Rich and Poor: The Divide

What do most Americans think about the distribution of rich and poor?  

Here's a video that summarizes some survey information and compares it to factual information.  It will shock you.  This video as well as Credit Suisse’s new Global Wealth Report set forth some shocking facts, such as "just 1% own 46% of the world, while the bottom 80% of the population has only 7% of the nation's wealth between them"....and "the situation today in the U.S. is...worse than history’s worst. Twice as bad as in ancient Rome, worse than in tsarist Russia, worse than in America’s Gilded Age, worse than in modern Egypt, Tunisia or Yemen, worse than in many banana republics in Latin America. Yes, today’s inequality is even worse than experienced by slaves in 1774 colonial America."  It compares our situation today with the situation just prior to the French Revolution.

Nick Hanauer is a respected entrepreneur and venture capitalist.   His TED talk disputes the idea that the rich are job creators.   His presentation was apparently considered to be so controversial it was removed, as discussed here.  A Forbes article naturally provides a rebuttal to Nick's presentation with predictable "let them eat cake" arguments such as the one that implies poor people can invest in stocks and get the lower 15% capital gains tax rate just like rich people can, so the system "must be fair".  If you like melodrama, here's a debate between Hanauer and Neil Cavuto on Fox News.

Are Hanauer's assertions supported by actual data?  Yes.  For example, here's a graph (copied from Wikipedia) demonstrating that, if anything, lowering taxes on the rich actually hurts--rather than helps--the economy.

A 2012 study by the Tax Justice Network indicates that "wealth of the super-rich does not trickle down to improve the economy, but tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy," resulting in a greater government deficit and a more sluggish economy.  Some people might attempt to dodge this fact by asserting that taxes in general are too high.  In actuality, the federal tax rates had fallen to the lowest level in 30 years when President Barack Obama took office — and have fallen more since that time.  Top federal tax rates and capital gains rates (on the rich) are indeed very low by historical standards.

"Trickle down theory" is not (and never was) a valid economic theory.  It was a pejorative phrase once used by Will Rogers as part of a joke.  If it actually did work, the Middle Ages and serfdom would not have lasted for hundreds of years.  In fact, this "theory" has been completely refuted throughout history, up to the present day.  Reagan's version of "trickle down theory" was "supply side economics".  It didn't work.

The vast majority of super rich people are not inventors, startup entrepreneurs, angel investors or venture capitalists...they simply hold large investments that compound automatically and effortlessly, often in offshore tax havens.  The poor make their money via toil and sweat.  They do not contribute a huge amount to the tax roll for one reason and one reason alone:  they are too poor to have any money left over after paying for food, clothing and shelter.  If you consider yourself a Christian and are tempted to believe the poor are not paying their fair share, you might want to pick up a Bible and read Mark 12:41-44.

As referenced in a previous blog post, this article suggests that the government's QE program--while well intentioned--has done much to further exacerbate the growing inequality, as well as impeding and delaying--rather than spurring--job growth.  However, lacking any fiscal policy from Congress, it was the only thing that could be done, and it does seem to be helping Japan, at least from the standpoint that it's devaluing their currency and making it easier to export.  Europe has already demonstrated to us that the opposite approach--austerity--doesn't work.

Some people believe our problem with wealth inequality lies with the government--ironically, rather than accusing it of favoring the rich, it's instead believed to be too big, too inefficient, unaccountable to its constituents, pandering to the poor, etc.  This is a vague accusation that is usually accompanied by anecdote but rarely by actual facts or statistics.  In fact, under President Obama's term, the government had shrunk even more than the private sector!  Meanwhile, the divide between rich and poor has only accelerated.

A good education has traditionally at least bought us a ticket to the middle class.  However, the middle class has been shrinking at an alarming rate.  We all should be worried, especially because of its implications regarding the lack of appropriate job skills and declining levels of education and literacy in the U.S.

Eventually there will be a backlash to the growing divide between rich and poor, and--lacking either an economic or political solution--it could potentially turn into a violent class struggle, which would be tragic for all of us.  The good news is that it is not too late to do something about it.

There are already hints of a backlash, even in the business community--such as this observation that capital investment and wages have been falling while at the same time, corporate profits have been rising; or this criticism of Walmart employees' low wages.

Here are the author's suggestions:

1.  Understand and discuss the aforementioned issues with your friends.

2.  Vote for politicians--regardless of party affiliation--who are educated, reasonable and willing to negotiate on tax and spending issues...in other words, pragmatists rather than ideologues. Vote for a politician who strongly believes in educating our future workforce and giving them appropriate skills.  Do not vote for any politician who believes in the myth that "big government" is somehow to blame for all our problems, or that lowering taxes on the rich will spur job creation.