Economic Inequality

Marc Chandler on the similarities between the Great Depression and today:

A nation’s aggregate income can be divided into two parts: wages and salaries on one hand and profits on the other. The Great Depression was preceded by a shift of national income shares toward profits and away from wages and salaries.

Work cited by the American historian James Livingston (Rutgers University) found that 90% of American taxpayers had less disposable income in 1929 than they did in 1922, which corporate profits rose by nearly two-thirds and dividends doubled. The top 1% of tax payers experienced more than a 60% increase in disposable income.

In the US, since the recovery began, total US wages and salaries have risen by $168 bln, while profits have risen by $528 bln. BCA Research indicates this is the first time profits have outperformed wages and salaries in absolute terms in 50 years.

The Economist notes that this is not strictly a US phenomenon. It recently reported that since the recovery began, German profits have risen 113 bln euros (~$160 bln), while wages and salaries have risen by 36 bln euros. The UK situation is more uneven: profits have risen by GBP14 bln (~$23 bln) while wages have fallen by GBP2 bln.

When thinking about post-WWII institutions, the UN, the IMF, the World Bank, GATT/WTO and Bretton Woods quickly come to mind. There is another one that is often forgotten. There was a social pact of sorts that linked wages and salaries to productivity gains. Various forces led to a break of this pact and the de-coupling was between wages and salaries and productivity.

From 1973 through 2007, US productivity rose 83%. Real median wages rose 5%. Mean wages rose faster reflecting the rising income inequality. In an international ranking of income equality the US is in 90th place with a .45 GINI score (on a scale of 0-1, with the higher number being associated with greater income inequality), more than twice as high as Sweden, which enjoys the least income inequality and has a GINI score of 0.23.

Wealth is also highly concentrated. The quality of the data varies around the world, but academic work suggests that 10% of the world adult population control about 85% of the global household wealth, based on data from 2000. In the US, the top 10% own almost 70% of the household wealth.

Switzerland is the only major industrial country that wealth is more concentrated and its top 10% account for a little more than 73% of the nation’s household wealth. In comparison, France was at 61%, Sweden was near 58.5% and the UK was at 56%. Ten percent of Canadian adults control 53% of the country’s household wealth, while in Germany the figure is near 44.5% and Finland is near 42.5%.

We need a more progressive income tax system.  The dividend and capital gains tax cuts should have gone away last year.  Obama really dropped the ball on that.  It is criminal to be looking at cutting programs supporting the poor while cutting taxes on the ultra wealthy.