This article concerns U.S. economic policy decisions in comparison to expert research and opinions. It focuses on conclusions and advice from top economists, covering key economic areas with an emphasis on how policies affect the middle and lower classes. In summary, the consensus of leading economists is that an economy is only as strong as the wealth of the majority. Unfortunately, the wealth of the majority is being shifted to one percent of the nation. Meanwhile that one percent has placed a large portion of the tax burden on their fellow citizens, which in turn has weakened our economic infrastructure. These economic policies are causing middle class families to slip into poverty while those in poverty watch the ‘American Dream’ die.
Originally, the intent of this article was to focus solely on poverty with the examination of opportunities for impoverished individuals. Soon after research began on the economic challenges of those who are poor, it was discovered that economic policies worked against the lower and middle classes. The most troubling part of this is that the majority of current policy makers support these policies regardless of warnings from top economic research organizations, Nobel Prize winning economists and other experts.
At the time of this writing, the U.S. poverty rate is nearly two times higher than our peer countries and our child poverty rate is more than twice that number. A little over 15 percent of Americans live in poverty—that is 46.5 million of which 20 million live in extreme conditions. When looking into the causes of poverty and the shrinking opportunities in America, it is not long before one finds a plethora of research papers, open editorials, and reports from economic experts who ultimately conclude that income inequality is the cause of our current economic condition. Furthermore, the consensus of these experts is that income inequality is the result of poor policy making that is influenced by corporations and the very rich. These policies have "offshored" American jobs, have deliberately kept minimum wages from matching inflation, and have placed most of the tax burden on lower income earners, which has deteriorated our economic infrastructure.
When it comes to income inequality and its effect on poverty, no one is speaking louder than the Economic Policy Institute (EPI). The EPI is a non-profit, non-partisan think tank, established in 1986 to study and defend the needs of low and middle class workers. In an interactive video displayed on their website, Inequality.is, the EPI explains with clarity how our economy has come to its current state and why citizens are becoming poorer. The website tackles nearly every issue that is relevant to our economic condition, concluding that influence on policy from America’s wealthiest is to blame for our economic decline.
The EPI has pointed out several policies that need to change in order to pump more wealth back into the lower and middle classes. For example, the EPI shows that trade policies have not been fair to American workers. In fact, the EPI says that “free trade” is more about picking and choosing what groups are insulated by global competition and what groups are not—think of “sending jobs overseas” or “made in America”. The EPI also says that the American government is not focused on the right issues when it comes to unemployment stating that, “Our macroeconomic policy has been too focused on keeping inflation, rather than unemployment, at extremely low levels.” Of course, there are more issues on policy covered by the EPI—all of which are backed by strong evidence, empirical studies, and historical data.
Regardless of the EPI’s conclusions and recommendations, some will argue that our current policies are great for America. Political pundits and very few “paid-for-opinion” economists will defend tax, labor, employment, and wage regulations arguing that every individual has the ability to work hard and move up the income ladder. We should keep in mind that these are political pundits and paid commentators. Many surveys suggest that most economists agree that income inequality is hurting the American economy. One such survey was from the Associated Press who published the results in an article titled, "US Income Gap is Holding Back Economy." According to the results, the main concern of most economists is that higher wages and market gains are flowing mostly to affluent Americans while they spend less than the lower and middle classes. The real downside to this scenario is that the lower and middle classes are finding less money to spend—sliding steadily down the economic rungs. This in turn affects the economy as a whole.
Outside of surveying economists about their expert opinion, many economic organizations and university departments agree that the United States ranks low in economic mobility. For example, the University of Ottawa found this to be true in a study concluding that, “The more unequal a society is currently, the greater the chance that the children will be stuck in the same sphere.” The Brookings Institute, a nonprofit public policy organization, analyzed recent data from sources around the globe and concurred with this statement, "The notion of 'American exceptionalism' is given new meaning in a second international study that also finds less—not more—mobility in the United States.” One last example can be found in a report from the Organization for Economic Co-operation and Development, which concludes that, “Mobility in earnings, wages and education across generations is relatively low in France, southern European countries, the United Kingdom and the United States.” With prestigious nonprofit and nonpartisan economic research organizations sharing the consensus that economic mobility in the United States is not a reality, how can anyone argue?
The economic reality of the United States and its relationship to economic policy cannot be denied when viewing historical data. One year ago, Alan Krueger, chairperson of the Council of Economic Advisers (CEA), presented the council’s analysis of the economy, income inequality, and correlating historical data on the subject. One highlight in the presentation was that the share of income going to the top 1% increased 13.5% between 1979 and 2007. They noted that this is the equivalent of a $1.1 trillion shift in wealth distribution. They further mentioned that the size of the middle class has fallen from 50.3% to 42.2% since 1970. The presentation from Alan Krueger of the CEA included a consensus from economic experts on why earning inequality is as it is today. The reasons listed were technological change, international trade, decline in minimum wage, and decline in unionization—all of which have everything to do with economic policy.
Technical change is an education issue, which in turn leads to income inequality. A study published in the American Journal of Sociology titled, “How Did the Increase in Economic Inequality between 1970 and 1990 Affect Children’s Educational Attainment,” by Susan Mayer found that states with higher economic inequality experienced a decrease in educational opportunities for children of low‐income families. The effects recorded in the study were not associated with family income or economic segregation. The problem was a lack in State funds. Mayer said that, “…higher spending on elementary and secondary schooling and lower college tuition [will] increase the educational attainment of low‐income children.” This leads to a discussion about tax cuts for the wealthy, which affects available funds for schools and adult education programs. U.S. policy makers should consider that as technology advances the need for an educated workforce will increase—especially if the U.S. wants to grow exports in the technology sector.
As for international trade, according to the U.S. Congress Joint Economic Committee, free trade agreements have cost the U.S. jobs. In 2011, the committee studied the impact of U.S. trade policies on the economy with a focus on manufacturing jobs. In a hearing on September 21, 2011, the bilateral committee chairperson said that, “…our trade policies do little more than off-shore good-paying jobs while giving our trading partners unlimited access to our market.” One reason why trade policy is important is that it affects employment, which in turn affects economic growth and sustainability. A simple way to look at this is in terms of the relationship between importing and exporting. The more a country exports the more jobs it creates to do the exporting and manufacturing of the products. However, if a country imports more than it exports, manufacturing jobs are lost or not created. Again, this is the simplest way to view the economic issue.
Another important element in balancing the economy is minimum wage. Minimum wage was established in 1938 to protect the wellbeing of low-wage workers by providing them with bargaining power. Inflation plays a role in our dollar’s purchasing power, which is why decisions to raise wages occur. Unfortunately, as inflation has increased over the decades the real value of the minimum wage has decreased. In other words, minimum wage has not been adjusted to protect the wellbeing of low-wage workers. For example, in 1968, the minimum wage was $10.77 in today’s value. Currently, federal minimum wage is $7.25. This might be evidence that policy makers are not minding the balance of the U.S. economy.
Lately, the main argument for not raising the minimum wage is that raising the wage will increase unemployment rates. However, to leading economists, this is nonsense. John Schmitt, an economist at the Center for Economic and Policy Research, produced a report last year based on recent studies on the impact of raising the minimum wage. Schmitt’s conclusion was this, “Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990’s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers.” Another argument, from business executives and owners, is that businesses would have to raise their prices. This argument is usually snuffed by economists with simple mathematical formulas or a mention that more buying power would exist anyway.
Concerning unions, according to the Economic Policy Institute, unions are important for the lower and middle classes by helping to close the gap on wage inequality. It is estimated by the EPI that unions add a 20% increase in wages for blue-collared workers and those without a college degree. Unions also control pay standards for nonunion employers. The EPI gives an example of a high school graduate who works for a non-unionized employer. If the high school graduate works in an industry that is 25% unionized, but does not work in a union establishment that person is still likely to be paid 5% more. The EPI also notes other advantages such as paid leave, vacation time, and better health insurance. Concisely, unions combat low wages and fight for benefits. This is the reason why economists conclude that the decline in unions is part of the reason for income inequality.
As for the most sensitive topic in America, recent economic research has shown that current tax policies have contributed to the rise in income inequality. Andrew Fieldhouse of the Economic Policy Institute published a report last June based on recent research in the role of U.S. tax policies and their worsening effect on income inequality. Many studies of which Fieldhouse reported on found that tax policies have indeed increased the income gaps for the lower two-fifths of U.S. households since 1979. In other findings, Fieldhouse concluded that reductions in tax rates for capital gains and ordinary income have a strong correlation with the rising share of economic wealth for the top one percent earners. Additionally, there is strong evidence that these tax breaks are the cause of the decline in labor income. It was further concluded in Fieldhouse’s report that increasing top tax rates would make a huge impact on the economy—for all classes.
One study used by Fieldhouse was that of Thomas Hungerford, a specialist in public finance for the Congressional Research Service. Hungerford reported in 2011 that, “inflation-adjusted after-tax income grew by 25% between 1996 and 2006 for tax filers. This income growth, however, was not equally shared throughout the income distribution.” Hungerford further reported that the inflation-adjusted income fell for the poorest 20% while doubling in favor of the richest 1% during this period—noting the strong correlation of income inequality between 1996 and 2006. In conclusion, Hungerford stated that tax policies have made “a significant contribution to the increase in income inequality.”
The relationship between tax policies and income inequality is broadly acknowledged by economists. Oddly enough, the top one percent—who receives most of the tax breaks—is also aware of this injustice. America’s second wealthiest person, Warren Buffet, wrote in an open editorial for the New York Times, “My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.” Buffett’s letter was about the unfair tax advantages that he and his “mega-rich” colleagues receive in comparison to the rest of us in the 99% category. Buffett is not the only billionaire who believes that they should pay the same rate as everyone else. Other billionaires who back Warren Buffett on this include Bill Gates, George Soros, Eli Broad, Tom Steyer, David Rubenstein, John Paul DeJoria, Michael Bloomberg, Mark Cuban, James Simons, and John Arnold… just to name a few.
Some billionaires such as Warren Buffett state that they never asked for those tax cuts and I am sure this is true. Nevertheless, it is well known that many people and corporations with economic pull have persuaded government officials to create policies that spare their income bracket. The Economic Policy Institute has loudly stated that the decline in tax rates for top earners has directly caused post-tax inequality. They share on their website, Inequality.is, that the billionaire and corporate friendly tax policies have created incentives for those with substantial economic pull to rig economic policies in their favor. The EPI states that if we raised the taxes of the “very rich” to the levels of those in the middle class, America would find plenty of revenue for essential investments and there would be less of a reason for those with economic power to rig the rules.
The EPI’s concern about tax cuts stem from the relationship between tax policies, poverty, and economic mobility. Leading economists and sociologists understand that economic strength and mobility cannot happen without tax dollars that support economic infrastructures such as anti-poverty campaigns, education, and small business programs. After pointing out the no-brainer troubles that follow income inequality, Joseph Stiglitz, a Nobel laureate in economics and professor at Columbia University, wrote in a New York Times article that, “Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength.” This has been the mantra of leading economists.
The top 1% earners in this country have enjoyed passing along tax burdens to the other 99% while ignoring the failing economic infrastructure that has contributed to their wealth. Meanwhile, trade agreements have weakened the job market, wages are stagnating, and unions that protect workers have been dismantled—all by the influence of those who receive billions of dollars in tax cuts. The main reason given for these crippling economic policies is that the policies enable new business and investments, which in turn stimulate the economy—something called “trickle-down economics.” However, we have yet to see anything trickle-down. In fact, we mostly see the wealth trickle somewhere else by means of 'offshoring' jobs and moving tax savings to foreign bank accounts. While these things happen, the American Dream continues to slip away. According to The Pew Charitable Trusts, “40 percent of Americans consider it common for a person in the United States to start poor, work hard, and become rich.” This is the essence of the American Dream. Unfortunately, the Pew Charitable Trust also notes that 43 percent of Americans at the bottom remain there and 70 percent never make it to the middle class.
It is difficult to see a way out for impoverished Americans when their own country continues to work against them. While these poor souls struggle, the middle class is having difficulty guaranteeing their children’s future as their wages idle and opportunities diminish. Undeniably, the poor are getting poorer and the rich are getting richer. Maybe this wouldn’t be the case if U.S. policy makers heeded the advice of prominent economists and economic research organizations.
Thanks for reading!
John Debar, a conscious observer
Bibliography:
http://www.conscious-observer.com/...