Income Inequality in the United States: Understanding and Solutions

Why is there such a large income inequality problem in the United States and can it be solved?
Brandon Lawrence

Background Information I chose the topic of social mobility in the United States because I am interested in how the economy works. The labor market has gone through rapid changes over the past 10 years due to the improvement of technology. I know many people who lost jobs during the last economic downturn and wanted to explore the topic further to see what can be done to fix the problem of stagnating wages in the lower and middle class.

The Problem

The Problem In 1978, the typical worker made $48,000 (adjusted for inflation) while the typical 1% made $393,000 per year. In 2010, the typical worker made only $33,000 while the top 1% made an astounding $1,000,000 per year. This means that 400 people have more wealth than over half of the U.S. population. In 1928 and 2007, the top 1% had a larger than 23% income share. Consequently there were large economic crashes after those periods.

Historical Income Share for Top 1%

The Middle-Class Income growth for the middle-class went into stagnation (flat growth). This resulted in increased borrowing. As time went on they had to borrow more money creating a debt bubble, which lead to the most recent financial crisis. To keep up with rising prices and flat wages, the middle class used their home equity to borrow until they defaulted on their mortgages creating one of the most severe recessions in history.

Historical Income Growth for Lower and Upper Class

Historical Income Growth for Lower and Upper Class Income for the top 1% has sky rocketed while income growth for the middle and lower class has stagnated. Consumer spending is 70% of the U.S. economy. The core of the economic machine comes from the middle class. There is no way to sustain the economy without growing the middle class, which is currently struggling.

Why the Rich are not Job Creators With a person that earns 1,000 times as much as the typical American, they don’t buy 1,000 as many pillows a year, for example. The problem is the rich spend too little, not generating enough economic activity. The investments the rich make in funds of funds, private equity, hedge funds, etc. has no social utility other than offering a good utility for them. When we have so much underutilized capacity we need spending.

Why the Rich are not Job Creators The problem when someone who is rich calls themselves a job creator is that they are not describing the economy. They are making a claim on privileges, status and power. Their customers are the job creators, the middle-class and the poor are the true job creators because they are the ones buying the products. The most pro-business tactic would be to help the middle and lower class thrive .

Government Sets the Rules The government sets the rules to enable a free-market. In the 1970s wages turned flat from globalization and technology. The iPhone for example is mainly produced in other countries. The old assembly line is gone and it is all robots and computers now.

Where iPhone Parts Come From

Technology Innovation A company like Amazon does $70 billion in sales and employs over 60,000 workers. If a normal retailer would do $70 billion in sales, they would have 600,000 to 1,000,000 workers due to their inefficient models. Resulted in companies such as Circuit City going out of business. If people have the ability to move up the income ladder we don’t have a problem. As income inequality rises, upward mobility is harder than it was before.

1950s-1970s In the 50s – late 70s there was an economic boom People with college education went from 6% - 24%. By the late 50s we had the best educated worforce in the world. Labor unions lead to workers attaining more share of the growing pie, larger middle class, created wage growth, workers buying more, companies hiring more, tax revenue increased, so the government invested more, and workers were better educated. Other countries like Germany heavily invested in education. This is why we buy parts for the iPhone from Germany because it is built with such precision.

A New Era How does the middle class manage to spend with flat pay? Woman went into work, worked longer hours. Take out debt. The biggest problem is that large amounts of money comes from lobbying.

Final Remarks There is no magic bullet to solving the income inequality problem. The rich do better with an economy that is growing from a middle class that is growing faster. History is on the side of positive social change. Considering where we have been, we can all be a leader to make change!

Personal Reflection Through my research I have learned about many different views on the income inequality problem. Many that are in the upper tier of income say that they are job creators. I have come to the conclusion that they are not and are only saving their massive profits. The true job creators are the lower and middle class. They are the ones who are buying the products. If we did not have a middle or lower class there would be no economy. The main problem comes from globalization and technology. In ten years we probably won’t see cashiers in grocery stores anymore, it will be all electronic. In addition there is no clear solution. This does not mean the problem is forever, rather we need to stick together to make a change.

Bibliography http://modeledbehavior.files.wordpress.com/2010/07/ image18.png. Web. 17 Apr. 2014. http://blog.ewmfg.com/wp-content/uploads/2013/02/iPhone5- source-map.jpg. Web. 17 Apr. 2014. Lardaro, Leonard, Dr. "Interview." Personal interview. 15 Mar. 2014. Reich, Robert B. Inequality for All: Aftershock: Movie Tie-In Edition. N.p.: Random House, 2013. Print. US News. U.S.News & World Report, http://www.usnews.com/ opinion/blogs/economic-intelligence/2013/09/12/record- high-income-inequality-threatens-us-growth. Web. 16 Apr. 2014. Weiner, Joann. "Is a Global Wealth Tax the Key to Reducing Income Inequality?" Washington Post. The Washington Post, 16 Apr. 2014. Web. 16 Apr. 2014.

Income Inequality in the United States: Understanding and Solutions