The Osterley Times: Income-Inequality Gap Widens

The gap between the amount of income taken by the richest and the poorest of America's citizens is widening and the rich are now taking home the largest percentage of the nation's wealth that they have taken since the 1920's.

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

So the rich are getting richer whilst the bottom 50% take an even smaller share of the pie than they have taken in the past.

President Bush, the man who has favoured tax cuts that aided the rich and super rich to hold on to even more of their money, stepped up to the plate to give his reasoning of why this is now taking place.

In an interview yesterday with The Wall Street Journal, President Bush said, "First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps. And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids. That's why No Child Left Behind is such an important component of making sure that America is competitive in the 21st century."

His theory seems to be that a lack of education explains why some people remain poor, and there is truth in that, although Bush does seem to be still pushing the American Dream that, if you work hard and study hard, then you too can join the richest in society.

But the truth is that there is much less social mobility in the United States - and in Britain - than we are led to believe. Recent studies have shown that the social class into which a person is born has much more to do with where they will end up that any other factor.

A classic social survey in 1978 found that 23% of adult men who had been born in the bottom fifth of the population (as ranked by social and economic status) had made it into the top fifth. Earl Wysong of Indiana University and two colleagues recently decided to update the study. They compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70% of the sons in 1998 had remained either at the same level or were doing worse than their fathers in 1979.
In the 1990s 36% of those who started in the second-poorest 20% stayed put, compared with 32% in the 1980s and 28% in the 1970s.
A study by Thomas Hertz, an economist at American University, found that 42% of those born into the poorest fifth ended up where they started—at the bottom. Another 24% moved up slightly to the next-to-bottom group. Only 6% made it to the top fifth. On the other hand, 37% of those born into the top fifth remained there, whereas barely 7% of those born into the top 20% ended up in the bottom fifth.
Two economists at the Federal Reserve Bank of Boston analysed family incomes over three decades. They found that 40% of families remained stuck in the same income bracket in the 1990s, compared with 37% of families in the 1980s and 36% in the 1970s.

So why does President Bush and other members of his social class continue to see education, rather than the extraordinary life of privilege they were born into, as the reasons for their personal success and other people's failure?

The Economist has suggested a reason:

Members of the American elite live in an intensely competitive universe. As children, they are ferried from piano lessons to ballet lessons to early-reading classes. As adolescents, they cram in as much after-school coaching as possible. As students, they compete to get into the best graduate schools. As young professionals, they burn the midnight oil for their employers. And, as parents, they agonise about getting their children into the best universities. It is hard for such people to imagine that America is anything but a meritocracy: their lives are a perpetual competition. Yet it is a competition among people very much like themselves—the offspring of a tiny slither of society—rather than among the full range of talents that the country has to offer.

It is perhaps for this reason that Bush, and others like him, convince themselves that they deserve the tax cuts that make them even richer; even whilst Bush vetoes the State Children's Health Insurance Programme. They have convinced themselves that their extreme wealth is the result of their own hard work, rather than a birth lottery in which they were born with a winning ticket.

This insanity of pretending that the best thing for the whole of society was not to ensure a more even distribution of wealth but to make sure that the rich held on to more of their money was first aired in Ronald Reagan's "voodoo economics" theory which stated the belief that the whole of society would benefit from the "trickle down effect" of reducing taxation on the rich.

The results, we now know, were a disaster. In 1982, the first full year after the tax cuts were enacted, the economy actually shrank 2.2%, the worst performance since the Great Depression. And the effect on the federal budget was catastrophic.

Jimmy Carter's last budget deficit was $77 billion. Reagan's first deficit was $128 billion. His second deficit exploded to $208 billion. By the time the "Reagan Revolution" was over, George H.W. Bush was running an annual deficit of $290 billion per year.

Yearly deficits, of course, add up to national debt. When Reagan took office, the national debt stood at $994 billion. When Bush left office, it had reached $4.3 trillion. In other words, the national debt had taken 200 years to reach $1 trillion. Reagan's Supply Side experiment quadrupled it in the next 12 years.

Is there anything to compare this to? When Bill Clinton took office he intentionally reversed the Supply Side formula, raising taxes on the wealthy and reducing them on the lowest wage earners. Supply Side true believers predicted the arrival of the Apocalypse. Bob Dole said the stock market would collapse. Newt Gingrich said the world would fall into another Great Depression.

What actually happened?

Between 1992 and 2000, the U.S. economy produced the longest sustained economic expansion in U.S. history. It created more than 18 million new jobs, the highest level of job creation ever recorded. Inflation fell to 2.5% per year compared to the 4.7% average over the prior 12 years.

Real interest rates fell by over 40% producing the greatest housing boom ever. Overall economic growth averaged 4.0% per year compared to 2.8% average growth over the 12 years of the Reagan/Bush administrations. Most impressively, Clinton reversed the mammoth deficits of the Supply Side years, turning them into surpluses. He used these surpluses to begin paying down the national debt.

Albert Einstein once said that insanity was doing the same thing over and over again and expecting different results, and- on what we know from the Reagan experience that Bush is repeating - it would be possible to make the charge of insanity against the Bush administration, although I think to do so would be to totally miss the point.

They are not expecting a different result, they know fine well that reducing taxation for the richest people in society aids no-one but themselves, but they don't care.

They think they deserve it.

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