If you are not familiar with these two words then you haven’t been watching the news the past 2 months or paid attention to the Occupy Wall Street (OWS) demonstrations.  There is a new report from the Congressional Budget Office (CBO) which attempts to make the case that the Rich have seen a disproportionate increase in income and Obama would love to seize that narrative for the 2012 elections.  The main takeaway of the report states that those households with the highest 1% of income saw their income rise 275% from 1979 to 2007 which the rest had modest increases ranging from 18% to 65%.  The graph below is taken from the report.

The fact that income is not proportionally distributed is not a shock and is a given with Capitalism.  Some people work hard, innovate and develop products that people demand and the market rewards them and on the flipside, some people make poor business decisions and the market punishes them with extreme prejudice.  I’ve always said that Capitalism punishes the stupid and the lazy so deal with it.  Capitalism is the best economic model we have and the success of countries who adopted it has proven this to be the case.  The US has the number 1 economy in the world, the failures of Socialism are legion and those who think America should go down that path are foolish, ignorant or enemies of America. 

But when economies improve, the percent of improvement in each income demographic group should be similar although distribution of the absolute value of wealth will still be disproportionate.  So why did income increase higher as you move up the income demographic groups?

 Before I get to my theories, let me provide a few links to those who are more versed in Economics than me.  

NYU Professor Schools PBS

The first link comes from a PBS show where they interviewed NYU professor Richard Epstein.  This video is 9 minutes of pure Capitalism Win.  Watch the whole video and observe the reporter as he is totally confused by this type of economic theory and the scales appear to drop from his eyes although I doubt he’ll have the courage to process the truth bombs that the good professor was dropping.  The main line of questioning is focused on income inequality and like I said before, this is no shocker.  Those who create products that are in such demand by the Market are rewarded accordingly and this motivates others to do the same.  That is a good thing people.  Economics is all about motivations and when a person is not motivated to invest their money, work long hours developing a product, meet a payroll and make sound business decisions then people won’t waste time and money doing these critical activities that are necessary for a growing economy. 

James Pethokoukis Post

James Pethokoukis wrote a post here which also addressed the Income Inequality subject.  Mr. Pethokoukis claims that the median household income has risen 49% ($37,000 to $55,000) so that is a larger improvement than stated by the CBO.   Mr. Pethokoukis also points out that price indexes for the poor rose much less than those items purchased by the rich so the relative increase in median household income has more buying power for the lower income groups.  This was stated here:

“The Minneapolis Federal Reserve concluded—after taking into account household size and differing price indexes—median household income for most household types increased by 44 percent to 62 percent from 1976 to 2006. In addition, its research shows that median hourly wages (including fringe benefits) rose by 28 percent from 1975 to 2005.”

The richest 1% also contains sports athletes, movie stars and music stars and the CBO even pointed this out and Mr. Pethokoukis states that:

”The compensation of ‘superstars’ (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a many fold increase in income for such people.” The CBO also mentioned”changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities” as possibilities.

Mr. Pethokoukis also stated that the increase in technological change requires a workforce that is more educated and that the US has lagged behind that curve.  I’ll get to that more in detail later when I outline my theories.

Mr. Pethokoukis also wrote another post here where he compares the Income Inequality arguments to Anthropogenic Global Warming (man-made global warming).  This post doesn’t add much to my thesis here but it is worth a read because it gives insight into the politics that we’ll see in 2012.

My Theories

One theory by the Left and OWS is that the Mega Rich control government.  If that were true, why do they pay more taxes than any other income demographic group?  From the 2009 IRS tax data, the top 0.5% of filers earns over $500,000 per year, comprise 13.9 percent of all taxable income and pay 29.8% of the total income tax.  So the reason for the higher increase in income from the 1% can’t be attributed to some conspiracy theory that they control the government.  If it were so, then they’d pay a much lower percentage of the income taxes.

What happened in the US during the timeframe of 1979 to 2007?  The rise of the global market occurred and more companies moved low skill manufacturing from the US to other countries.  Who does this hurt?  Not the upper management of Corporations since they don’t lose their jobs but instead those who work in manufacturing facilities.  Those individuals were caught off guard and lost their jobs and now had to find either other lower paying jobs (due to low education level) or accept unemployment or Welfare benefits which pushed their income further down.  The global market is not going away and is a reality.  Companies, who have a responsibility to maximize profit, will move their manufacturing to lower cost areas and they are right in doing this. 

We are in a transition period in the US where we are moving more to a knowledge based economy.  We will use other countries to make our products and keep only a minimal manufacturing base in the US.  Manufacturing is critical to the US economy and we need to maintain this core competency because innovation springs from manufacturing but a bulk of this low tech manufacturing will be done in foreign countries.  This is a fact and the US should adjust.  We must increase the education of our workforce to meet the new needs of our new domestic economy.  While we transfer to this new paradigm, there will be those who have less education who will suffer (these individuals are in the lower income groups).

Lowering the Corporate tax rates would help keep some of these jobs in the US but still a great many will move due to lower labor rates.  And once we increase the education level of our population, this is really a desirable position for the US.  Let other countries do the hard labor of low tech manufacturing and let’s have the US focus on innovation, product development and high tech manufacturing.  These jobs pay better and the quality of life will improve but we are not prepared for this right now.  Education must improve and this will be the tide that floats all boats. 

Entitlement spending from our government also plays into this Income Inequality.   As we continue the entitlement handouts we condition people to accept lower expectations of their abilities.  There are scientific studies that show extending Unemployment Insurance keeps unemployment higher than it would normally be without those entitlements.  I also showed in a previous post where welfare spending seemed to lead increase in poverty rates.  The more Government rewards economic sedentary activity the more the lower income demographics will languish. 

So it is a combination of the world moving to a global economy and the Liberal policies that sow seeds of mediocrity that I feel have contributed to this Income Inequality that was manifested in larger percentage increases for high income groups.  It is not through some collusion between the Mega Rich and Government to fix the game. 

I leave those who disagree with this parting question.  How has the wealth of the 1% prevented you from making your fortune?  What is preventing you from getting more education, starting a business or moving up the corporate ladder?  Steve Jobs was the product of an unwanted pregnancy, adopted and dropped out of college after 1 semester.  What is your excuse?