By Bill Schmick
Income inequality in the United States should worry you. Chances are, if you are reading this column, you still consider yourself one of America’s middle class. Just how long you remain one may be entirely out of your hands.
If you think I’m exaggerating, just take a moment to review this most recent data. You may already be aware that income inequality in America has been on the rise over the last 30 years. Last month, the Census Bureau found that the highest-earning 20 percent of households earned 51.1 percent of all income last year. That is the biggest share on record since 1967. The share earned by middle-income households fell to 14.3 percent, a record low. From 1979 to 2007, incomes of the richest one percent of Americans soared 275 percent. That same 1 percent earned 23.5 percent of all income, the largest share since 1928. At that rate, the rich are 288 times richer than you the middle-class.
At the same time, poverty has deepened. Fifteen percent of Americans live below the poverty line, which comes to 46.2 million people -- 46 percent more than in 2000. If it were not for unemployment benefits and Social Security payments, millions more would fall below that poverty line. And guess what, the politicians are bound and determined to reduce those benefits within the next year. Bottom line: Income inequality is worse today than at any time in American history.
And yet, when American voters are asked how important income inequality is to them, only about 17 percent thought it was extremely important for the government to try to reduce income and wealth inequality. There could be several explanations for that willingness to witness more and more of the nation’s wealth falling into fewer and fewer hands.
One reason is the belief that each of us has a chance to become one of those favored few. Back in the 1950s, for example, 87 percent of Americans thought there was plenty of opportunity to progress. After all, that’s the American Dream, right? Americans may be worried that if the government attempts some kind of Robin Hood redistribution grab it could hurt their chances or their children’s prospect of becoming the next Donald Trump.
Equally important is the belief that capitalism cannot work without income inequality. We have been spoon fed this myth ever since Trotsky first offered their alternative to capitalism. What incentive would the entrepreneur have to invest, to take chances, to innovate if the government’s heavy hand of taxation simply appropriated his hard-won gains? It is the same argument that Ayn Rand used in her book "Atlas Shrugged." The logic is simple and erroneously simplistic: Since inequality is good for capitalism, the more inequality, the better capitalism works.
Some economists contend that the phenomenon of income inequality is not confined to the United States. The rich are getting richer all over the world. One economic theory that could account for this trend stems from a study by Simon Kuznet. Called "Kuznet’s Curve," the theory says income inequality rises in an industrial revolution, falls as the country grows and develops and then rises again.
For some of the wealthiest nations, especially industrial exporters like America in the 1950s and 1960s, income equality was on the rise. The U.S. was one of the dominant capital goods exporters in global trade and average incomes kept pace with productivity. But as the rest of the world caught up, America began shipping much of our industrial capacity off-shore. In its place, the technology and service sectors came to the forefront. Unfortunately, technology actually reduced the number of middle income jobs in America and the service sector paid far less than factory jobs. This all happened as economic growth began to moderate.
In my next column, we will see exactly where the United States now stands in relation to the rest of the world in income inequality. We will also address what this continuing trend will mean for you and your children in the years to come and what can be done to reverse this trend.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management, managing over $200 million for investors in the Berkshires. His forecasts and opinions are purely his own. None of this commentary is or should be considered investment advice or a promotion of Berkshire Money Management.