City University of New York



POLICY OPTIONS BRIEFTO: President Barack Obama, Senate Majority Leader Mitch McConnell, Speaker John Boehner, and Federal Reserve Chairwomen Janet Yellen. FROM: Greg Potter.RE: (SUBJECT) Wealth and Income Inequality in America.DATE: March 7th, 2015.Problem: Wealth Inequality in America. The United States has wider disparities of wealth between rich and poor than any industrialized country in the world. Wealth inequality can be defined as the unequal distribution of assets within a population. Your “wealth number” is equal to your assets, such as real estate, stocks, bonds and cash less your liabilities. Economist Emmanuel Saez and Gabriel Zucman, who have dedicated their careers to compiling and analyzing wealth and income data, point out that in America today, the wealthiest 160,000 families own as much wealth as the poorest 145 million families. And the New York Times reports that the six heirs of the Sam Walton fortune, the founder of Walmart, own as much wealth as the bottom 100 million Americans. Another display of the wealth disparity crisis is to compare the growth of the Forbes 400 list of America’s richest citizens vs. the wealth of the average middle class family. In 1982, when Forbes began annually listing America’s 400 richest people, the United States sported only 13 billionaires. In 2014, you won’t even make the Forbes 400 list if you have a billion dollars. In order to qualify now, you need at least a record high $1.55 billion in wealth, which means that 113 U.S. billionaires didn’t even make the cut in 2014. This puts the total number of American billionaires in 2014 at 513, which is a massive 3,800 percent increase since 1982. All the while, the average middle class American family is worth less today than in 1969. In 1969 the wealth of a middle class family was $68,000, while in 2013, the number stands at $63,800. (Indexed to 2013 dollars)Problem: Income Inequality in America. Income inequality in the United States has also reached a crisis point, growing steadily for the past 30 years. Income inequality refers to the extent to which income is distributed in an uneven manner among a population. According to the AFL-CIO, the average CEO today in America takes home more than $12 million, while the average worker makes about $34,000.” That translates into the CEO making 353 times more than the average worker. That is the widest disparity in the developed world. To put these numbers into perspective, in Japan, the world’s third largest economy, the CEO makes only 65 times more than the average worker. A microcosm of income inequality is being played out at America’s largest private employer?Walmart?which employees over 1.3 million Americans. Walmart’s CEO Mike Duke took home a total compensation, income plus bonus, of $23.15 million in 2012, while half of Walmart’s workers made less than $22,400, which according to PayScale is below the poverty level for a family of four. Take note that Mr. Duke made roughly 1034 times more than his average employee. Another way to examine the income disparity problem is to analyze the issue in terms of total population. In 1982, the highest-earning 1% of families received 10.8% of all pretax income, while the bottom 90% received 64.7%, according to research by UC-Berkeley professor Emmanuel Saez. Three decades later, according to Saez’ preliminary estimates for 2012, the top 1% received 22.5% of pretax income, while the bottom 90%’share had fallen to 49.6%. This is the worst income disparity since the 1930’s. The Aftermath Millions of Americans under siegeWealth and income inequality harms over 100 million Americans, causing health outcome imbalances, food poverty and uneven educational opportunities. The rich live longerIn the area of health, the people in the top 5 percent of the income earners live about nine years longer than those in the bottom 10 percent. And poor Americans are at greater risk for virtually every major cause of death, including cancer, heart disease and diabetes. Record stock prices and record food povertyConcerning poverty, nearly 50 million Americans face “food insufficiency”, which has severe health effects for children, leading to learning disabilities and conditions like anemia and asthma. The poverty and inequality crisis is exemplified by the fact that a record 46 million Americans currently participate in the “SNAP” food assistance program, while concurrently corporate profits and asset price are at their highest levels in recorded history. The wealthy spend more and score betterEducation is under duress too. High income families spend seven times more a year on average than a low-income family, up from four times in the 1970’s, according to a report, coauthored by MIT economics professor Michael Greenstone. These families now spend as much as $9,000 annually on private tutoring, SAT prep courses, computers and other activities, compared to $1,300 for low-income families. The money advantage provides a true benefit, as test scores of low-income students have shown only modest gains nationally during recent decades, while high income students have shown large increases.Also, it’s been shown that mothers with college degrees spend 4.5 more hours a week engaging with their children than mother’s with a high school diploma or less. By age 3, children of parents who are professionals have vocabularies that are 50 percent larger than children from working-class families, and 100 percent larger than vocabularies of children whose families receive any sort of government assistance.CausesFiscal Policy for the 1%One cause of wealth and income inequality in America is the extraordinary influence that corporate special interest groups have on fiscal policy. And now the “big money” has reached extreme levels, led by the 2010’s Supreme Court Citizens United v. Federal Election commission ruling. The Citizens ruling says that the government can’t place any restrictions on campaign contributions from both corporations and unions and also allows the creation of a Super PAC, which can take unlimited funds from individuals, unions and corporations. The Citizens ruling has given an unfair advantage to those with monetary resources as they can now affect elections directly, and ultimately shape policy at the expense of ordinary Americans. Is monetary policy just a government subsidy program for the wealthy?In addition, the Federal Reserve’s extreme monetary policy measures since the 2008/2009 financial crisis are stretching the wealth and income inequality gap even further. The Federal Reserve’s four trillion dollar quantitative easing program has driven interest rates close to zero, causing a massive increase in asset prices, as seen in the Dow Jones Industrial Average stock index’s meteoric rise by more than 150 percent since 2009. As a result, the incomes of the very wealthiest 1 percent of Americans increased by 31.4 percent from 2009 to 2012, and by contrast, the bottom 99 percent saw their earnings in the same period go up by just 0.4 percent. And in 2012, the top 1 percent collected 19.3 percent of all household income and the top 10 percent took home a record 48.2 percent of total earnings. Policy OptionsOption#1: Electioneering Reform thru abolishment of Citizen United.Is American democracy dead?“Big money” interests groups are destabilizing our democracy and stretching the wealth gap to extremes. As Martin Gilens of Princeton University and Benjamin I. Page of Northwestern University point out, “America’s democracy is at a crisis point because the majority of the Americans actually have little influence over the policies the government adopts. Americans do enjoy some features of a democracy, such as regular elections and freedom of speech and association, but the policy making is dominated my powerful business organizations and a small number of affluent Americans. Thus, America’s claims to being a democratic society are seriously threatened.” Is it a coincidence that America is on the cusp of becoming an oligarchy while at the same time wealth and income inequality have never been higher?With the wealth gap at extremes the political polarization in Congress has also never been worse. The most likely explanation of the relationship between inequality and polarization is the increased income and wealth of a small minority has bought the allegiance of a major political party. To add fuel to the fire, Congress has never been richer, with a median net worth of $1 million. So not only does the “big money” control our elected representatives through campaign donations, they’re personal economic interests are aligned as well. Solution:The first step to taking back our democracy is to overturn Citizen United through a constitutional amendment. It’s imperative we stop corporations and the super rich from buying politicians and policy. Support for the amendment to overturn Citizens already exists in California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Montana, New Jersey, New Mexico, Oregon, Rhode Island, Vermont and West Virginia in the form of legislative resolutions or statewide referendum results. There are many local and national grass roots organizations whose goals are to abolish Citizens United. One such organization is which specifically addresses “big money” in politics. The Move-to-Amend petition says, “We, the People of the United States of America, reject the U.S Supreme Court’s Citizens United ruling and other related cases, and move to amend our Constitution to firmly establish that money is not speech, and that human beings, not corporations, are persons entitled to constitutional rights. The downside to this policy goal is the process will take many years, which gives the wealthy factions more opportunity to tighten its grips on government, allowing wealth and income disparity to fester.Option #2: Baby Shares Program.Capital vs. Labor?Capital wins.The stock market is a wealth generator. From 1980 till today, the Dow Jones Industrial Average stock index is up roughly 1,900%, that’s taking into account three market crashes. During the same time period, middle class wealth and income was basically flat. (See Figure 1 below.)Figure 1And who invests in the stock market? The richest 10 percent of Americans own roughly 80 percent of the value of the nation’s capital stock; the richest 1 percent own about 35 percent. And as the returns to capital continue to outpace the returns to labor, this allocation of ownership will only further aggravate America’s wealth inequality. Solution:A way to help reduce the wealth gap is the introduction of the “baby share.” A baby share is an endowment given to Americans at birth and maintained by the federal government until they are 18. The share functions similar to Social Security, and will be invested in fifty percent in an S&P 500 market index fund and fifty percent in a Treasury Bond Index fund. The baby share can only be used for college, starting a business or buying a house. The amount of the share awarded would be $20,000 and given to citizens in the lowest 75% wealth category. The baby share program would cost roughly $60 billion a year, about one-tenth of the 2014 defense budget. The baby share program would not increase the deficit. A recent CBO report finds that right now, tax credits primarily benefit the wealthy to the tune of $1 trillion a year. A portion of this money could easily fund the baby share and over time help close the massive wealth gap between the rich and poor. See chart below for “baby share” cost analysis.Britain toyed with the idea of a “baby share” program, but after the financial crisis, the idea was shelved due to austerity policies. Hillary Clinton also pitched this idea during her 2008 presidential campaign, though it never gained momentum. This policy could appeal to Republicans, who seem to have an affinity with the word “free markets.” This is a market approach to solving wealth inequality, though it does involve cutting corporate welfare. Option #3: Federal Reserve Charter Reform.How the Fed enables inequality:For the past six years the Wall Street banks have been the sole beneficiary of the largest government subsidy program in history. The Federal Reserve, through it money creation powers, implemented a bond buying program called quantitative easing or QE. The Federal Reserve monetary policy program digitally injected over $4 trillion dollars into the banking system from November 2008 until October 2014, with no strings attached. Quantitative easing adds to the problem of wealth and income inequality by making the rich richer and the poor poorer by intentionally driving down interest rates to extremely low levels. It allows people who can get access to the cheap money on a regular basis to benefit in extraordinary ways. For example, corporations use the low rate environment to regularly implement company buybacks, which just set a record high $98 billion in February 2015. Companies that are earning a lot of money and generating free cash flow are borrowing money at basically zero rates and buying back their stock. From an investor’s standpoint, you want the highest return on your dollar, period. If the highest return comes from not growing your business but buying your shares back, then that’s a great plan. Can buybacks be a modest driver of inequality? Yes, because instead of investing in new plant capacity and new employees, companies just use the free cash flow to buy shares. This drives stock prices higher and increases its key EPS (earnings per share) metric, as shares are removed from the market. This is great for the investor class, but not so much for everyone else. Please review Figure 2 below as the chart shows the decline of interest rates since the onset of QE. Figure 2Now examine Figure 3. This chart shows the correlations between the Federal Reserve’s balance sheet expansion, stock market upward momentum, income growth for the 1% and lack of income growth for 99% of Americans. Figure 3Solution:One way the Federal Reserve can help close the wealth gap would be to target monetary policy towards ordinary Americans. The Fed could allow Americans to borrow money at the same rates as the Wall Street banks, hedge funds and corporations do. And guess what? The Federal Reserve can legally do this right now, as is stated in Section 13.3 of the Federal Reserve Act. Section 13.3 allows the central bank to lend to industrial corporations and small business, including partnerships, individuals and other entities that are not commercial banks or even financial firms. The Fed made thousands of direct loans to private businesses during the New Deal. And in the latest crisis, the Fed bailed out AIG, an insurance company, and aided mutual fund companies and insurance companies. In fact, Elizabeth Warren recently proposed a “Bank on Students Fair College Loan Act” which allows students to borrow directly from the Federal Reserve at the same .75 percent rate they give to Wall Street. Though her plan initially received much attention and support the Republicans eventually blocked the bill.Congress created the Federal Reserve and has the power to change it. And since the Fed seems unable to wants to help Main Street, a new Fed Charter is needed. The newly reformed Fed Charter would force the Federal Reserve and Congress to work hand in hand on fiscal and monetary policy. Careful cooperation with the fiscal side of government can harness the Fed’s money creation and lending powers to help finance major public objectives like infrastructure and college loans. Countries like Japan already employ this strategy. This policy costs nothing and is currently a hot topic in Congress. A Federal Reserve overhaul can quickly gain momentum in Congress because many are uneasy with the Federal Reserve’s autonomy. Republican Rand Paul has put forth an “Audit the Fed bill”, as he seeks more central bank transparency. And the Senate Banking Committee’s Chairmen, Republican Richard Shelby of Alabama, has indicated he plans to draft legislation to reform the Federal Reserve, seeking to reel in some the central banks powers and handing it off to Congress. And as mentioned earlier, Elizabeth Warren and many Democrats want to see college student loans come directly from the Fed. ................
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