Higher Ed, Income Inequality & the American Economy (Part 3)

The role of income inequality in our ailing economy

In my last post, I considered the claim that more and better education is the answer to fixing our troubled economy. However, as I pointed out in the first post to this series (Sept. 8), there is a second explanation to the uneven nature of America’s economic recovery from the Great Recession: the game may be rigged to favor the very rich at the expense of everyone else. If this explanation has merit, then trying to repair the economy through more and better education will eventually prove to be not just futile but potentially very destructive to long-established institutions of higher learning.

In a brilliant essay based on his talk at Lehman College in April of this year, Anthony Carnevale, a professor at Georgetown University, points out two largely contradictory schools of thought that underlie our democratic beliefs: the power of free markets versus the right of the individual to prosper (The Herbert H. Lehman Memorial Lecture, “The U.S. Workforce and Higher Education: A New Deal,” April 2, 2014). There is considerable evidence that our nation suffers when these two competing philosophies are out of balance. There is also considerable evidence that our economy is suffering today because the interests of the individual are being trumped by the strength of the current political commitment to enhancing free markets.

Let’s look at some economic data:

  • Between 2007 and 2012, the median annual income for a typical U.S. household fell (in inflation-adjusted dollars) from $55,627 to $51,017 (Los Angeles Times, “For Family, Double-Trouble Woes,” June 29, 2014).
  • Paradoxically, not withstanding a drop in median income, there has been growth in total income earned by Americans – but it has been distributed unevenly. Since 1949, the share of income growth that has gone to those in the top 10 percent of income has steadily increased. Between 1949 and 1953, 20 percent of all new income earned by Americans went to the top 10 percent of earners. Between 1975 and 1979, 45 percent of total new income went to the top 10 percent. Between 1987 and 1990 the fraction had risen to 80 percent. And between 2009 and 2012, it was 116 percent – all of the new income went to the top 10 percent and sixteen percent of the existing income of the other 90 percent was effectively transferred to the top 10 percent. Talk about the rich getting richer, and the poor getting poorer! (The New York Times, “Economic Expansion for Everyone? Not Anymore,” Sept. 27, 2014.)
  • There is also stratification within the top 10 percent. The top 3 percent of families share 30.5 percent of all of the income earned in America; the bottom 90 percent share just 52.7 percent of all of the income (Federal Reserve Bulletin, “Changes in U.S. Family Finances from 2010 to 2013,” September 2014).
  • This stratification is even more acute at the very top of the income ladder. In 2010, 93 percent of the additional income created in America went to the top 1 percent (The New York Times, “An Idiot’s Guide to Inequality,” July 23, 2014).
  • And it’s not just about income. Wealth (accumulated assets) is even more skewed. The median net worth of the top 20 percent of American households rose 11 percent between 2000 and 2011, to $630,754; during that same 11 year period, the median net worth of the bottom 20 percent of American households dropped from minus $905 to minus $6,029 (United States Census Bureau, Income and Poverty in the United States: 2013,” September 2014).
  • Wealth is even more highly stratified than income. The top 3 percent of all families share 54.4 percent of the collective wealth; the bottom 90 percent share just 24.7 percent (Federal Reserve Bulletin, Change in U.S. Family Finances from 2010 to 2013,” September 2014).
  • And the richest 1 percent in the United States now owns more wealth than the bottom 90 percent (The New York Times, “An Idiot’s Guide to Inequality,” July 23, 2014).
  • Low wages at the bottom account for the following troubling statistic: 20 percent of U.S. households earned less than $20,900 in 2013 (United States Census Bureau, “Income and Poverty in the United States: 2013,” September 2014).
  • Frighteningly, almost 20 percent of children younger than 18 (14.7 million) were living in poverty in America in 2013 (United States Census Bureau, cited above).
  • The very bottom of the economic ladder is crowded – 2.3 million families have incomes that place them more than $15,000 below the federal poverty line ($23,830 for a family of four) (United States Census Bureau, cited above).
  • Despite the significant income advantage college graduates have over high school graduates, they, too, have been negatively affected in recent years. For people aged 25 to 34 with a bachelor’s degree or higher, median income in 2012 was $49,950, as compared to $54,020 in 2002 (The Chronicle of Higher Education,Racial Gaps in Attainment Widen, as State Support for Higher Ed Falls,” June 3, 2014).

This is all very depressing – but what does it mean?

Unfortunately, it’s not just about what has happened to families and individuals. A wire service story about a recent report from Standard & Poor’s begins “Income inequality is taking a toll on state governments,” and the subtitle to the story is “Stagnant pay means less spending, compelling states to consider tax increases to preserve programs,” (Associated Press, “Wealth Gap Is Squeezing State Revenue,” Sept. 16, 2014).

It is generally understood that consumer spending accounts for 70 percent of the economy – but if median family income is not rising, then we would not expect to see an increase in consumer spending – and no increase in spending would explain a very weak economic recovery (as we are indeed now experiencing).

Increasing the number of people with a college education – desirable in its own right, to be sure – would not significantly alter this situation because, as we have seen, salaries for young college graduates have fallen in recent years – and more low salaried and underemployed college graduates will not provide the stimulus, in the form of consumer spending, that our economy needs to begin to grow again.

So if more and better education is not the silver bullet that will impart vigor to a stagnant economy – if, instead, our economy is stalled because of overreliance on an unfettered free market that has led to a level of income and wealth inequality not seen in more than 80 years – what should we do to get out of the economic doldrums?

In a word (actually, in a phrase), more money must flow into workers’ pockets and away from corporate interests. Too much of corporate wealth is sequestered, stimulating nothing. Most of the money in wage earners pockets, on the other hand, is quickly spent, and this money, as it circulates through the economy, causes the economy to grow.

Now this is very controversial stuff. We Americans believe strongly in the rights of the individual, and we celebrate those who, through hard work and intelligence, have become hugely successful. Bill Gates, Warren Buffet and Steve Jobs are names known to virtually everyone, because they epitomize the American success story. If, for example, we were to suggest taxing these people at higher rates, wouldn’t that discourage young people from trying to follow their lead? Don’t we need fewer restrictions on entrepreneurship, not more? Isn’t this a call for wealth redistribution? Isn’t this a call for class warfare?

I submit that wealth redistribution has already happened – except that the redistribution was from those in the lower socioeconomic classes to those at the very highest levels of the economy. The rich have gotten a lot richer, and the poor and middle class are all significantly poorer. Moving money back from the one percent to the bottom 90 percent would start to restore the balance in income and wealth to what it once was.

But how would we actually achieve wealth redistribution? Our economy is growing much more slowly than have past economic recoveries, and a shift in both the type and number of jobs lost and added has resulted in a widespread loss of prosperity on the part of most Americans. Growing our economy must be a primary goal – and the “elect me and I’ll create jobs” cries of candidates for political office, however well intended, are not backed up with any real plan to make good on the claim.

There are two competing theories for growing both the number of jobs and the size of the economy. One is to cut taxes and spending, and minimize (or eliminate) deficit spending – the model that a typical family would likely use, in the event that one of the wage earners in a family lost his or her job.

The second is for government to stimulate the economy by spending more, either by running a deficit (something that is possible at the federal level), or, at the state level, by raising taxes – the argument in both cases being that a financial catalyst is needed to jolt the economy back into action.

Interestingly, there are examples of both models in place at this very moment. Kansas, with a very conservative governor, cut taxes very significantly, in the hope of stimulating existing businesses into expanding and attracting new businesses to the state. California, with a very liberal governor, placed a surtax on the incomes of the wealthiest Californians, resulting in an increase in state tax revenues of more than 13 percent, allowing significant new investments in higher education and other social programs.

The experiment in Kansas failed. Few new jobs were created, tax revenues are down, and both Standard & Poor’s and Moody’s lowered the state’s bond rating – meaning that when Kansas borrows money, it must do so at a higher rate of interest (Providence Journal, “How Not to Get Your Country Back,” Sept. 17, 2014). California, on the other hand, after years of cutting programs and services, is seeing a resurgent economy.

Here’s another way to redistribute wealth. Raising the minimum wage to $10.90, in order to match the buying power it had in 1968, would put money in the pockets of people who would spend it, enhancing consumer spending – and, as we have seen, consumer spending represents 70 percent of the economy. Raising the minimum wage would also lead to salary increases for those who are currently earning just slightly more than the current minimum wage. People at the bottom of the socioeconomic ladder would, with higher salaries, be more self-reliant and less dependent on programs that currently make up the social safety net. Higher wages would lead to higher tax revenues at the state level, thereby reducing demand on social support programs, whereas a stagnating level of tax receipts has led to a growing downward spiral in the quantity and quality of services the states can provide.

At the federal level, it is past time for the federal government to disallow corporations to reincorporate in other countries to avoid paying taxes in the U.S., or to sequester their earnings in offshore accounts, rather than repatriating them to the U.S. (where, of course, they would have to pay taxes). These sequestered funds now amount to more than $2 trillion – almost twice the size of the total student loan debt – yet it is student loan debt that is routinely trotted out as a major contributor to our weak economic recovery (not true, by the way, as I documented in my blog post of Aug. 4, 2014). We also need to stop allowing hedge fund managers to pay tax at the rate of just 15 percent on what is euphemistically called “carried interest” (read: “profit”).

In sum, the idea that the solution to our weak economic recovery lies in “fixing” higher education is not borne out by the evidence. Rather, the pernicious effect of a growing inequality in wealth and income between the very top of the socioeconomic spectrum and virtually everyone else is stultifying our economy and creating profound social impacts (such as a sizable jump in the level of poverty among children in recent years) that will reverberate for decades.

So why is all the focus on fixing a “broken” system of higher education?

Next week: Misdirecting Blame: Accidental or Purposeful?