A New American Dream – A Simple Life: Part I

Suze Orman

“My only fear in life, when it comes to money, is what’s happening in the United States of America. The American dream is dead for the majority of America.”- financial guru Suze Orman

A New American Dream

What in the world is going on this country, and how in the world did we ever get here? Do you worry what our future will be like if we continue on the same path? Are you looking for ways we can change that future? If so, you’re in good company – millions of other Americans are wondering exactly the same thing!

The old American dream is giving way to a new American dream, a dream that can improve quality of life, promote social justice, and protect the environment. In this three-part series, I’ll try my best to first articulate where we are now, and then offer a vision of a society that pursues not just “more,” but more of what matters—and less of what doesn’t. I invite you, our reader, to participate in a valuable dialog that will, at least in some small part, help shape a new American dream.

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It’s the Inequality!

It’s the inequality! Do you recall that political slogan “It’s the economy, stupid!”? Today’s slogan should be “It’s the inequality, stupid!” The inequality I refer to is twofold because economic inequality is intrinsically linked to social inequality.

Do you have any idea about how extreme the inequality is? It’s probably far worse than you think! I challenge you to take this little quiz:

Inequality Quiz

These pie charts represent the distribution of wealth in three different countries. Each slice represents the proportion of wealth held by one-fifth of the population in the country: the yellow slice, by the wealthiest fifth, the blue slice by the next wealthiest, down to the red slice, which represents the poorest fifth, in terms of wealth.

PBS pie chart unlabeled

Have you figured it out? For the correct answer, see the How Does the U.S. Slice the Pie? Answer Key at the end of this post. Well, how did you do?

Which country would you prefer to live in?

For further information about this quiz, see Easy As Pie: Inequality In Downloadable Charts.

Out of Balance

In 2011, a study called “Building a Better America - One Wealth Quintile at a Time” was published in Perspectives on Psychological Science. The researchers were Michael I. Norton of Harvard Business School and Dan Ariely of Duke University. The goal was to determine the wealth distribution that was most preferred by Americans.

The results are striking. The majority of respondents “vastly underestimated the actual level of wealth inequality. . .believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%.” When asked about their ideal wealth distribution, respondents reported “a desire for the top quintile to own just 32% of the wealth.” – See more at: http://journalistsresource.org/studies/economics/taxes/perceptions-income-inequality-u-s#sthash.5tpJz7ls.dpuf

  • Actual number: 84%
  • Perceived number: 59%
  • Desired number: 32%

second American revolution

Wealth and Income Inequality in America – Wake Up!

Over the first weekend in March 2013, a YouTube video breaking down income inequality in America went viral. I highly recommend that you watch this YouTube video. It does a simply amazing job communicating statistics, and it’s fun to watch!

Published on March 7, 2013

The top 1% has 40% of the wealth. The bottom 80% has only 7% of the wealth. The top 10% has 72% of the wealth. The bottom 50% has only 2% of the wealth. Wake up people! Wealth and income inequality in America needs to be fixed.

Well I Left You Half

A Brief History

To figure this out, let’s see a bit of economic history:

Charts from Mother Jones

WINNERS TAKE ALL

The superrich have grabbed the bulk of the past three decades’ gains.

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WHO’S WINNING?

For a healthy few, it’s getting better all the time.

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YOUR LOSS, THEIR GAIN

How much income have you given up for the top 1 percent?

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“The One Percent Gobbled Up the Recovery, Too - In fact it put the 99 percent back in recession”

That’s the title of February, 2013 piece by Timothy Noah.

The article refers to work done by renowned Berkeley professor and economist Emmanuel Saez. Together with Thomas Piketty, an economist at the École d’economie de Paris, Saez first mapped the enormous 34-year run-up in income share for America’s top 1 percent. (Saez is a renowned income inequality expert and winner of the prestigious John Bates Clark Medal, an award that the American Economic Association gives every year to the top economist under age 40.)

According to Saez, when you look at the economic recovery’s first two years (2010-2011), the top 1% (which by 2011 meant any household making more than about $367,000) captured 121% of all pre-tax income gains. How is it even possible for the one percent to capture more than 100 percent of all income gains since the last recession? Here is how Timothy Noah explains it:

“What did the bottom 99 percent see? Over 2010 and 2011, it saw, on average, a slight net decline in pre-tax income of 0.4 percent. This “negative growth” is what, at least theoretically, boosts the one percent’s share of income gains from 100 percent to 121 percent. If you think of income distribution as a Pac-Man game, with the one percent as Pac-Man, imagine your Pac-Man consuming all the pac-dots in one game and then somehow, after you’ve left the arcade, gobbling up some of the pac-dots in the next player’s game too. Another way to put it is that the one percent didn’t just gobble up all of the recovery during 2010 and 2011; it put the 99 percent back into recession [emphasis mine].”

Remember Shared Economic Growth?

  • 1900 – 1978: Broad, shared economic growth, each generation did better than the one preceding it.
  • 1950′s: Great Compression, in which workers - through unions and Social Security, among other factors - captured a solid share of the economy’s growth.
  • 1979- ?: Great Divergence, in which top 1% took in nearly a quarter of the nation’s income and controlled nearly half its wealth.

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How Do We Stack Up Against Other Countries?

U.S. Income Inequality Has Jumped More Than Any Other Major Western Country’s Since 1960

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U.S. Income Equality Trails Iran, Mongolia, and Lithuania

Follow this link to see the map, and take the equality quiz: Infographic: US Income Equality Trails Iran, Mongolia and Lithuania.

Causes of Economic Inequality

Opposing Theories

Not all economists agree about what’s causing inequality. There are two prevalent theories:

  • Skill-Biased Technical Change
  • Deliberate Result of Government Policy

David Autor, one of the country’s most celebrated economists, is a chief proponent of the  Skill-Biased Technical Change (S.B.T.C.) theory. Larry Mishel,  president of the Economic Policy Institute, believes that economic inequality was the deliberate result of government policy. Autor and Mishel debated this question at this year’s (January, 2013) meeting of the Economic Policy Institute.

An article by Adam Davidson, (New York Times), gives an excellent synopsis of the opposing viewpoints, as they were presented at that meeting:

The Skill-Biased Technical Change (S.B.T.C.) theory holds that inequality is a side effect of the digital revolution. The computer revolution displaced millions of Americans from clerical and production occupations, forcing them to compete in lower-paying jobs in the retail, fast-food, and home health sectors. Meanwhile, computers disproportionately helped people like doctors, engineers, and bankers in information-intensive jobs. This was the view presented by David Autor.

Mishel has long been an opponent of the S.B.T.C. theory. He argued that the change came around 1978, when politicians from both parties began to think of America as a nation of consumers, not of workers. President Jimmy Carter deregulated the airline, trucking and railroad industries in order to help lower consumer prices. Congress chose to ignore organized labor’s call for laws strengthening union protections. Ever since, Mishel said, each administration and Congress have made choices - expanding trade, deregulating finance and weakening welfare - that helped the rich and hurt everyone else. Inequality didn’t just happen, Mishel argued. The government created it.

Adam Davidson, author of the New York Times article, asked Frank Levy, the M.I.T. labor economist, to help make sense of the competing theories. “Levy suggested seeing how inequality has played out in other countries. In Germany, the average worker might make less than an American, but the government has established an impressive apprenticeship system to keep blue-collar workers’ skills competitive. For decades, the Finnish government has offered free education all the way through college. It may have led to high taxes, but many believe it also turned a fairly poor fishing economy into a high-income, technological nation.”

New Study: Inequality Is a Product of Government Policy

Facundo Alvaredo of Oxford University, Anthony B. Atkinson of Oxford University, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley recently published the results of an insightful study wherein the wealthiest 1 percent of the U.S. is compared to the top 1 percent of several other nations. See Facundo Alvaredo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, “The Top 1 Percent in International and Historical Perspective,” Nber.org (May 2013).

The study reveals the staggering degree to which wealth inequality has grown in the U.S. The report focuses on four governmental policy issues and examines their impact on the accelerating U.S. inequality, specifically:

1) Do lower taxes on the already wealthy, which allow them to save more, make their fortunes snowball?

2) Do current rules redistribute more wealth to executives and managers, perhaps at the expense of the companies they run?

3) Does inherited wealth, which is on the rise in Europe as well as the United States because of tax rules that make it easier to pass fortunes to heirs, reinforce inequality?

4) Does having income from work juice the growth of fortunes, because the savings can be reinvested rather than spent?

David Cay Johnston,  winner of the 2001 Pulitzer Prize for Beat Reporting, wrote an article titled “Economic Inequality in the United States is by Design,” published in the June 3, 2013 issue of The Progressive. I strongly recommend that you read the full text: The Progressive.

Johnston’s article describes a study done by four prominent economists. Here are some of the findings:

  • For more than five decades starting in 1928, at the end of the Roaring Twenties bubble that produced the Great Depression, top American incomes were a much smaller share of all incomes. Those at the top began gathering a rapidly growing share of national income when the first Reagan tax cuts took effect in 1981.
  • In 1981, the top 1 percent had 10 percent of all reported income; but by 1999 they were at 20 percent. That share has risen and fallen with the economy since, but the 12-year average shows the top 1 percent enjoying a fifth of all income since 2000.
  • In the two years of recovery for which we have data, 2009 to 2011, 121 percent of the income gains went to the top 1 percent. These gains were so highly concentrated that 40 percent of all the increased income in our nation of 314 million went to fewer than 16,000 households.
  • The economists said: “Tax cuts may have led managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment.” Johnston translates: “In plain English, that means some executives are lining their own pockets at the expense of the enterprises they run. In a country where they can keep most of their increased pay because of tax rate cuts, executives have an incentive to focus on their wealth, while if tax rates were at pre-Reagan levels, pushing for much higher pay results in much less personal after-tax gain.”
  • “Today, a CEO may be both better paid and more able to accumulate,” the authors write. Johnston explains how this works: “And at the heart of that ability to make more from work and make investments grow more are lowered tax rates on those at the top. With lower rates, boards of directors are willing to pay more, executives get to keep more and of the money they save, they also get to keep more - all of which would be fine if society as a whole were better off as a result, something the American economic data has shown is not the case.”
  • The study also produces data that bucks the popular political view toward taxes that cutting tax rates for the wealthiest Americans will result in our country’s GDP ballooning.  The study finds no correlation between the two. Countries that made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark.

Johnston’s conclusion: “In short, what the paper shows is this: Inequality is a product of government policy.”

Economic Equality and Simple Living?

In the 1960′s and ’70′s, there was a movement whose participants valued voluntary simplicity for reasons of social justice. This is still a great reason to embrace simple living today!

“Social inequality is different from economic inequality, though the two are linked. Social inequality refers to disparities in the distribution of economic assets and income, while economic inequality is caused by the unequal accumulation of wealth; social inequality exists because the lack of wealth in certain areas prohibits these people from obtaining the same housing, health care, etc. as the wealthy, in societies where access to these social goods depends on wealth.”

- From Wikipedia, the free encyclopedia

So, we can readily understand that a more equitable distribution of wealth is desirable. But is economic growth the answer? NO! What’s needed instead is a sharing of the world’s resources, especially as those resources are limited. That’s where simple living comes in! The less I consume, the more I have to share with others.  The choice to live simply becomes an act of sharing. Sharing can be an alternative to growth.

By the end of this series, I hope that all of us come to an understanding as to how simple living can help solve these horrendous problems of inequality, not  only for America but for all who inhabit planet Earth.

Stay Tuned for Part II

The next installment in this three-part series will address these questions: What will our future will be like if we continue on this same path? What are the social implications of rising economic inequality?  Domains to be considered include:

  • Access to education
  • Poverty, hunger, homelessness
  • Access to health care
  • Job satisfaction
  • Economic mobility
Don’t miss Part II! Enter your email address in the “Subscribe” box on the right.

In the meantime, would you like to hear what other Americans are saying about how economic inequality has affected them? Watch this video from PBS NewsHour:

Watch Many Americans Feel ‘Stuck in a Rut’ as Economy Improves,… on PBS. See more from PBS NewsHour.

 

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PBS pie chart labeled