Income Inequality

Introduction

The United States has come a long way since it was first established in 1776. The U.S. economy has had its ups and downs, but still manages to be the strongest in the world. Just because the U.S. has the strongest economy, does not mean that it does not have its fair share of problems. Beginning in the 1970’s, one problem that has been hurting the U.S. economy is income inequality. The 2013 documentary, Inequality for All, presented by Robert Reich has shone a light on how and why income inequality has hurt the economy over the years. There are many components that contribute to income inequality. Some of these components consist of rising inequality in wealth, debt, education, and the diminishing of the middle class.

Rising Inequality in Wealth

Over the years, the gap between the average earning workers and the top 1% of earners has widened. This creates an unequal distribution of wealth and is harming the working class. Robert Reich stated that the typical male worker earned $48,302 in 1978 while the top 1% earned $393,682 (Reich 2013: 5). These statistics drastically changed because in 2010 the male worker was making $33,751 and the top 1% was earning over a million dollars. Many factors come into play when discussing the reasons why income inequality has increased. Some of these factors include technology, government policies, the decline of manufacturing, and globalization.

Technological advances have impacted society because it has improved conditions for some jobs, while replacing others. Advancement in computer technologies has minimized the need for bank tellers because there are now ATMs and access to bank statements and transactions online (Manza, 2018, p. 224). However, these advancements have created jobs for financial analysts, who need to have college degrees. Technology has created a college wage premium where people who have less than a college degree have had difficulty finding good jobs and their earnings have declined. This has happened because higher education has not grown as fast as technology has advanced. Therefore, people who have obtained college degrees have become scarcer, respective to the needs of the economy, and their scarcity results in higher paying salaries (Manza, 2018, p. 225). The college wage premium increases if technology advances faster than higher education because the educational system cannot produce enough trained workers who are qualified to work with the new technology. It is important for people to have affordable access to higher education, so they will be able to find good jobs and better the economy.

The government should be funding more money towards higher education and making it more affordable for everyone. The government can do this is by implementing a strict progressive tax system and not allowing the rich to report their income as capital gains. Reich says that the upper class pays about 15% in taxes, while the working class pays around 33% (Reich, 2013: 67). The taxation system is in favor of the rich and this causes problems for the economy.  The government is in debt and by not having enough tax revenue they have to cut spending for things like education, Medicare, and welfare. Giving tax breaks only makes rich people richer and hurts the working class. Another government policy that would help decrease income inequity is raising the minimum wage in relation to the inflation rate. In recent years, about 70% of people who are earning minimum wage are adults and many of them are women and minorities (Manza, 2018, p. 228). It is hard for people to take care of their families and pay for all their expenses when they are barely making ends meet. Increasing the minimum wage will help grow the economy because it will increase consumer spending. It will also improve worker productivity and reduce the number of resignations due to low wages. People will want to go to work if they believe they are being paid a reasonable wage.

The United States has experienced a constant decline in manufacturing and industrial jobs, also known as deindustrialization. In 1950, nearly 40% of jobs were in manufacturing and industry, and the wages were fairly high for skilled manufacturing workers, but nowadays, merely 20% of jobs are in manufacturing (Manza, 2018, p. 225). The end-less threat of outsourcing jobs to other countries has helped constrain salaries for manufacturing workers. Deindustrialization has harmed workers because they are swapping out good jobs for bad ones that pay less and provide fewer benefits.

Globalization is also a key factor in flattening out wages and increasing income inequality. Products that could be made in the U.S. are instead manufactured overseas because of cheaper labor. This takes jobs away from U.S. workers, but it gives jobs to people in other nations. However, these people in other nations are working in terrible conditions that are poor and unsafe and are paid immensely low wages. Globalization has caused companies to cut costs and increase their profits by holding down wages, reducing benefits, and disregarding their employees. This creates income inequality because the lower-level workers are making less money, while the executives are profiting and earning more money. Countries that prioritize higher education have dealt with globalization better because they created a highly skilled workforce (Reich, 2013: 41). Their wages are higher, but it is worth it to produce things that are so well made and meticulous.

Debt

Debt is something that everyone tries to avoid, but it is inevitable. With the rising costs of medical insurance, housing, college tuition, etc., people are taking out loans and mortgages to keep up with their living standards. Since wages are stagnant, people have accumulated more and more debt to cope with not having enough money. According to the U.S. Census Bureau, the median household income was $57,617 in 2016 (U.S. Census Bureau). However, the average American household is in $137,063, according to the Federal Reserve Bank (Sun, 2017). This suggests that many Americans are spending more money than they can afford. In the mid 90’s onward, there was a vast rise in housing prices and Americans used their homes as collateral to pay for expenses. From 2001 to 2005, Americans cashed out over $500 billion in home equity to cover the costs of things like credit cards, student debt, and medical expenses (Reich, 2013: 58). People are in desperate need of money to be able to support themselves and their families when their wages are going nowhere. How does this relate to income inequality? Well, when rich people are stockholders of a bank, they also own the mortgages and loans the bank has made. So, when someone makes an interest payment, that money is going to the rich stockholder.

Education

As previously mentioned, higher education is a possible solution to decrease the gap in income inequality. Robert Reich says that inequality is clearly related to education. During the Great Prosperity, higher education is what raised Americans out of poverty and into the middle class (Reich, 2013: 40). It was not until the late 1970’s where college graduation rates started to level out. Over the years, tuition rates and fees have risen due to the government reducing spending for higher education, making college less affordable to the average American.

Social reproduction is a factor when it comes to inequality in education. Children who grow up in a wealthier class receive more education than a child born into poverty. People born into poverty are stuck in a vicious cycle and it is hard for them to climb the social ladder when they do not have access to a good education system or the money to further their education. Over the last 50 years, the educational achievement gap can be better explained by family income rather than race (Manza, 2018, p. 370). Even though efforts have been made to improve the standards of schools, there has been a growth in the gap between poorer children and richer children. One of the reasons for this inequality is the quality of the access that these children have. Low-income families usually live in neighborhoods that have poor and under-funded public schools. When their children attend these schools, they are at a disadvantage because the schools lack the resources to fully educate their students. On the other hand, wealthy families invest a lot of money and resources to make sure their children are getting the best education possible. This leads to income inequality because the rich children had the opportunity to attend college and learn the skills needed to get a high paying job, while the poor child could not afford college and had to settle for working at a low wage job.

Compared to other developed countries, the United States falls behind when it comes to international student assessment and high school graduation rates (Manza, 2018, p. 376). This is concerning because if other countries exceed the U.S. in education, they could potentially gain competition for economic growth and global business. Knowledge-based industries, such as pharmaceutical and software companies, are expected to be the future sources of economic growth and that is why it is important for American schools to continue competing with other countries. The United States should be investing in people, so they can attend colleges and learn the skills needed to join the workforce and in return better the economy.

The Diminishing of the Middle Class

In order for a country to be prosperous, it needs to have a stable economy and a strong middle class is what makes an economy stable. The United States economy is 70% consumer spending and the heart of consumer spending is the middle class (Reich, 2013: 10). As income inequality increases, the middle class begins to diminish and that is what is hurting the economy. This means that people are spending less money, wages stagnate, tax revenues decreases, companies downsize, government cuts programs, workers are less educated, and unemployment rises (Reich, 2013:59). This is known as the vicious cycle and it happens when the middle class doesn’t have enough purchasing power. The middle class has gone into debt because of stagnating wages and this has created a debt bubble. This hurts the economy because people are spending less and GDP decreases. The United States still has one of the strongest economies, but that does not mean anything when it is screwing over Americans. GDP is supposed to represent quality of life and living standards for a countries’ residents, but that is clearly not the case for the United States. Income inequality and stagnating wages are the reasons the middle class is disappearing because the rich keep getting richer and the poor keep getting poorer. The rich are not the ones that keep the economy going because they do not spend enough money to produce a sufficient amount of economic activity. That is why the middle class is so important for economic stability, and without a strong and vibrant middle class, the U.S. will be stuck in a vicious cycle.

Conclusion

The United States economy cannot grow, if things remain the way they are. Change and reform need to occur, so that the quality of life and living standards of Americans can improve. The U.S. needs to be a part of a virtuous cycle in order to prosper. Since income inequality keeps increasing, social mobility has decreased. It is becoming harder for people to move up in social status because they do not have the resources to better themselves. The government needs to increase taxes for the rich because this will allow more tax revenue to be put into education and other beneficial programs. Investing in higher education will allow people to learn the skills needed to be able to compete in this current global economy. Creating a vibrant middle class will boost the economy by increasing consumer spending, but this cannot be achieved if wages continue to be stagnant. Increasing wages will help improve economic mobility and this in turn will allow for a big and wealthy middle class. No one wants to be financially struggling and having to live paycheck to paycheck. Change will not occur overnight, but society needs to speak up and address the problems in our economy, so solutions can start to be made.  

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