“America’s Ten Crises: Part 10—Income Inequality”

(The following is an excerpt from this writer’s forthcoming, March 2013 ‘Z’ Magazine article, ‘Income Inequality and Double Dip Recession’. For a complete version, see ‘Z’ Magazine).

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.

Income inequality in the US is not only growing, but growing at an accelerating rate. What follows is a detailed accounting of the dimensions of the growing income inequality in the US, and some of the more important reasons for that continuing, and now accelerating, income shift. Growing income inequality—approaching now obscene levels—is not simply a ‘moral outrage’. It not only represents a gross violation of historically held American values or reasonable equality for all. It is a condition that has served, and continues to serve, as a major cause of the lack of sustained economic recovery in the US now for five years—as well as a major factor in explaining why the US continues today to drift toward another ‘double dip’ recession.

Median Real disposable household income has been declining steadily over the long term since 2000 and that decline has accelerated since 2008, at a rate between 1-2% per year. With consumption constituting 70% of the US economy, spending by 100 million wage earning households in the US (bottom 80%) has limped along based increasingly on debt spending, more credit card usage, more withdrawals from 401k and savings accounts, and more part time second job employment. Recent data show more than 50% of all 401k withdrawals, which are rising rapidly, are withdrawn just to pay monthly bills. Auto, student and installation debt continues to accelerate. Part time jobs have increased nearly five-fold since 2008. Meanwhile, corporations sit on more than $2 trillion in cash and justify their hoarding, instead of investing and creating jobs, referring to the lack of household consumption for their goods and services as main reason for their reluctance to invest and create jobs. The US economy limps along in a ‘stop-go’ trajectory, and most recently ‘stop’ instead of ‘go’ as government and business continue to cut spending.


The Wealthiest 1% Households Historic Income Gains

That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.  

Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.  

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007.  Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.

The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012, and the accelerating accrual of all income gains by the top 1% noted previously in the opening paragraphs of this essay.

Income Decline for the Bottom 80%    

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

Policies and measures that have raised corporate profits in the US to record levels over the past three decades, and especially since 2001, are in many instances the same policies that have reduced income for the middle and working classes in America. A short list of the major causes would include:

1.    De-unionization of much of the labor force and a consequent collapse in the union-nonunion wage differential

2.    Free trade policies that have lowered wages for new export companies by 20% compared to higher paid jobs lost to imports.

3.    Millions of jobs permanently lost to free trade from NAFTA, CAFTA, and others

4.    Offshoring of high paying jobs by multinational corporations to Asia and beyond

5.    Creation of a 40 million two-tier workforce of part time and temp workers, with 60% wages and virtually no benefits

6.    Elimination of health care benefits for tens of millions, and reduction in benefit coverage and higher cost sharing for those remaining with benefits

7.    Longer duration between adjustments of minimum wage legislation, and smaller progressive adjustments when they occur

8.    Rising base level of unemployed as recessions occur more frequently, are deeper and longer in duration, resulting in job recovery longer and at lower pay

9.    Management hoarding of all productivity gains without sharing in part with wages

10. Elimination of defined benefit pensions and replacement with minimal 401k plans

11. Exemption by government rule changes of millions of workers from eligibility for overtime pay

12. Rise in property tax, sales taxes, and other local government fees and charges as local government grants more and more tax cuts to corporations and businesses.

13. Indexation and rise in payroll tax contributions by workers

14. Reduction in paid leave time for vacations, holidays, sick leave, etc.

These and scores of other measures have resulted in a concurrent decline in working and middle class income, as profits of Corporations and income from capital simultaneously have risen.  The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degreed workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.

It also explains in large part why the current US economic recovery has repeatedly relapsed on three different occasions since the formal end of the recession in June 2009, and will continue to do so in the future. While corporations,  bankers, speculators, stock and bond traders, and the wealthiest households continue to experience significant long term income gains and have recovered years ago from the 2007-09 economic contraction, the rest of the populace remains plagued by an economy that has been simply ‘bouncing along the bottom’ now for four years.

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