Wednesday, January 8, 2014

We Have a Serious Income Inequality Problem -- and it's NOT Caused by the Poor

We have a serious income inequality problem -- and it's NOT caused by the poor.

The days of being able to make it with guts, gumption and a good idea are no longer viable for the majority. In this country, the 400 richest Americans now have more wealth than the entire bottom half of earners— 150 million Americans— put together. Those who have made enormous amounts of money did not do this without the help of student loans, the employees who create and manage the day-to-day opportunities in their companies, the shareholders who actually invest their own money into the companies, the laws they now write for themselves which include exorbitant tax breaks and loopholes, and of course, consumers, the buyers in the marketplace. Post crash of 2008, we are left with people just like you and me, the middle class who are jobless. The 8.8 million hard working people who lost their jobs are now, many of them homeless too. Their CEOs are still earning 300 times the amount of the average worker who is now without a job altogether. CEOs used to make 40 times what an average worker makes. Their earnings are not supporting the economy. It is pure economics to see the importance of the wealthy re-investing in the economy through JOBS – not handouts -- so that the middle class, the workers, can keep our economy going.So many WRONGLY claim that 50% of us are supporting ~50% of slackers. 
Facts are that ONLY 6.9% of people in the entitlement program (which includes Social Security, Medicare, and Medicaid, most Veterans' Administration programs, federal employee and military retirement plans, unemployment compensation, food stamps, and agricultural price support programs) are non-elderly earning under $20,000 a year. There are two primary ways to pay no (or negative) federal income taxes? The first is to be poor, and the second is to be elderly. In 2011, of the 18.1% of American households who paid no federal tax (meaning, no federal income or payroll tax), more than half were elderly, and most of the other half were non-elderly people making below $20,000 a year. 28.3% of the 43% to which you refer pay payroll tax; 10.3% are elderly; and again, only 6.9% are non-elderly with an income under $20,000 annually. OF THAT PERCENTAGE, some ABUSE the system. The ABUSE MUST BE STOPPED by enforcing current laws and putting caps in place. The other thing people forget about is sales tax, phone tax, cable tax, gas tax, sewer tax, etc. The poor pay a lot of taxes (maybe not income tax) and these taxes amount to a lot of their income leaving them very little on which to live. People need to know what entitlements are and whom they serve; they must understand that the greater number of people who benefit from our aid are NOT abusing the system. So many have lost all perspective on this. Do you realize that MOST of the people on aid are middle to lower income families who are elders, children, or military, and those who lost everything in the financial crisis (8.8 million), who had homes and jobs but do not any longer and are now in need ($19.2 trillion lost in household wealth (2011dollars)? Let's never lose site of who gets aid. The wealth gap is NOT what it has been historically. Not only is it larger, but it is growing with the rich getting richer and the poor getting poorer. We have never seen this before.This is the most critical and dangerous wealth gap in our history -- ever. It is moving top UP and bottom DOWN.

As it stands, the super rich are ensuring themselves special treatment by Congress and the IRS that those average workers cannot ensure themselves (See comments on Citizens United and on McCutcheon v. FEC). Instead, the super rich are closing factories that employ entire generations and towns of U.S. citizens and they are moving those factories overseas, ensuring pay (although lower pay)to foreign workers. This in no way helps our economy.

Those folks who lost their jobs, those hard working Americans who lost their jobs and homes, have no way to buy consumer goods – which is the heart of a healthy economy. This big money is not earned by the CEO, without the help average worker – that CEOs lifeline. I posted the facts about the chairman of Merck took home $17.9 million in 2010, as Merck laid off 16,000 workers and announced layoffs of 28,000 more. The CEO of Bank of America raked in $10 million, while the bank announced it was firing 30,000 employees. Even though the rate of unemployment has begun to fall, jobs still remain scarce, and the pay of the bottom 90% continues to drop, adjusted for inflation. But CEO pay is still rising through the stratosphere. Among the CEOs who took in more than $50million in 2011 were Qualcomm’s Paul Jacobs ($50.6 million), JCPenney’s Ron Johnson ($51.5 million), Starbucks’s Howard Schultz ($68.8 million), TycoInternational’s Ed Breen ($68.9 million), and Apple’s Tim Cook ($378 million).That’s a great number earning big bucks but not without their lifeline of their business and our economy – the workers.

The Wall Streeters are doing even better. The super-rich are NOT investing in jobs and growth. They’re putting their bonanza into U.S. Treasury bills or investing it in Brazil or South Asia or anywhere else it can reap the highest return. THE AMERICAN ECONOMY IS IN TROUBLE BECAUSE SO MUCH INCOME AND WEALTH HAVE BEEN GOING TO THE TOP THAT THE REST OF US NO LONGER HAVE THE PURCHASING POWER TO KEEP THE ECONOMY GOING.

Pay close attention to these names: Partners in private-equity firms like Romney’s Bain Capital don’t risk their own money. They invest other people’s money and take 2 percent of it as their annual fee for managing the money regardless of how successful they are. They then pocket 20 percent of any upside gains. Partners like Romney pay taxes on only 13-15% of what they make—a lower rate than that paid by many middle-class Americans (you, your friends, me) — because of a loophole that treats this income as "capital gains."The ostensible reason capital gains are taxed at a much lower rate than ordinary income is to reward investors for "risking" their money, but private-equity managers don’t risk a dime. In fact, rather than taking any real risks, they get government to subsidize them. Having piled the companies they purchase with debt, private-equity managers then typically issue “special dividends” that repay the original investors. Interest payments on that mountain of debt are tax deductible. In effect, government subsidizes them for using debt instead of incurring any real risk with equity. If the companies are subsequently forced into bankruptcy because they can’t manage payments on all this debt, they dump their pension obligations on the Pension Benefit Guaranty Corporation (PBGC), a federal agency, which picks up the tab. If the PBGC can’t meet the payments, taxpayers are left holding the bag. It’s another variation on Wall Street’s playbook of maximizing personal gain and minimizing personal risk. If you screw up royally, you can still walk away like royalty. Taxpayers will bail you out. Personal responsibility is completely foreign to the highest echelons of the Street. Citigroup’s stock fell 44 percent in 2011, but its CEO,Vikram Pandit, got at least $5.45 million on top of a retention bonus of $16.7million. The stock of JPMorgan Chase fell 20 percent, but its CEO, Jamie Dimon,was awarded a package worth $22.9 million. The higher you go in corporateAmerica as a whole, the less of a relationship there is between risk and reward. Executives whose pay is linked to the value of their firm’s shares get a free ride when the stock market as a whole rises, even if they didn’t lift a finger. On the other hand, to protect their wallets against any risk that their firm’s share price might fall, they can place countervailing bets in derivatives markets. This sort of hedging helped the head of AIG, Hank Greenberg, collect $250 million in 2008, when AIG collapsed.

We need to approach the problem of widening income inequality from 6 different directions. The trick is to understand how they all fit together while choosing manageable actions that make sense to who you are. We may not be able to do everything at once but think of each action you take as an incremental step towards the structural change our economy needs. To get started, tell us who you are or select an issue that matters to you below.

RAISE THE MINIMUM WAGE - Help turn the jobs we have into ones that will boost the economy, not bust it. Ensure full-time jobs have wages and benefits for people to afford basics.

STRENGTHEN WORKERS’ VOICES - Don’t let big employers take away the fundamental right of people to stick together to speak up for themselves at work; public policy should support workers who choose to form a union. (Frankly, if measures were in place and enforced to prevent corporate abuses, we may eliminate the need for unions. Some of today's unions have become the bullies they were created to combat).

INVEST IN EDUCATION - Ensure everyone has access to a great education spanning from early childhood to post-secondary.

REFORM WALL STREET - Ensure the financial sector is working honestly and accountably to prevent it from taking over our economy.

FIX THE TAX SYSTEM - Ensure everyone is contributing their fair share; reverse the “great tax shift” – tax policies that shifted taxes from rich individuals and corporations to the rest of us.

GET BIG MONEY OUT OF POLITICS - Overturn Citizens United so that corporations can’t spend unlimited amounts of money on campaigns, and in return affect public policy and spending priorities.
For more on how we got to where we are and how to get us to a better place, read: 
Beyond Outrage: Expanded Edition: What has gone wrong with our economy and our democracy, and how to fix it by Robert B. Reich