Even the Fed and the rich are worried about income inequality

Bill Knight column for Thurs., Fri., or Sat., Nov. 6, 7 or 8

Ongoing wage stagnation points to the continuing problem of income inequality that’s so troubling even a wealthy observer and the head of the Federal Reserve have expressed concern.

An Oct. 24 third-quarter report issued by the Bureau of Labor Statistics shows the news about Americans’ pay is disappointing.
Through September, the “median usual weekly earnings” of the country’s 107.8 million full-time wage and salary workers 16 years old and up is $790, a 2.4 percent increase from a year earlier, the BLS said. However, adjusted for inflation, the median is $332, BLS added – a 0.6 percent improvement from the year before. (Median is the midpoint, meaning an equal number of pay levels are above and below that figure.)

Different sectors varied in earnings and increases from 2013, of course. The Production/Transportation sector is $640/week, up 1.1 percent from last year’s third quarter; the Management/Professional sector is $1,131/week, up 1.3 percent; the Construction/Natural Resources sector is $755, up 1.4 percent; and the Service Occupations sector is $508/week, up 3.6 percent from 2013’s third quarter.

Meanwhile, however, the “trickle down” economic theory – enriching the wealthy by lowering their taxes to ostensibly result in rich people creating jobs – is increasingly suspect. It’s “a tenet of American economic beliefs and an article of faith for Republicans that is seldom contested by Democrats,” wrote multimillionaire venture capitalist Nick Hanauer in Bloomberg Business Week. “Trouble is, sometimes the things that we know to be true are dead wrong.”

The actual “job creators” are everyday Americans with enough money to become customers of businesses’ goods and services, he said.

“If no one can afford to buy what I have to sell, my business will soon fail,” said Hanauer, who’s started or helped dozens of companies in retail, manufacturing, software and medical services. “Without consumers, you can’t have entrepreneurs and investors.”

People financially unable to be consumers get that way because their incomes aren’t keeping pace with costs of living, much less gains by the 1%.

Income inequality exists, and it may be time to question it, according to Janet Yellen, Chair of the Board of Governors of the Federal Reserve System.

In an Oct. 20 speech at Boston’s Federal Reserve Bank, Yellen said, “By some estimates, income and wealth inequality are near their highest levels in the past 100 years, much higher than the average during that time and probably higher than for much of American history before then.

“It is no secret the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority,” she continued. “I think it is appropriate to ask whether this is compatible with values rooted in our history.”

The connection between addressing income inequality and strengthening the economy is explained by Hanauer, the Seattle resident who also wrote books including “The True Patriot.” He advocates raising taxes on the top and raising wages for the rest. Making more than $9 million a year, Hanauer buys a lot of goods and services, he said. However, he does not buy as much as would be purchased annually if the $9 million was spent by 9,000 Americans each earning an additional $1,000 a year.

“Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent,” he said, “while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the super-wealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.

“If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year,” he added. “Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.”

[PICTURED: Mike Konopacki cartoon from huckkonopackicartoons.com.]