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Introduction
Some state and local officials are blaming their governments’ budget problems on the compensation and benefits of public employees. They say they can no longer afford to pay what they allege is excessive remuneration for public workers.
Many federal officials say there is no money to provide health-care coverage for the public, extend unemployment compensation, increase social security benefits, provide more funds for education, rebuild the nation’s infrastructure, or strengthen the social safety net for the record number of Americans in poverty.
But money can be found to address those issues. A problem is that vastly increased portions of the nation’s income and wealth have been taken by the rich, who also have enjoyed drastic reductions in their tax rates.
Although money is available to alleviate the nation’s problems, it is being hoarded by the wealthy instead of used for paying fair compensation to private-sector workers and adequate taxes to support public services.
Numerous other social ills also result from extreme economic inequality, with disastrous consequences to the U.S.
Income disparities widening
From about 1945 to 1975, the U.S. attained its highest levels of income equality since records have been kept. The trend toward greater equality began in the 1930s and continued into the 1970s.
For example, the richest 1% of Americans took over 23% of the nation’s income in 1928, but by the 1970s their portion had steadily declined to 8-9%. And the nation moved in a direction of broadly sharing the fruits of increased prosperity.
After 1980, however, the wealthy began taking an increasingly larger piece of the national income. According to a 2010 report by the Joint Economic Committee of Congress, the share of the nation’s income received by the richest 10% of households increased from 34.6% in 1980 to 48.2% in 2008. The report also says that during the same period, the portion of the nation’s income taken by the richest 1% of households rose from 10% to 21%.
The richest 1% of Americans took over four-fifths of the total increase in American income during the period from 1980 to 2005. This led to them receiving total pre-tax income exceeding that received by the bottom 40% of American workers. By 2012, they were receiving 24% of the nation’s income.
Much of the gains have been received by the richest one-hundredth of the 1%. In 2005 dollars, their average annual income increased from $4.2 million in 1979 to $24.3 million in 2005.
On the other hand, the Congressional Budget Office states that for families in the middle of the income distribution, their inflation-adjusted incomes increased by only 21% between 1979 and 2005. This was far slower than the 100% growth in median income experienced during the generation after World War II. And much of the growth in the more recent decades has been due to increasing numbers of families with two spouses working outside the home.
During 2001 to 2005, median income of the public at large actually declined by 3.6%. And Beth Shulman wrote in her 2005 book The Betrayal of Work: “Thirty million Americans, one out of every four workers, makes less than $8.70 an hour.” She also points out that those types of jobs don’t provide benefits, such a medical insurance.
But in 2004 alone, the pay of the top 500 CEOs in America increased by 54%, with the average salary being $11.8 million plus stock options. And in 2005, median pay for CEOs of the 100 largest U.S. companies increased by 25% to $17.9 million.
The increasing compensation of corporate CEOs has been a big part of the problem. During the 1950s and 1960s, CEOs of major U.S. corporations received 25 to 30 times the wages of the average employee. By 1980, the amount was 40 times; by 1990, 100 times; and by 2007, 350 times. And for CEOs of the 365 largest companies, the difference has been well over 500 times the pay of the average worker.
Such trends have made income distribution in the U.S. the most unequal by far among the rich nations. And because of the Great Recession that began in 2008 – and was caused by Wall Street’s greed and recklessness – most American families are worse off today than they were 30 years ago.
All this has occurred despite workers’ skyrocketing productivity, which was up 80%. The median household income would have been around $20,000 more in 2006 if earnings had increased at the same rate as productivity during the preceding 30 years. And the typical person would have been about 60% better off.
But the rich took almost all the income gains resulting from the increased productivity. As Ohio congressman Tim Ryan puts it: “We have seen a huge transfer of wealth from the middle class to the wealthiest one percent. . . . The vast majority of Americans are working harder and longer, making less, and falling farther and farther behind.”
Wealth disparities increasing
With most of the income gains going to the richest Americans, there has been an increasing gap between their net worth and everyone else’s.
In 1976, the richest 1% of Americans possessed 20% of the nation’s wealth. By 1998, they held over a third of it. In 2011, the amount was 40%. This means the aggregate wealth of the richest 1% of American households exceeds the total held by the bottom 90%.
In 2005, Bill Gates was worth $46 billion and Warren Buffet $44 billion. The family of Wal-Mart founder Sam Walton has about $90 billion. That totals $180 billion. Meanwhile, the total wealth held by the bottom 120 million Americans – 40% of the U.S. population in 2005 – was approximately $95 billion.
In 2010, the aggregate wealth of the 400 richest Americans exceeded the total held by 155 million Americans. And just over 1% of the richest Americans control about 50% of the nation’s personal wealth.
At the other end of the wealth spectrum, 43.6 million Americans are living in poverty, including 22% of American children. Between 2006 and 2010, poverty in the U.S. increased by 27%. Of the 18 leading industrial nations of the world, the U.S. ranks first in the percentage of people living in poverty.
In 2011, The Huffington Post reported on a study by the National Bureau of Economic Research showing that almost 30% of Americans don’t have a savings account and nearly 50% have trouble paying their monthly expenses. The same year, the Wall Street Journal noted a study indicating that because the savings of most Americans are so small, almost half of them couldn’t obtain $2,000 in 30 days if they needed it.
The U.S. Department of Agriculture says 15% of American households have a daily risk of hunger. The New York Times reported in 2011 that 16% of Americans answered yes to a survey asking whether there were “times in the past 12 months when you did not have enough money to buy food that you or your family needed.”
The Los Angeles Times reported in 2012 on a study stating that over 9 million retired Americans don’t have enough money to cover basic living expenses such as for medical care and proper nutrition. A spokesperson for the group that did the study said: “This situation is dire and households are making untenable choices between paying the rent and buying nutritious food.”
According to a 2009 report in the New York Times, researchers from the Harvard Medical School said a lack of health insurance increases the risk of death by 40% and causes about 45,000 Americans to die each year. USA Today reported in 2006 that of those Americans having cancer but lacking health insurance, “nearly 70 percent have missed or delayed care for the cancer, and 43 percent went without vital prescriptions.”
The statistics show two entirely different living standards in the U.S. A small percentage of the population enjoys unimaginable wealth that they and their descendants couldn’t possibly spend over many generations. But tens of millions of other Americans – many of them working more than one job – either cannot or just barely meet their basic needs.
Tax policies exacerbate the disparities
Although some other advanced countries have pre-tax income disparities comparable to that in the U.S., those countries counteract the problem through taxes and income transfers. But the U.S. has cut taxes for the wealthy.
In the 1950s, taxes paid by U.S. corporations constituted 27% of federal revenue. In 2001, the amount was under 10%. By 2012, it was below 7%. Corporate tax levels are lower than they have been in almost a hundred years. Meanwhile, income taxes paid by middle-class working families constitute about half of federal tax revenue.
Because of numerous loopholes in the tax code, many companies pay little or no taxes. For instance, in 2010 General Electric had profits of $14.2 billion, including $5.1 billion from its U.S. operations. But the company paid no taxes that year and collected $3.2 billion in tax benefits.
This problem has been going on for a while. A congressional study found that in 2000, 63% of U.S. corporations paid no income tax despite having aggregate revenue of $2.7 trillion.
For individuals in the 1950s, the highest marginal income-tax rate was 91% under President Eisenhower. In the 1960s, President Kennedy lowered the rate to 77%, and in 1971 President Nixon took it down to 70%.
President Reagan lowered the top marginal rate to 50% in 1982, and then to 28% in 1988. The first President Bush raised it to 31% in 1990. After President Clinton raised it to 39.6% in the 1990s, the second President Bush lowered it to 35% in the early 2000s.
Thus, for the last three decades the top marginal tax rate has been far lower than it previously was – and for many years less than half the former rates.
Because capital gains and dividends are taxed at 15%, many of the richest Americans such as Mitt Romney and Warren Buffet pay at closer to that rate, which as Buffet has noted is less than the rate his secretary pays. In 2010, the 13.9% rate paid by Romney on his $21.6 million income was the same as the rate paid by workers making between $8,500 and $34,500.
The low tax rate on capital gains and dividends is surely a reason why the 400 richest Americans had an effective income-tax rate of less than 17% for 2007.
Such results weren’t seen even during the latter part of Ronald Reagan’s presidency in the 1980s, when the tax rate on capital gains was increased to 28%. Reagan, at least at the time, did not believe that people who earned their income from labor should pay a higher tax rate than those receiving earnings from investments.
In the 2000s, the second President Bush reduced the estate tax by making it applicable only to estates worth over $3.5 million (or $7 million per couple). President Obama and congressional Democrats decided to keep the exemption at $3.5 million even though this change benefits only the richest 2% of Americans and will cost the U.S. treasury $485 billion between 2012 and 2021.
From 1950 until about 1973, when the relatively high tax rates for the rich were in effect and income and wealth were more evenly distributed, the U.S. economy boomed and the period is known as the “Golden Age of Capitalism.”
The economy also boomed in the 1990s after President Clinton raised taxes on the rich and increased the minimum wage.
That history indicates there are plenty of incentives to invest and work hard even when people pay high taxes on their income. Former U.S. Secretary of Labor Robert Reich points out that “the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity, which fueled growth.”
The substantially lower taxes on the rich have not only failed to produce economic prosperity and greatly increased the economic disparities among Americans, but also ballooned the national debt and annual federal deficits. The national debt is $16 trillion, and the U.S. government is borrowing nearly 40 cents of every dollar it spends. It is leaving the bills from today’s spending for future generations to pay.
The lower taxes have also decreased the revenue available for investing in social services that would alleviate poverty and promote middle-class prosperity.
Increased income and wealth for the rich often don’t correlate to their job performances
Some assert that the richest Americans deserve their vastly increased income and wealth because of their contributions to society. Although that is sometimes arguably the case, it often is not.
For one thing, the salaries taken by CEOs of the largest U.S. corporations are far higher than what CEOs took in the past. In relative terms, American CEOs are paid about 10 times what their counterparts were in the 1960s, despite performing worse on the job.
Moreover, in absolute terms, CEOs in the U.S. are paid up to 20 times more than CEOs of similarly large businesses in other advanced countries. Economist Ha-Joon Chang states that despite the large pay differentials, “American CEOs are running companies that are no better, and frequently worse, than their Japanese or European competitors.”
Additionally, in her 2003 book Pigs at the Trough, Arianna Huffington shows that many CEOs have obtained fantastic wealth from running their companies into the ground. She describes an example from the auto industry: “Consider the case of former Ford CEO Jacques Nasser, who was rewarded with millions in stock and cash despite an awful 34-month reign that left the carmaker’s revenue in a nosedive and 35,000 workers out of a job. It’s hard to imagine that Ford could have done worse if they’d just made decisions by letting a monkey flip a coin.”
Huffington points to other sky-high pay for poor CEO performance at Enron, Tyco, WorldCom, SBC Communications, Oracle, Scientific-Atlanta Inc., Applera, Coca-Cola, Cisco, Qwest, Starwood Hotels, E*Trade Group, and Fruit of the Loom.
Huffington sums up: “The closer you look, the more you see executives reaping enormous rewards despite atrocious showings on the job.” And she says rewarding CEOs for failed performance has become the norm rather than the exception.
Lou Dobbs similarly writes in his 2006 book War on the Middle Class: “CEO compensation is often directly inverse to the performance of the companies they lead.” He notes that “over the past five years the CEOs of AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon, and Wal-Mart were paid an aggregate $865 million in compensation – while shareholders lost a total of $640 billion. . . . Clearly, these CEOs were not being paid for delivering value to those who held stock in the companies.”
Former Chrysler CEO Lee Iacocca bemoans the same problem in his 2007 book Where Have All the Leaders Gone? He writes that “the thing that most people, including me, find unbelievable is how many executives get huge pay packages even though they’re doing terrible jobs of running their companies.”
A 2011 article in the New York Times says the problem continues with no sign of abating. It reports that in 2008: “Wall Street chief executives walked away with hundreds of millions in bonuses and other compensation after driving their companies into insolvency and plunging the nation’s economy into crisis.”
The article further states that “multimillion-dollar pay for failure is flourishing like never before.” As an especially egregious example, it says that even though the short reign of a recent Hewlett-Packard CEO “was by nearly all accounts a disaster,” the company awarded him over $13 million in termination benefits.
The article quotes John J. Donohue, professor at Stanford law school and president of the American Law and Economics Association. “It’s a great irony that spectacular failure is rewarded lavishly. It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”
The article also quotes compensation expert Graef S. Crystal as saying the system is “a mess” and “a joke.” But it says Congress has shown little interest in addressing even the most outrageous compensation practices, and corporations and their boards of directors aren’t doing anything about the problem either.
The excessive executive compensation stems largely from the control that CEOs of American corporations have over the boards of directors who approve their salaries. The board members are often close associates hand-picked by the CEOs and serving at the CEOs’ pleasure. They are frequently executives of other companies and have business ties with one another. They can manipulate information supplied to independent directors. And as corporate executives, they have an incentive to standardize the business practice of providing high executive pay for poor performance.
Not surprisingly, therefore, a study by the International Labour Organization found little or no correlation between executive compensation and company performance. It indicated the exorbitant pay packages likely result from superior bargaining positions of executives.
This problem is not unprecedented. The British economist John Maynard Keynes, whose writings did much to save capitalism during the Great Depression of the 1930s, said that one of the major faults of capitalism is “its arbitrary and inequitable distribution of wealth and incomes.” He advocated government action to correct the fault.
Results of the disparities
Besides causing millions of Americans to fall into poverty or struggle to maintain a middle-class lifestyle, many other serious societal problems result from the increasing economic inequalities.
A stagnant economy is one of them. Much of the nation’s economic activity is driven by consumer demand for goods and services. But if the vast majority of Americans have a small and declining amount to spend for those things, economic growth is much lower than it could be. To be successful, businesses need customers with money to spend, which comes from good wages.
A plutocracy is another result. With the rich having more money to contribute to political campaigns and for hiring lobbyists, politicians are more likely to be bought by the moneyed interests and serve them rather than the public interest. The rich also fund media, books, and ads promoting their interests. And they support “think tanks” that publish reports, carried by the media, advocating public policies benefiting the wealthiest Americans.
As a result of excessive influence by the wealthy, government takes actions such as reducing taxes for the rich, providing tax loopholes for their businesses, keeping the minimum wage low and not indexing it to inflation, using taxpayers’ dollars to bail out corporations deemed too big to fail, opposing the formation and power of unions, permitting illegal immigration to help force down the wages of American workers, providing good schools for the well-off and inadequate ones for the poor, and supporting trade policies that promote the relocation of jobs to nations having extremely low wages, long working hours, dangerous work conditions, and little concern for the environment.
Particularly harmful has been the government’s failure to reverse the declining rate of union membership. In the 1950s, over a third of American workers were represented by a union, but less than 7% of private-sector workers are today. Robert Reich states: “If there’s a single reason why the median wage has dropped dramatically for non-college workers over the past three and a half decades, it’s the decline of unions.”
Another consequence of greater economic inequality is less governmental support for social services. The superrich can live in gated communities and work in office parks away from everyone else. And they pay for their own medical care, education, child care, personal security, transportation, recreational facilities, and other things that government normally funds for the good of all. Because they live in a world apart from the rest of society, the wealthy are unlikely to empathize with other citizens and support public funding for social services.
The family lives of the poor and middle class are harmed by the low wages that force them to work long hours. The results include less time for parents to spend with their children, more stress on families, and a greater likelihood of divorce. And the number of abortions rises, because many abortions are obtained by poor women who do not believe they can afford a child.
Numerous studies show a strong correlation between income inequality and rates of violent crime in societies. This correlation is a reason why the U.S. has far more violent crime than advanced countries having more equal distributions of income and wealth. And it’s a reason the U.S. prison population has increased sevenfold since the mid-1970s.
In their book The Spirit Level: Why Greater Equality Makes Societies Stronger, researchers Richard Wilkinson and Kate Pickett rely on a massive amount of statistical evidence to show that high levels of economic inequality are correlated with many social afflictions. The problems include not only violence and crime but also mental illness, drug and alcohol abuse, poor physical health, higher infant mortality rates, shorter life expectancy, higher obesity rates, lower educational achievement, reduced levels of trust among people, less empathy for others, higher rates of teenage pregnancy, increased imprisonment rates, and lower social mobility.
Wilkinson and Pickett also say governments in more equal societies are more likely to support recycling and other acts benefitting the environment, be more generous in providing development aid and otherwise responding to the needs of poor countries, and be less belligerent internationally.
Wilkinson and Pickett sum up: “The evidence shows that reducing inequality is the best way of improving the quality of the social environment, and so the real quality of life, for all of us.” And they say “the health of our democracies, our societies and their people, is truly dependent on greater equality.”
These findings mean that high levels of economic inequality are a reason that compared with other nations, the U.S. rates unfavorably on many quality-of-life rankings. For example, in recent years the U.S. has ranked 32 on infant mortality (having nearly twice the rates of France, Japan, and Australia ), 29 on life expectancy, 37 on an index of health-care quality, 45 on an environmental sustainability index, 12 on student reading ability, and 9 on adult literacy.
Germany and Japan are examples of countries having wealthy and efficient economies without the inequalities seen in the U.S. and with far less social problems.
Conclusion
For many decades, Americans have generally agreed on the social benefits of capitalism. But they have also recognized that government needs to regulate the marketplace to protect the public against the harms of unrestrained capitalism, such as dangerous products, unsafe work conditions, and environmental destruction. The debates have usually centered on how extensive the regulations should be and what form they should take.
The last few decades in the U.S. show that one of the harms of an inadequately regulated capitalist system is that the rich seize a hugely unfair portion of the income resulting from the increased hard work and productivity of all workers. As a result of the extreme inequality between the rich and everyone, numerous economic and social problems become worse.
The superrich even have the ability to give themselves many millions of dollars in compensation for horrible job performances that wreck companies and throw thousands of workers out of jobs.
The free market is not correcting those problems but making them worse. This means that just as in other areas where an unregulated capitalism produces socially undesirable results, government needs to step in to promote fair compensation and less economic inequality.
Some of the steps government can take include setting the minimum wage at the level of a living wage and indexing it to inflation, supplementing the pay of low-wage workers, enacting tax incentives to encourage companies to pay fair compensation to employees, refusing to award government contracts to companies with unfair compensation practices, promoting worker representation on corporate boards of directors, enacting laws conducive to the formation and power of unions, and requiring that private-sector jobs resulting from taxpayer-funded research and development be created in the U.S. rather than in other countries.
Government can also increase taxes to make the rich pay their fair share, penalize corporations and citizens for placing money in foreign tax havens to avoid U.S. taxes, break up companies deemed “too big to fail” so that taxpayers don’t have to save them from the consequences of bad business decisions, increase educational opportunities for the poor and middle class, create public-works jobs to rebuild the nation’s infrastructure, provide more funds for social services, and support trade agreements that prevent other countries from gaining unfair competitive advantages by exploiting workers and destroying the environment.
In the Universal Declaration of Human Rights of 1948, Article 23 states in part: “Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.”
The U.S. needs to once again take that right seriously. Government policy must keep workers from being underpaid and executives from being overpaid, while at the same time maintaining sufficient market incentives to promote hard work, creativity, and innovation.
Otherwise, all of society suffers from social problems caused by extreme economic inequality.
Some state and local officials are blaming their governments’ budget problems on the compensation and benefits of public employees. They say they can no longer afford to pay what they allege is excessive remuneration for public workers.
Many federal officials say there is no money to provide health-care coverage for the public, extend unemployment compensation, increase social security benefits, provide more funds for education, rebuild the nation’s infrastructure, or strengthen the social safety net for the record number of Americans in poverty.
But money can be found to address those issues. A problem is that vastly increased portions of the nation’s income and wealth have been taken by the rich, who also have enjoyed drastic reductions in their tax rates.
Although money is available to alleviate the nation’s problems, it is being hoarded by the wealthy instead of used for paying fair compensation to private-sector workers and adequate taxes to support public services.
Numerous other social ills also result from extreme economic inequality, with disastrous consequences to the U.S.
Income disparities widening
From about 1945 to 1975, the U.S. attained its highest levels of income equality since records have been kept. The trend toward greater equality began in the 1930s and continued into the 1970s.
For example, the richest 1% of Americans took over 23% of the nation’s income in 1928, but by the 1970s their portion had steadily declined to 8-9%. And the nation moved in a direction of broadly sharing the fruits of increased prosperity.
After 1980, however, the wealthy began taking an increasingly larger piece of the national income. According to a 2010 report by the Joint Economic Committee of Congress, the share of the nation’s income received by the richest 10% of households increased from 34.6% in 1980 to 48.2% in 2008. The report also says that during the same period, the portion of the nation’s income taken by the richest 1% of households rose from 10% to 21%.
The richest 1% of Americans took over four-fifths of the total increase in American income during the period from 1980 to 2005. This led to them receiving total pre-tax income exceeding that received by the bottom 40% of American workers. By 2012, they were receiving 24% of the nation’s income.
Much of the gains have been received by the richest one-hundredth of the 1%. In 2005 dollars, their average annual income increased from $4.2 million in 1979 to $24.3 million in 2005.
On the other hand, the Congressional Budget Office states that for families in the middle of the income distribution, their inflation-adjusted incomes increased by only 21% between 1979 and 2005. This was far slower than the 100% growth in median income experienced during the generation after World War II. And much of the growth in the more recent decades has been due to increasing numbers of families with two spouses working outside the home.
During 2001 to 2005, median income of the public at large actually declined by 3.6%. And Beth Shulman wrote in her 2005 book The Betrayal of Work: “Thirty million Americans, one out of every four workers, makes less than $8.70 an hour.” She also points out that those types of jobs don’t provide benefits, such a medical insurance.
But in 2004 alone, the pay of the top 500 CEOs in America increased by 54%, with the average salary being $11.8 million plus stock options. And in 2005, median pay for CEOs of the 100 largest U.S. companies increased by 25% to $17.9 million.
The increasing compensation of corporate CEOs has been a big part of the problem. During the 1950s and 1960s, CEOs of major U.S. corporations received 25 to 30 times the wages of the average employee. By 1980, the amount was 40 times; by 1990, 100 times; and by 2007, 350 times. And for CEOs of the 365 largest companies, the difference has been well over 500 times the pay of the average worker.
Such trends have made income distribution in the U.S. the most unequal by far among the rich nations. And because of the Great Recession that began in 2008 – and was caused by Wall Street’s greed and recklessness – most American families are worse off today than they were 30 years ago.
All this has occurred despite workers’ skyrocketing productivity, which was up 80%. The median household income would have been around $20,000 more in 2006 if earnings had increased at the same rate as productivity during the preceding 30 years. And the typical person would have been about 60% better off.
But the rich took almost all the income gains resulting from the increased productivity. As Ohio congressman Tim Ryan puts it: “We have seen a huge transfer of wealth from the middle class to the wealthiest one percent. . . . The vast majority of Americans are working harder and longer, making less, and falling farther and farther behind.”
Wealth disparities increasing
With most of the income gains going to the richest Americans, there has been an increasing gap between their net worth and everyone else’s.
In 1976, the richest 1% of Americans possessed 20% of the nation’s wealth. By 1998, they held over a third of it. In 2011, the amount was 40%. This means the aggregate wealth of the richest 1% of American households exceeds the total held by the bottom 90%.
In 2005, Bill Gates was worth $46 billion and Warren Buffet $44 billion. The family of Wal-Mart founder Sam Walton has about $90 billion. That totals $180 billion. Meanwhile, the total wealth held by the bottom 120 million Americans – 40% of the U.S. population in 2005 – was approximately $95 billion.
In 2010, the aggregate wealth of the 400 richest Americans exceeded the total held by 155 million Americans. And just over 1% of the richest Americans control about 50% of the nation’s personal wealth.
At the other end of the wealth spectrum, 43.6 million Americans are living in poverty, including 22% of American children. Between 2006 and 2010, poverty in the U.S. increased by 27%. Of the 18 leading industrial nations of the world, the U.S. ranks first in the percentage of people living in poverty.
In 2011, The Huffington Post reported on a study by the National Bureau of Economic Research showing that almost 30% of Americans don’t have a savings account and nearly 50% have trouble paying their monthly expenses. The same year, the Wall Street Journal noted a study indicating that because the savings of most Americans are so small, almost half of them couldn’t obtain $2,000 in 30 days if they needed it.
The U.S. Department of Agriculture says 15% of American households have a daily risk of hunger. The New York Times reported in 2011 that 16% of Americans answered yes to a survey asking whether there were “times in the past 12 months when you did not have enough money to buy food that you or your family needed.”
The Los Angeles Times reported in 2012 on a study stating that over 9 million retired Americans don’t have enough money to cover basic living expenses such as for medical care and proper nutrition. A spokesperson for the group that did the study said: “This situation is dire and households are making untenable choices between paying the rent and buying nutritious food.”
According to a 2009 report in the New York Times, researchers from the Harvard Medical School said a lack of health insurance increases the risk of death by 40% and causes about 45,000 Americans to die each year. USA Today reported in 2006 that of those Americans having cancer but lacking health insurance, “nearly 70 percent have missed or delayed care for the cancer, and 43 percent went without vital prescriptions.”
The statistics show two entirely different living standards in the U.S. A small percentage of the population enjoys unimaginable wealth that they and their descendants couldn’t possibly spend over many generations. But tens of millions of other Americans – many of them working more than one job – either cannot or just barely meet their basic needs.
Tax policies exacerbate the disparities
Although some other advanced countries have pre-tax income disparities comparable to that in the U.S., those countries counteract the problem through taxes and income transfers. But the U.S. has cut taxes for the wealthy.
In the 1950s, taxes paid by U.S. corporations constituted 27% of federal revenue. In 2001, the amount was under 10%. By 2012, it was below 7%. Corporate tax levels are lower than they have been in almost a hundred years. Meanwhile, income taxes paid by middle-class working families constitute about half of federal tax revenue.
Because of numerous loopholes in the tax code, many companies pay little or no taxes. For instance, in 2010 General Electric had profits of $14.2 billion, including $5.1 billion from its U.S. operations. But the company paid no taxes that year and collected $3.2 billion in tax benefits.
This problem has been going on for a while. A congressional study found that in 2000, 63% of U.S. corporations paid no income tax despite having aggregate revenue of $2.7 trillion.
For individuals in the 1950s, the highest marginal income-tax rate was 91% under President Eisenhower. In the 1960s, President Kennedy lowered the rate to 77%, and in 1971 President Nixon took it down to 70%.
President Reagan lowered the top marginal rate to 50% in 1982, and then to 28% in 1988. The first President Bush raised it to 31% in 1990. After President Clinton raised it to 39.6% in the 1990s, the second President Bush lowered it to 35% in the early 2000s.
Thus, for the last three decades the top marginal tax rate has been far lower than it previously was – and for many years less than half the former rates.
Because capital gains and dividends are taxed at 15%, many of the richest Americans such as Mitt Romney and Warren Buffet pay at closer to that rate, which as Buffet has noted is less than the rate his secretary pays. In 2010, the 13.9% rate paid by Romney on his $21.6 million income was the same as the rate paid by workers making between $8,500 and $34,500.
The low tax rate on capital gains and dividends is surely a reason why the 400 richest Americans had an effective income-tax rate of less than 17% for 2007.
Such results weren’t seen even during the latter part of Ronald Reagan’s presidency in the 1980s, when the tax rate on capital gains was increased to 28%. Reagan, at least at the time, did not believe that people who earned their income from labor should pay a higher tax rate than those receiving earnings from investments.
In the 2000s, the second President Bush reduced the estate tax by making it applicable only to estates worth over $3.5 million (or $7 million per couple). President Obama and congressional Democrats decided to keep the exemption at $3.5 million even though this change benefits only the richest 2% of Americans and will cost the U.S. treasury $485 billion between 2012 and 2021.
From 1950 until about 1973, when the relatively high tax rates for the rich were in effect and income and wealth were more evenly distributed, the U.S. economy boomed and the period is known as the “Golden Age of Capitalism.”
The economy also boomed in the 1990s after President Clinton raised taxes on the rich and increased the minimum wage.
That history indicates there are plenty of incentives to invest and work hard even when people pay high taxes on their income. Former U.S. Secretary of Labor Robert Reich points out that “the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity, which fueled growth.”
The substantially lower taxes on the rich have not only failed to produce economic prosperity and greatly increased the economic disparities among Americans, but also ballooned the national debt and annual federal deficits. The national debt is $16 trillion, and the U.S. government is borrowing nearly 40 cents of every dollar it spends. It is leaving the bills from today’s spending for future generations to pay.
The lower taxes have also decreased the revenue available for investing in social services that would alleviate poverty and promote middle-class prosperity.
Increased income and wealth for the rich often don’t correlate to their job performances
Some assert that the richest Americans deserve their vastly increased income and wealth because of their contributions to society. Although that is sometimes arguably the case, it often is not.
For one thing, the salaries taken by CEOs of the largest U.S. corporations are far higher than what CEOs took in the past. In relative terms, American CEOs are paid about 10 times what their counterparts were in the 1960s, despite performing worse on the job.
Moreover, in absolute terms, CEOs in the U.S. are paid up to 20 times more than CEOs of similarly large businesses in other advanced countries. Economist Ha-Joon Chang states that despite the large pay differentials, “American CEOs are running companies that are no better, and frequently worse, than their Japanese or European competitors.”
Additionally, in her 2003 book Pigs at the Trough, Arianna Huffington shows that many CEOs have obtained fantastic wealth from running their companies into the ground. She describes an example from the auto industry: “Consider the case of former Ford CEO Jacques Nasser, who was rewarded with millions in stock and cash despite an awful 34-month reign that left the carmaker’s revenue in a nosedive and 35,000 workers out of a job. It’s hard to imagine that Ford could have done worse if they’d just made decisions by letting a monkey flip a coin.”
Huffington points to other sky-high pay for poor CEO performance at Enron, Tyco, WorldCom, SBC Communications, Oracle, Scientific-Atlanta Inc., Applera, Coca-Cola, Cisco, Qwest, Starwood Hotels, E*Trade Group, and Fruit of the Loom.
Huffington sums up: “The closer you look, the more you see executives reaping enormous rewards despite atrocious showings on the job.” And she says rewarding CEOs for failed performance has become the norm rather than the exception.
Lou Dobbs similarly writes in his 2006 book War on the Middle Class: “CEO compensation is often directly inverse to the performance of the companies they lead.” He notes that “over the past five years the CEOs of AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon, and Wal-Mart were paid an aggregate $865 million in compensation – while shareholders lost a total of $640 billion. . . . Clearly, these CEOs were not being paid for delivering value to those who held stock in the companies.”
Former Chrysler CEO Lee Iacocca bemoans the same problem in his 2007 book Where Have All the Leaders Gone? He writes that “the thing that most people, including me, find unbelievable is how many executives get huge pay packages even though they’re doing terrible jobs of running their companies.”
A 2011 article in the New York Times says the problem continues with no sign of abating. It reports that in 2008: “Wall Street chief executives walked away with hundreds of millions in bonuses and other compensation after driving their companies into insolvency and plunging the nation’s economy into crisis.”
The article further states that “multimillion-dollar pay for failure is flourishing like never before.” As an especially egregious example, it says that even though the short reign of a recent Hewlett-Packard CEO “was by nearly all accounts a disaster,” the company awarded him over $13 million in termination benefits.
The article quotes John J. Donohue, professor at Stanford law school and president of the American Law and Economics Association. “It’s a great irony that spectacular failure is rewarded lavishly. It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”
The article also quotes compensation expert Graef S. Crystal as saying the system is “a mess” and “a joke.” But it says Congress has shown little interest in addressing even the most outrageous compensation practices, and corporations and their boards of directors aren’t doing anything about the problem either.
The excessive executive compensation stems largely from the control that CEOs of American corporations have over the boards of directors who approve their salaries. The board members are often close associates hand-picked by the CEOs and serving at the CEOs’ pleasure. They are frequently executives of other companies and have business ties with one another. They can manipulate information supplied to independent directors. And as corporate executives, they have an incentive to standardize the business practice of providing high executive pay for poor performance.
Not surprisingly, therefore, a study by the International Labour Organization found little or no correlation between executive compensation and company performance. It indicated the exorbitant pay packages likely result from superior bargaining positions of executives.
This problem is not unprecedented. The British economist John Maynard Keynes, whose writings did much to save capitalism during the Great Depression of the 1930s, said that one of the major faults of capitalism is “its arbitrary and inequitable distribution of wealth and incomes.” He advocated government action to correct the fault.
Results of the disparities
Besides causing millions of Americans to fall into poverty or struggle to maintain a middle-class lifestyle, many other serious societal problems result from the increasing economic inequalities.
A stagnant economy is one of them. Much of the nation’s economic activity is driven by consumer demand for goods and services. But if the vast majority of Americans have a small and declining amount to spend for those things, economic growth is much lower than it could be. To be successful, businesses need customers with money to spend, which comes from good wages.
A plutocracy is another result. With the rich having more money to contribute to political campaigns and for hiring lobbyists, politicians are more likely to be bought by the moneyed interests and serve them rather than the public interest. The rich also fund media, books, and ads promoting their interests. And they support “think tanks” that publish reports, carried by the media, advocating public policies benefiting the wealthiest Americans.
As a result of excessive influence by the wealthy, government takes actions such as reducing taxes for the rich, providing tax loopholes for their businesses, keeping the minimum wage low and not indexing it to inflation, using taxpayers’ dollars to bail out corporations deemed too big to fail, opposing the formation and power of unions, permitting illegal immigration to help force down the wages of American workers, providing good schools for the well-off and inadequate ones for the poor, and supporting trade policies that promote the relocation of jobs to nations having extremely low wages, long working hours, dangerous work conditions, and little concern for the environment.
Particularly harmful has been the government’s failure to reverse the declining rate of union membership. In the 1950s, over a third of American workers were represented by a union, but less than 7% of private-sector workers are today. Robert Reich states: “If there’s a single reason why the median wage has dropped dramatically for non-college workers over the past three and a half decades, it’s the decline of unions.”
Another consequence of greater economic inequality is less governmental support for social services. The superrich can live in gated communities and work in office parks away from everyone else. And they pay for their own medical care, education, child care, personal security, transportation, recreational facilities, and other things that government normally funds for the good of all. Because they live in a world apart from the rest of society, the wealthy are unlikely to empathize with other citizens and support public funding for social services.
The family lives of the poor and middle class are harmed by the low wages that force them to work long hours. The results include less time for parents to spend with their children, more stress on families, and a greater likelihood of divorce. And the number of abortions rises, because many abortions are obtained by poor women who do not believe they can afford a child.
Numerous studies show a strong correlation between income inequality and rates of violent crime in societies. This correlation is a reason why the U.S. has far more violent crime than advanced countries having more equal distributions of income and wealth. And it’s a reason the U.S. prison population has increased sevenfold since the mid-1970s.
In their book The Spirit Level: Why Greater Equality Makes Societies Stronger, researchers Richard Wilkinson and Kate Pickett rely on a massive amount of statistical evidence to show that high levels of economic inequality are correlated with many social afflictions. The problems include not only violence and crime but also mental illness, drug and alcohol abuse, poor physical health, higher infant mortality rates, shorter life expectancy, higher obesity rates, lower educational achievement, reduced levels of trust among people, less empathy for others, higher rates of teenage pregnancy, increased imprisonment rates, and lower social mobility.
Wilkinson and Pickett also say governments in more equal societies are more likely to support recycling and other acts benefitting the environment, be more generous in providing development aid and otherwise responding to the needs of poor countries, and be less belligerent internationally.
Wilkinson and Pickett sum up: “The evidence shows that reducing inequality is the best way of improving the quality of the social environment, and so the real quality of life, for all of us.” And they say “the health of our democracies, our societies and their people, is truly dependent on greater equality.”
These findings mean that high levels of economic inequality are a reason that compared with other nations, the U.S. rates unfavorably on many quality-of-life rankings. For example, in recent years the U.S. has ranked 32 on infant mortality (having nearly twice the rates of France, Japan, and Australia ), 29 on life expectancy, 37 on an index of health-care quality, 45 on an environmental sustainability index, 12 on student reading ability, and 9 on adult literacy.
Germany and Japan are examples of countries having wealthy and efficient economies without the inequalities seen in the U.S. and with far less social problems.
Conclusion
For many decades, Americans have generally agreed on the social benefits of capitalism. But they have also recognized that government needs to regulate the marketplace to protect the public against the harms of unrestrained capitalism, such as dangerous products, unsafe work conditions, and environmental destruction. The debates have usually centered on how extensive the regulations should be and what form they should take.
The last few decades in the U.S. show that one of the harms of an inadequately regulated capitalist system is that the rich seize a hugely unfair portion of the income resulting from the increased hard work and productivity of all workers. As a result of the extreme inequality between the rich and everyone, numerous economic and social problems become worse.
The superrich even have the ability to give themselves many millions of dollars in compensation for horrible job performances that wreck companies and throw thousands of workers out of jobs.
The free market is not correcting those problems but making them worse. This means that just as in other areas where an unregulated capitalism produces socially undesirable results, government needs to step in to promote fair compensation and less economic inequality.
Some of the steps government can take include setting the minimum wage at the level of a living wage and indexing it to inflation, supplementing the pay of low-wage workers, enacting tax incentives to encourage companies to pay fair compensation to employees, refusing to award government contracts to companies with unfair compensation practices, promoting worker representation on corporate boards of directors, enacting laws conducive to the formation and power of unions, and requiring that private-sector jobs resulting from taxpayer-funded research and development be created in the U.S. rather than in other countries.
Government can also increase taxes to make the rich pay their fair share, penalize corporations and citizens for placing money in foreign tax havens to avoid U.S. taxes, break up companies deemed “too big to fail” so that taxpayers don’t have to save them from the consequences of bad business decisions, increase educational opportunities for the poor and middle class, create public-works jobs to rebuild the nation’s infrastructure, provide more funds for social services, and support trade agreements that prevent other countries from gaining unfair competitive advantages by exploiting workers and destroying the environment.
In the Universal Declaration of Human Rights of 1948, Article 23 states in part: “Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.”
The U.S. needs to once again take that right seriously. Government policy must keep workers from being underpaid and executives from being overpaid, while at the same time maintaining sufficient market incentives to promote hard work, creativity, and innovation.
Otherwise, all of society suffers from social problems caused by extreme economic inequality.