INCOME INEQUALITY in the United States.

"The worst form of inequality is to try to make unequal things equal."  -- Aristotle

"The development of free markets has greatly lessened the extent of inequality...Nowhere is the gap between rich and poor wider, nowhere are the rich richer and the poor poorer, than in those countries that do not permit free markets to operate."  -- Milton Friedman *

"No American is ever made better off by pulling a fellow American down, and every American is made better off whenever any one of us is better off.  A rising tide raises all boats."  -- John F. Kennedy

The famous quote of the French Revolution was "Liberty, Equality, Fraternity".  Problem is that liberty and equality are logical opposites.  Some people are smarter than others.  Some people work harder than others.  Some people are more talented or attractive then others.  If you are given the liberty to exploit those differences, the results will be unequal. 

Income Inequality has been increasing in this country since the mid 1970's.  In 2005, the 20% of  households with the lowest incomes averaged around $11,000/year; the top 20% averaged about $160,000.  So what has happened in the last few decades to increase the spread between the rich and the poor?  Basically three things:

1.)  Technology -- the explosion of technology has eliminated a lot of lower skill jobs.  Technology has markedly improved the productivity (and therefore salaries) of workers, but they must upgrade their skills to be interfaced with the technology.  For example, a worker with a backhoe can do the job of five guys with a shovel in half the time.  There go five jobs.  But it takes skilled workers to build the backhoe, maintain it, and repair it.

2.)  The Global Economy -- Companies now have new markets for their products, but they also must search out cheaper labor if they are producing a product that is labor-intensive to manufacture.  They are now competing with other international companies who are producing similar products in low labor cost markets.  Thus, the domestic company must also find those low cost labor markets or die.  This does not bode well for high cost unions in the rust belt.

3.)  Increase in Single Parent Households  --  40% of one-parent families are below the poverty line.  Only 7% are below in two-parent families.

Economists express inequality of income graphically with what is called the Lorenz Curve.  The deviation from perfect equality is called the Gini Coefficient.  A coefficient of zero means all households have exactly the same income.  A coefficient of 100 means that one household has all the income.  In 1975, the US was at 36.  Today it is at 47.  In contrast, the EU is 31, and Brazil is 60.  Some would say the US is not bad.  Others would say it is unacceptable.  Depends on your politics.

It is interesting to note that as poverty decreases, income inequality increases.  Since 1820, the global Gini Coefficient has risen 30%.  During the same period, however, poverty fell drastically.  More currently, between 1980 and 2005, the Gini increased in 80% of the OECD nations as well as Russia and China. 

In spite of the fact that in recent years the top earners have reaped higher gains, still all income groups have increased their wealth.  According to the Congressional Budget Office, from 1979 to 2007, even the lowest 20% still had an 18% growth in inflation adjusted income.    http://cbo.gov/publication/42729

The principle reason for growth in the income of rich households is not that their compensation has exploded.  Rather it is that their numbers have significantly grown.  More and more households have moved out of the middle class and into the top quintile of earners. **

By the same token, lower tax rates have made the tax system MORE progressive.  In 1980, the top 1% earners had a top marginal tax rate of 70%.  At that time they accounted for 20% of all tax payments.  With todays top marginal rate much lower, they now account for 40% of all income tax payments. 

One word of caution about economic statistics.  Be careful of the stat for "households".  The reason is that the number of people per household has been declining for years.  It, therefore, also follows that the number of people earning income has also fallen in the average household. Comparing households of highly varying sizes can mean comparing apples and oranges. A much more revealing stat is "income per capita".   If you see that figure dropping over the years, then take note.

How would we reduce the spread between the rich and the poor?  One solution is the progressive tax system.  But we already have one of the most progressive tax in the industrial world, and soaking the rich doesn't hurt the rich as much as it hurts those who depend on the rich. The other possibility is education of our youth.  But with mandatory kindergarten required in all states, we now have 13 years of taxpayer funded education.  K - 12 education takes up about a third of all state and local spending, yet the public is led to believe that schools are getting shortchanged.  School spending, adjusted for inflation, has increased 140% between 1970 and 2007.  Meanwhile, during this same period, the National Assessment of Educational Progress tests showed that reading and math scores were flat, and science scores went down.  Then there is the Community College system which is heavily taxpayer funded.  Then we have the Pell Grant for the poorer students, and about 90% of Community College students qualify for that.   One could argue that there are many flaws in our educational system, but it is not from a lack of funding.

One final note....when income statistics leave out both taxes on people in upper income brackets and transfers to people in lower income brackets, they exaggerate inequalities as of a given snapshot of time.  By the same token, even though the spread in incomes has increased, the spread in consumption between the rich and poor has not.  The consumption of the rich has stayed the same.  What, then, do they do with their added income?  They invest it.  Increased investing means more plant and equipment which means more jobs. 

In a perfect world everyone would be beautiful, handsome, rich, and have a wonderful personality.  I guess we have a ways to go.

* Capitalism and Freedom; p.169; Free to Choose; p. 137

** The Fourth Great Awakening -- The Future Of Egalitarianism; Robert Fogal; p. 221

http://www.kingworldgraphics.com/sb

CHINA -- An Economic Miracle. Success of Socialism or Capitalism?

  
Chairman Mao's command economy, and specifically his socialistic program called The Great Leap Forward, was an unmitigated failure.  In fact, in the 1970's China was facing mass starvation.  When Mao died, Deng Xiaoping took over.  Realizing the old model was not working, he adopted free market ideas.  Deng started experimenting modestly by allowing farmers to keep their own excess of production.  That is, once they met their modest state quotas they could keep and sell their surplus...for whatever price the market would bear.  The rest of the story is now etched in history with the biggest economic boom in recorded history.  They went from a complete basket case to a country which will be number one in GDP, surpassing the US by 2022.  As Deng said, "It doesn't matter what color a cat is as long as it catches the mice."  But isn't China still a Communist country?  Politically they are....dissidents are jailed, and the internet is censored.  But in many ways, economically they are freer than the US.

Should the US be concerned that they should lose the GDP race?  Not really.  We will still be far ahead of China in the per capita GDP stat.  In short, the standard of living for the average American will continue to far exceed that of the average Chinese citizen.

The Communist Party is still securely in power.  There are still a few state-run companies who inefficiently plod along.  But a free market based system is here to stay.  In the old Communist system foreign trade and investment were discouraged.  Now it is a virtual free for all with many foreign companies setting up manufacturing in China.  China's early growth wasn't the result of increases in education, levels of investment, or government intervention.  It was quite simply the result of the government getting out of the way and letting market forces take over.

Of course, this rapid growth which has averaged around 8% a year for the last 2 decades, has its dark side.  There has been a surge of heavy capital intensive industries which use a large amount of raw materials and energy.  Also, until recently there has not been any EPA type of organization to keep pollution in check, and the environment has suffered.  China needs a broad shift away from heavy industry and more toward domestic consumption and the providing of services.

As a result of the economic boom, vast numbers of workers are moving from rural agriculture to urban manufacturing.  In spite of this shift, because of the global demand for Chinese products, there has developed a shortage of labor.  That will bring an end to the era of cheap labor.

So what can we conclude from this economic miracle?  Was it the "War On Poverty" that propelled China? Perhaps a "New Frontier", or "Great Society", or "New Deal" social engineering type of program?  No, none of these.  It was just a change from the central command economy of socialism to a market based one that created this miracle.

http://www.kingworldgraphics.com/sb

POSTSCRIPT:  China has been buying our debt for a number of years.  We've actually been playing a cruel joke on them.  We've persuaded them to send us their goods, and in exchange we give them pictures of George Washington.  If they want to redeem their bonds, we are quite willing to pay them in our currency at a depreciated rate of about 20 cents on the dollar.