Income inequality and its effect on the current state of the United States economy is often viewed as complicated subject requiring hundreds of pages of reading and hours of lectures. However, in the video to the left former Secretary of Labor Robert Reich claims to sum up the entire problem in just two minutes. According Reich, the United States economy is suffering from a weak middle class which has not seen their incomes grow at healthy rate over the past 30 years. Reich contends that the increased wealth over the past 30 years has all gone to the “super rich,” which has resulted in high unemployment and an anemic economic recovery. Reich’s five points can be read below, along with the link citations behind his assertions.
Point #1 – Since 1980 the United State economy has doubled in size, but adjusting for adjusting for inflation most people wages have barely increased
In 1980 the GDP of America was $5.908 trillion. In 2011 the GDP is approximately $13,441 trillion. However, as Reich notes, those gains have not been spread out evenly. The chart here shows how most workers have seen their income stay flat relative to inflation. Wages have gone up, but not at a rate above inflation which essentially means the purchasing power of most Americans has remained flat as well.
Point #2 – Almost all the gains have gone to the super rich
As Reich points out, the top 1% of income earners now take home 20% of the overall income. In addition, the top 1% now owns 40% of the wealth in America. The top 20% own approximately 85% of the wealth, and earn approximately 60% of the income in America.
Point #3 – The rich use their wealth to gain political power
Reich points out that the top tax rate on the richest Americans has gone down from 70% in 1980 to a current rate of 35%. Many of the Republican presidential candidates actually propose lowering the top tax rate further to 25%. In addition, as Reich notes, many of the rich earn their income through capital gains, which only gets taxed at 15%. Overall, the richest 1% of Americans pay an average tax rate of 17%.
Point #4 – The lower tax rates lead to higher budget deficits
As a result of lower tax rates the government revenue is now down to 15% of the overall GDP in America. In 1980 taxes accounted for 19% of the overall GDP in America. Budget shortfalls are causing cuts to programs which tend to benefit the poor and middle class including education and welfare programs. The United States infrastructure system has been decaying due to a lack of funding.
Point #5 – The middle class is divided because of scarcity
As scarcity becomes more prevalent groups tend to compete with each over limited resources. As Reich points out, many are now blaming labor unions or immigrants for the economic situation as opposed to the tax system or income inequality.
Point #6 – The middle class no longer has the purchasing power to fuel the economy
The engine of the United States economy is consumer spending, which accounts for 70% of the overall economic activity. The middle class simply does not have as much to spend on products, which results in less products and services being sold, which leads businesses to lay off more of the middle class due to lack of demand. This system creates a cycle as the laid off workers have less to spend leading to even less demand.
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