astonishing how significantly one idea can shape a society and its policies. Consider this one. If taxes on the rich go up job creation will go down.
This idea is an article of faith for Republicans and seldom challenged by Democrats and has indeed shaped much of the economic landscape. But sometimes the ideas that we are certain are true are dead wrong.
Consider that for thousands of years humans believed that the earth was the center of the universe it’s not and an astronomer who still believed that it was would do some pretty terrible astronomy. Likewise a policy maker who believes that the rich are job creators and therefore should not be taxed would do equally terrible policy.
I have started or helped start dozens of companies and initially hired lots of people but if there was no one around who could afford to buy what we have to sell all those companies and all those jobs would’ve evaporated. That’s why I can say with confidence that rich people don’t create jobs nor do businesses large or small.
Jobs are a consequence of a circle of life-like feedback loop between customers and businesses. Only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense an ordinary consumer is more of a job creator than a capitalist like me.
That’s why when business people take credit for creating jobs is a little bit like squirrels taking credit for creating evolution. It’s actually the other way around. Anyone who has ever run a business knows that hiring more people is a course of last resort for capitalist. It is what we do if and only if rising consumer demand requires it. In this sense calling ourselves job creators isn’t just inaccurate it is disingenuous.
That’s why our existing policies are so upside down when the biggest tax exemptions and the lowest tax rates benefit the richest all in the name of job creation all that happens is that the rich get richer. Since 1980 the share of income for the top 1% of Americans has more than tripled while our effective tax rates have gone down by 50%. If it was true that lower taxes for the rich and more wealth for the wealthy lead to job creation today we would be drowning in jobs.
[Crowd applause]
Thank you…and yet unemployment and underemployment is at record highs. Another reason that this idea is so wrongheaded is that there can never be enough super rich people to power a great economy. Someone like me who makes hundreds or thousands of times as much as the median American but I don’t buy hunters or thousands of times as much stuff. My family owns three cars not 3,000. I buy a few pair of pants and shirts a year like most American men and occasionally will go out and eat with friends.
I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new cars, any clothes or enjoy any meals out. Nor can I make up for the falling consumption of the vast majority of middle-class families that are barely squeaking by buried by spiraling costs and trapped by stagnant or declining wages.
Here’s is an incredible fact. If the typical American family still retained the same share of income that they did in 1970 they would earn $45,000 more a year. Imagine what our economy would be like if that were the case. Significant privileges have come to people like me, capitalists, for being perceived as being job creators at the center of the economic universe and the language and the metaphors we use to defend the current economic and social arrangements is telling. It’s a small jump from job creator to THE Creator.
[Crowd laughs]
This language was not chosen by accident. And it’s only honest to admit that when somebody like me calls themselves job creators we’re not just describing how the economy works but more particularly we are making a claim on status and privileges that we deserve.
Speaking of special privileges the extraordinary differential between the 15% tax rate that capitalists pay on carried interest dividends and capital gains and the 35% top marginal rate on work that ordinary Americans pay is kind of hard to justify without a touch of deification.
We’ve had it backwards for the last 30 years. Rich people like me don’t create jobs. Jobs are a consequence of an Eco-systemic feedback loop between customers and businesses and when the middle class thrives businesses grow and hire and owner’s profit.
That’s why taxing the rich to pay for investments that benefit all is such a fantastic deal for the middle class and the rich. So ladies and gentlemen he is an idea that worth spreading. In a capitalist economy the true job creators are middle-class consumers and taxing the rich to make investments that make the middle class grow and thrive is the single shrewdest thing that we can do from the middle class, for the poor and for the rich. Thank you.
Is Corporate America to blame for a shrinking middle class?
Corporate America has indeed seen record profits and the wealthy have put more of their money into these stocks. This combination of factors has left Corporate America with a glut of cash – a record $5.13 trillion in liquid assets! That’s roughly 10% of all the wealth of our country!
To quickly visualize the growth of cash on corporate balance sheets over the last several years, Reuters generated this important graph from several sources including the IRS, the U.S. Census Bureau, and the U.S. Bureau of Labor Statistics:
David Cay Johnston an American investigative journalist and author is a specialist in economics and tax issues. He won the 2001 Pulitzer Prize for Beat Reporting. He recently video-blogged his important insights on the issue of the glut of cash on America’s corporate books:
Corporate America, in response to a perceived threat of unions, government caused uncertainties, and in the pursuit of cost savings and profits also stripped the United States of jobs by shifting production overseas to factories in China and other countries. Certainly this has benefitted those economies at the cost of solid US jobs – crippling our economy as a result. But it is unfair to lay the blame solely on Corporate America. After all, their decisions are based on competitive circumstances.
Think about it this way – companies must compete. If two similar products sit side-by-side on the shelf of the “Big Box Mart” and one is half the cost of the other, many Americans vote with their wallet by simply buying the “cheapest” item regardless of where it was made. If your “proudly made in the USA” towels aren’t selling because they are twice as expensive and the fastest way you can become competitive is to outsource manufacturing, you will make tough choices out of competitive pressure. If Americans made different decision and voted with their wallet by buying American made products, Corporate America would then make different decisions in how they invest…
This funny and rather prescient video by JibJab puts everything that has happened to our economy into perspective. Produced in 2005 it provides a glimpse of our then future selves…
Is unequal taxation to blame? The rich don’t pay their “fair” share, right?
Some have argued that we simply need to tax the wealthy even more and redistribute that wealth to those less fortunate.
There is no doubt that some of the greatest public works projects in our history could only have been initiated by the Federal Government. We also understand that we have a crumbling infrastructure that must be addressed to help our country continue toward future success and that Government has a role to play in infrastructure development.
Yet, the Federal Government has never been known for its thrift and certainly should not be relied upon as a wealth generating engine. The founders of our country believed in limited government for the people and by the people. They never imagined a “caretaker / nanny state” that would somehow “spread the wealth around” to make things “fair” for everyone.
“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” — Thomas Jefferson
“To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.” — Thomas Jefferson, letter to Joseph Milligan, April 6, 1816
“The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If ‘Thou shalt not covet’ and ‘Thou shalt not steal’ were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free.” — John Adams, A Defense of the Constitutions of Government of the United States of America, 1787
“With respect to the two words ‘general welfare,’ I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators.” — James Madison in a letter to James Robertson
“I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.” — James Madison, 4 Annals of Congress 179, 1794
“When the people find that they can vote themselves money, that will herald the end of the republic.” — Benjamin Franklin
“I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it.” — Benjamin Franklin
Circling back to the wealthy, while their tax rates have indeed declined over the years, the wealthy still pay the highest percentage of taxes of any class in our society.
To suggest that the wealthy are not “paying their fair share” is not entirely correct. Could they pay more? Probably, especially the top 5% of earners. In fact, since 1916 the top marginal tax rate has often been above 60% and was above 90% between 1950 and 1964. (See chart below for the complete details.) Must the highest tax rate rise to nosebleed levels? We don’t think so. After all, we saw economic expansion and an elimination of deficit spending in the Clinton years when the highest tax rate was around 40%.
Might such increases help pay for improvements in infrastructure and decreasing our national debt? If spent wisely, most definitely. Will such measures address the key underlining problems of the waning middle-class and the fact that our classes are becoming “locked” with upward mobility slowing or stopping altogether? No.
The facts we’ve established about Wealth Inequality:
- Wealth inequality exists, is growing, and tears at the fabric of society.
- The wealthy are largely not job creators in the way we would visualize the idea.
- The wealthy cannot consume enough to replace the consumption of a healthy middle-class.
- Corporate America is sitting on huge stockpiles of cash and not investing in jobs and factories because it fears the future and does not see increasing consumption by consumers.
- Corporate America certainly hurt the middle-class by outsourcing jobs to cut costs. This was in response to the middle-class focusing on buying things at the cheapest price possible regardless of where it was manufactured.
- Taxation is not the end-all answer to fixing income inequality. Not only are the wealthiest of people still paying more than their “fair share” of taxes, the Government is inefficient and cannot possibly cause the middle-class to grow.
So who is really to blame for the shrinking middle-class?
- Wealthy individuals have enriched themselves over the years while the middle class has seen income stagnate and real income (after inflation) decline. The wealthiest of Americans need to reevaluate the compensation structures in the businesses they own and lead by example: taking less for themselves, giving more to others, and insisting that their companies pay better wages.
- Corporate America must reinvest in America. It needs to help educate the middle-class why buying “Made in America” is so important. It needs to work to help America be the most productive workforce in the world. It needs to invest in American manufacturing and job training.
- The Federal Government can help level the playing field through tax policies, but there is a limit to what government can efficiently and constitutionally accomplish on its own. Spending on socialism needs to be limited as it is not the role of the Federal Government to play “Robin Hood”. Still, it is fair to say that historically low taxes on the wealthiest of individuals have not translated into an abundance of new jobs and that these low tax rates as a percentage of GDP appear to have done more harm than good. New tax revenues should be focussed on eliminating deficit spending while investing in productive long-term goals such as broadening the availability of higher education and ensuring that our infrastructure helps America continue as an economic leader.
The middle-class must look at itself as the primary cause and answer to its Declining Wealth.
A lack of education and understanding has caused the middle-class to become disconnected from the practice of long-term wealth building. It has become largely financially incompetent, more focused on what it can have today instead of what it may need years from now. (This is why more and more Americans are under-prepared for retirement.)
This is a seemingly shocking thing to put in writing and certainly isn’t a popular notion. But the middle-class, by not being properly educated about personal finance and by not being disciplined in making good financial choices, has become the source of its own demise.
Good news: The the middle-class can help itself (and the poor by proxy) with different choices…
- Correct Consumption – put simply, the middle-class largely caused Corporate America to “offshore” because of the never ending quest to buy things “cheaper”. If Americans didn’t always gravitate toward the lowest price and instead focused on quality, value, and where something was manufactured, it would alter the dynamics of manufacturing and cause more things to be made in the USA. This would help to create jobs. However, as long as price is the only or even the primary consideration, we will continue to see jobs go elsewhere until our society is so broken and so unequal we become the place of “cheap labor” compared to a rich China, a rich India, etc.
- Savings vs. Debt – The middle-class has consumed inefficiently by buying things on debt and servicing high-interest rate credit cards rather than saving for purchases and keeping cash-flow free from being consumed by high interest rates. A consumer with limited debt need not declare bankruptcy. The middle-class must eliminate its debt burden, control its consumerism, and start saving.
- Active Investing – The middle-class must again become owners in stocks, bonds, and other investment vehicles that provide for long-term wealth appreciation.
- Helping Others – 70% of Americans live paycheck to paycheck. By empowering people to change their lives, they can in turn help others. If the middle-class fixes itself and can begin to consume again out of a position of personal financial strength, Corporate America will then become emboldened to invest and create more jobs. This in turn will help more of the poor find worthwhile work. Likewise, if the middle-class has excess income, it can offer more help to the poor through financial giving.
Summerland Associates offers various targeted educational materials designed to help the “average” American begin to re-think their financial situation. By offering tools to help them quickly grow a portfolio into a sizable nest-egg and providing ongoing information on how to preserve and protect the new wealth they generate, we help to eliminate the root cause of Wealth Inequality.
A free copy of this report is also available via Apple’s Newsstand. Simply add the FREE Wealth Building Ideas App and then you can download the free report…
