Income Inequality

With interest rates remaining near zero and bond buying coming to an end, Federal Reserve Chair Janet Yellen recently had the time to reflect on income inequality in America, citing the increase in the portion of accumulated wealth held by the top 5 % from 54% in 1989 to 63 % in 2013.  This follows several months of adoring articles about French economist Thomas Piketty’s book, Capital in the 21st Century, which feed’s the Occupy movement’s theme of the rich unfairly getting richer. There is room to challenge some of Yellen’s  and Piketty’s logic, but it is probably more valuable to accept the general premise and ask “why”, and “what can be done”?

The large dynamics are easy to understand – globalization (Western labor competing with low cost third world workers); and technology (first we automated agriculture, then the factory, now the office.)  On this, there should be little disagreement. The differences come in the solutions where there are stark ideological differences and political correctness prevents helpful discussions.

The most telling statistic to highlight the decline of the middle class – the real cause of income inequality – is the labor force participation rate. Forget the artificial unemployment rate. Thirty-seven per cent of working age adults – 92 million people – are not working or looking for a job. There is an extensive safety net – unemployment compensation; disability payments; free healthcare; food stamps; subsidized housing – but these people are declining in economic standing. There is a lost generation that will never recover from the Great Recession, and many in the next generation who cannot get on the first rung of the ladder.

Economists should be able to agree that the presence of 11 million low-skilled illegal immigrants in the United States depress the labor market, with the most directly adversely affected group being the African American community. It is a tribute to the leadership of the Democratic Party that they have been able to retain 90 + % voting allegiance of African Americans (in part, but only on the margin, because of Barack Obama) and solid support of organized labor while advocating for millions who will displace them and drive down their wages. For the lower working class, this is a large factor in growing income inequality – never to be discussed by the Yellens and the Piketty’s

A second simple, politically incorrect, perspective is represented by Rick Santorum’s advice to people seeking to avoid poverty – get a degree, get a job, get married before you have kids. Nuclear families are not only better for raising kids, they are immensely better for capital formation. Two incomes work a whole lot better than a single mother struggling with two or three jobs. The decline of the family – particularly in the African American community where most babies do not have a father present – is a direct cause of downward economic drift. Don’t look for that in the NY Times.

A third easily agreed element for the Yellens and the Pikettys should be the lagging economic growth since 2008. In most recoveries, over this period the rate of GDP growth should be about 4% per year instead of the 2% that we have been experiencing. The Federal Reserve has certainly done everything that it can with monetary policy, but the legislative and executive branches have not done their part with corporate tax policy, energy policy, entitlement reform, foreign trade policy, or encouragement of lending to small businesses. The Office of Management and Budget projects that Obamacare requirements alone have cost some 2 million full time jobs. Lots of the bills sitting in [mc_name name=’Sen. Harry Reid (D-NV)’ chamber=’senate’ mcid=’R000146′ ]’s in box would make this better.

From a political perspective, Republicans have recovered from an 18 point deficit in 2008 on who the voters judge best able to manage the economy to  a 10 point advantage in today’s Wall Street Journal/NBC and Gallup polls. Whatever comes out of the federal government’s Ministry of Truth, the people know that the middle class is suffering, and six years into the reign of Barack Obama they have decided that their real life problems will not be solved by more welfare state programs. What is needed to revive the wealth of the middle class is more jobs, provided by vibrant capitalism. It seems that the voting public gets it.


This week’s video comes from a vigilant reader in Sonoma County wondering about who created the opening for ISIS in Iraq.  Hilarious, if not so serious.


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