Who’s to Blame For Growing U.S. Income Inequality?

by The Curmudgeon

Income disparity in the U.S. has reached an extreme that is so unbelievable it would make our founding fathers shudder. At the same time that we have a new gilded age of super-rich getting richer, we have more people than ever struggling to pay for food and basic necessities.

The NY Times and SF Chronicle reported this week that the top 10 percent of earners accounted for more than half of the country’s total income in 2012. That’s the highest level recorded since the government began collecting the relevant data in 1913, according to an updated study titled "Striking It Richer" by economists Emmanuel Saez and Thomas Piketty.

As shown in the figure below, the top 10% of earners accounted for more than half of all income in 2012. The share of the top 1% of income earners was about 23% last year.

From 2009 to 2012, the top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4%. Those super rich enjoyed 95% of the total U.S. income gains since the great recession "ended" in June 2009. In 2012, the top 1% incomes increased sharply by 19.6%. Meanwhile, incomes for the other 99% of Americans stagnated from 2009 to 2011. They grew only about 1% in 2012, based on preliminary projections by the economists.

The figures underscore that after the recession "ended," the country remains in a new Gilded Age, with income even more concentrated as it was in the years that preceded the Great Depression of the 1930s. High stock prices, rising home values and surging corporate profits have buoyed the recovery-era incomes of the most affluent Americans, with the incomes of the rest still weighed down by high unemployment and stagnant wages for many blue- and white-collar workers.

“These results suggest the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s,” Mr. Saez, an economist at the University of California, Berkeley, wrote in his analysis of the data. Mr. Saez and Mr. Piketty have argued that the concentration of income among top earners is unlikely to reverse without radical changes in the economy or in tax policy. Tax increases that Congress approved this January are not likely to have a major effect, Mr. Saez wrote: "they're not negligible, but they are modest.”

Yahoo Finance explores this egregious income inequality in a video and article with several excellent references: Top 1% Getting 95% of Income Gains: Is Washington Responsible?

Meanwhile, a Gallup Poll article More Americans Struggle to Afford Food states that 20% of Americans' struggle to afford food and their overall access to basic needs is close to record-low.

The 20% who reported this August that they have often lacked enough money to buy the food that they or their families needed during the past year, is up from 17.7% in June, and is the highest percentage recorded since October 2011. The percentage who struggle to afford food now is close to the peak of 20.4% measured in November 2008, as the global economic crisis unfolded.

Who Does Gallup Blame? Citing the Wall Street Journal, Gallup blames stagnant wages. According to an August 2013 Wall Street Journal analysis of Labor Department data, “the average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 [in July 2013] from $8.85 at the end of the recession in June 2009.” Depressed wages are likely negatively affecting the economic recovery by reducing consumer spending, but another serious and costly implication may be that fewer Americans are able to consistently afford food and meet other basic needs.

Gallup also blames Republicans. Federal government programs also play a role in addressing this issue. As food stamp (SNAP) enrollment increases, Republicans in Congress are proposing substantial cuts and reforms to the program, while Democrats are resisting such reductions. Regardless, food stamp benefits are set to be reduced in November after a provision of the 2009 fiscal stimulus program expires. Therefore, it is possible that even more Americans may struggle to afford food in the immediate future.

In a blog post that addresses this same topic, Mike (Mish) Shedlock provides answers for who is really to blame?

1. The Fed

2. Fractional Reserve Lending (Central banks in general for sloshing money around).

3. Lack of a Gold Standard

4. Congress (for throwing money at numerous programs)

5. War-mongers

Mish wrote, "Raising the minimum wage does not fix the problem. And wasting money waging wars we cannot afford is counterproductive. The two primary reasons are: fractional reserve lending (FRL) and the Fed (central banks in general). Combined, the Fed, FRL, and lack of a gold standard enable Congress and the war-mongers to waste money. The Fed and the ECB praise themselves as "defenders against inflation". One look at health-care or education costs is enough to prove they are in Fantasyland."

Curmudgeon Opinion: Who's to Blame for U.S. Income Inequality?

We place the blame primarily on the Fed's QE and ZIRP, a dysfunctional Congress, and unaffordable Obama-care that has exacerbated income disparity in the U.S. In many previous Curmudgeon posts, we've made the case that the Fed's monetary policies have been counter-productive for U.S. economic growth, wages and creation of good full-time jobs. The "do nothing" and "say no" Congress is very well known and accepted- we have nothing to add other than we think they are influenced way too much by lobbyists and political pressure groups.

But we think the damage ALREADY caused by Obama-care has not been properly reported by the news media. Obama-care has caused employers to hire part-time workers (vs. full time) that are not subject to mandatory health insurance. As a result, the U.S. labor force has more "part-timers" than ever before. Moreover, many people have stopped looking for work because they feel it's hopeless as employers are not hiring due to economic uncertainty. Several pundits have said, "the U.S. has become a nation of part-timers." If Obama-care was repealed, we believe companies would be more willing to hire full time employees and the US economy would be a lot healthier!

Meanwhile, the Fed's QE and ZIRP have benefited real estate speculators and equity investors, but has not at all helped wage earners, retired folks on fixed incomes, or the middle/working classes. Hence the rich are getting much richer and everyone else is getting poorer or struggling to make ends meet.

Victor Sperandeo adds: "I would agree -a good list. I would add the sum of all taxes and far too many regulations on business, which inhibits capital investment and raises the price of almost everything."

Till next time.....................

The Curmudgeon
ajwdct@sbumail.com

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.