The Roots of Inequality in the USA

This morning, we heard on the news that there are more Americans receiving food stamps than ever before because they cannot afford to feed their families.

Earlier this month, we learned that the really big banks that received loans from the government to bail them out of total collapse a year ago are all ready to pay back those loans. During 2009, they all have recovered extremely well and are now anxious to pay off those loans and get out from underneath the government oversight. Why? One big reason is so they can again give executive bonuses and raises. People, along with many members of our Congress, are pretty outraged about this especially since the banks recovered mostly by stock trading and still are not making credit more available, as they were asked to do as recipients of the government loans. It remains to be seen what happens next.

This situation is one example of the fact that there is a huge and growing disparity in income between people in the USA. What are the roots of this great disparity?

According to Paul Krugman in his book, Conscience of a Liberal, since about 1973, the last year of the great post war boom in the US, there has been a 'Great Divergence' in income distribution. Krugman points out that the median household income, adjusted for inflation, has made a total gain of 16% from 1973 to 2005 - pretty small! Meanwhile, the really rich have been getting even richer. Folks in the top 0.1% have made huge gains in the range of 500 to 700%!!

Who are these folks? They are CEOs and others in the highest ranks of the major companies plus sports and entertainment celebrities. Even in the '70s CEOs made much more than the average worker - about 30 times more. But today the differential is 300 times!

The differential between average worker and executive compensation has always been controversial but at a very low level. After all, the decisions on executive pay have always been made by Boards of Directors. Individual stockholders (like us) don't have the power to change these decisions. The American people, believing in capitalism, have never really supported government intervention in these decisions either - until recently.

Personally, we have always been very skeptical that those CEOs were doing such important and critical work for their companies to justify the super salaries. At the same time, we, like other average Americans are not empowered to change this situation.

So, what to do?

In our view, a better strategy than asking the government to moderate executive compensation, or expecting the companies' boards of directors to do so, is to raise the tax rate for the very wealthy. An easy first step would be to let the temporary tax cuts for the very wealthy that were passed by George W. Bush and the Republican Congress expire. In addition, the health care insurance reform legislation that is being considered includes a tax on rich people to help pay for insurance for the poor and uninsured people. Maybe these steps will help to reduce the income disparities - we hope so