The slide of the ‘average’

Much more has been written than read about the divisive subject of income and wealth inequality in America over the last decade. It is the reading equivalent of a dance marathon, painting a gloomy picture of American society. If we are to address it successfully, we must start by enacting policies that recognize the importance of the middle class rather than simply relying on the invisible hand of the free market.

Earlier this year, the number one book on the Amazon bestseller list was “Capital in the Twenty-First Century” by French economist Thomas Piketty. Its central message is a call for wealth redistribution to reduce inequality, an approach that has never been popular in America, a country where economic growth comes first and distribution last.

Despite President Obama’s repeated statements that inequality is the “defining challenge of our time,” things continue to slide for the average American. For those living close to the ground, inequality is alive and well in America.

While there is disagreement about how to measure inequality, most studies focus on income, wages and wealth. For example, the bottom quarter of American households have seen almost no increase in real income for the last 25 years.

The top one percent of Americans, however, seems to be getting on quite well. They have seen their real incomes almost triple during the same period. Their share of national income has reached 20 percent and they own nearly 35 percent of the country’s wealth, figures not seen since the Roaring Twenties. The rich are running up the score.

As few as 16,000 families have a combined wealth equal to 5 percent of America’s gross domestic product, a level of concentration reminiscent of business monopolies. There’s also the legitimate concern that as the economic power of the richest one percent increases, their political power increases with it and they shape the rules governing our economy and society. Can you imagine this group raising taxes on themselves to finance new investments in education, job retraining and infrastructure that are routinely suggested as solutions to the inequality problem.

Americans are witnessing the Matthew effect. To paraphrase Matthew 25:29 in the King James version of the bible: “that to those who have, more will be given, while to those who have less, even that will be taken away.” Or in popular parlance, the rich get richer and the poor get poorer.

This widening gap between the rich and the poor brings with it all kinds of bad implications. Rising income and wealth inequality and the lack of opportunity to move up the income ladder threaten the nation’s economic growth and fundamental values; the middle class is growing thinner and thinner.

A strict free-market capitalist, the economic equivalent of a religious fundamentalist, argues that because inequality puts more resources into the hands of capitalists, it promotes savings and investment that in tum generate economic growth and increase the size of the economic pie. Just lower taxes on rich folks, cut the federal deficit, and deregulate and they will invest in the economy, creating millions of new jobs and lifting the unemployed out of poverty. This holds a grain of truth, but just.

While the issue of what is to be done about economic inequality is not one that lends itself to easy answers, especially in our politically polarized environment, we must start with policies that recognize the important role the middle class plays in driving economic growth.

originally published: July 19, 2014

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