It’s The Income Inequality Gap, and it’s stupid

Nevada Income Gap Map We’ve had the following information in hand since last February:

“The average income in Nevada rose just 8.6% between 1979 and 2007, among the lowest increases in the nation. However, most of the state’s residents actually lost money during that time, as average real income dropped by 11.6% for the bottom 99% of earners. For the remaining top percentile of earners, average incomes rose by 164% between 1979 and 2007. As of 2007, the top 1% accounted for 28% of state residents’ total income, the fifth highest percentage in the United States. The gap between the top percentile and other earners has further increased in recent years. Incomes for the top 1% rose by 4% between 2009 and 2011, while incomes for the bottom 99% of earners slipped by a nation-leading 6.7%. Nevada has struggled with high unemployment in recent years, including an average unemployment rate of 11.1% in 2012, the highest in the nation that year.” [24/7WallSt]

Need more? The share of growth captured by the top 1% = 218.5%. The real income growth from 1979 to 2007 was the second lowest in the nation, at 8.6%  The income growth for the bottom 99% of Nevada residents was –11.6%, the 2nd least in the country, and the income growth for the top 1% was 164%, the 24th highest in the country. [24/7WallSt]

If this were a “one off” situation we might dismiss it more causally, but it isn’t.  The change in Nevada household income from the late 1970s to the mid 2000’s shows a 16.8% increase for the bottom 20%, a 19.7% increase for the middle 20%, and the top 20% saw income growth of approximately 58.6%. [CBPP pdf]  So, how much annual income does it take to make it into the top 1% of Nevada’s income earners?

Nevada top 1% From the map shown above, it takes about $306,000 per year to be in the top 1% of Nevada income earners.  And, what is the income inequality ratio in Nevada?

Nevada Income Inquality ratio map The answer is 44.1%, one of the highest in the United States.  The next obvious question is: Why does a widening gap in income by households create a problem?  Hint: You don’t need a degree in finance or economics to figure this one out.  What tends to happen is that in the long run the lower income families tend to stay in the lower income brackets, the top 1% move steadily upward, and it’s the middle class that gets caught in the squeeze.  Economists Saez and Zucman explain:

“Among the fascinating findings of Saez and Zucman is how thoroughly the top 0.1% have shouldered their way past all other households. While their wealth share was soaring, that of the next 0.9% was barely growing, while that of the “merely rich” — those ranking in the top 10% but below the top 1% — actually shrank.

But the real victims of the trend are in the middle class. Saez and Zucman show that the wealth share of the bottom 90% grew from the 1920s through the mid-1980s, from 15% to 36%. Mostly the gain was due to the growth of pensions and of homeownership. Since the mid-1980s, however, middle-class wealth has evaporated, falling to 23% in 2012, about the same level as 1940.” [LATimes]

So what? What if middle income range families are getting the squeeze? To demonstrate that they ARE getting shouldered out of their share of increasing wealth doesn’t necessarily prove the situation is essentially economically negative?  Or does it? The answer is “yes, it does” if we’re talking about the real economy and not the shadow economy of the investment bankers and financialist allies.  For what now may be a record number of times in a single blog, let’s review the calculation of the Gross Domestic Product:

Gross Domestic Product Formula

Once More! The C is for consumer spending. The I is for investment. The G is for government spending. The (X-M) part is the difference between imports and exports. Who has disposable income to spend on goods and services? Who has income to save or invest?  If you guessed that there are more lower and middle income households you’d be right.

As of the 2012 IRS report, there were 144,928,472 household income tax filings. Of these filings 705,029 came from homes in which the annual adjusted gross income was between $500,000 and $1 million. Incomes between $1.5 million and $2  million accounted for 71,874 households, and there were 106,711 filings from households reporting income between $2 million and $5 million. 27,167 homes reported AGI of between $5 million and $10 million, and 17,685 reported AGI over $10 million. [IRS download]

Those 2012 filings of AGI ($500K-$1M) were 4.68% of the total; the next category up were 1.68% of the total filings; the next category composed 0.49% of the total; and the next 0.74%; at the very top the AGI ($5M-10M) comprised o.0187%, and the over $10 million were 0.0122% of the total filings. Now for the practical question: Who is buying more washing machines, television sets, and automobiles?  Who is buying more clothing, gasoline, and groceries?

We can narrow this down to Nevada’s statistics. [IRS download]   There were a total of 1,289,360 filings in 2012. Of these 4,420 were for adjusted gross incomes over $500,000 and 3,300 came from households with over $1 million.  The top bracket filings constituted 0.34% of the total and 0.25% respectively.  Again, who is purchasing consumer goods and services in Nevada?  Facing reality – a household could own one home in Las Vegas, one at Lake Tahoe, and another in Elko County – that’s still only three washing machines, three dryers – we could even toss in a car elevator and the total consumer spending wouldn’t create the DEMAND for goods and services which might be generated from the remaining 99% of Nevada income earners.

This is precisely WHY the Supply Side “Trickle Down” hoax is so pernicious. Continuing to monkey with the tax code by giving tax breaks, tax ‘incentives,’ and tax avoidance tactics to the upper 1% simply means we’ve skewed the numbers by which we measure our own economic growth. It has been, and continues to be, nothing less than a recipe for disaster.

Now, let’s take a look at the I part of the equation. Where is the investment going?  In good old fashioned garden variety capitalism, the “savings” or excess income is Invested in stocks or bonds which corporations can use to expand production, add employees, and use to build facilities or put into research and development – so, what are investment advisors telling their clients in the upper income brackets now?

The “hottest” investments for 2014 were in non-wrap mutual funds (82%) and exchange traded funds (79%). [OnePA]  “The exchange traded funds are like index funds but they can be bought and sold just like shares of common stock.  Whenever an investor purchases an ETF, he or she is basically investing in the performance of an underlying bundle of securities — usually those representing a particular index or sector. Unit Investment Trusts (UITs) are often organized in the same manner. However, the unusual legal structure of an ETF makes the product somewhat unique.” [Invest]  They can be bought and sold like common stocks but the crucial part is that they are NOT common stocks, and the “somewhat unique” structure comes with some tax advantages.  Who could have guessed?  A non-wrap mutual fund is one in which there isn’t a mutual fund advisory program giving the investor access to a big pool at a set annual fee.   Not to put too fine a point to it, but what we have here is a Financialists Day Dream – lots of ‘financial products’ to trade based on “an underlying bundle of securities.” Not reality.  If you were thinking that the I stood for the good old capitalistic categories of fixed investment and changes in business inventories – think again?

And this is the way the income gap expands.  Wage and salary workers face issues of globalization, technological changes, educational and training gaps, and increasing levels of indebtedness, while the top 1% bets on the capacity of the 99% to pay off the debts which have been warehoused, sliced, diced, slung into the Wall Street version of the financial Cuisinart, and traded in the financial markets.

There are no Silver Bullets but there are some things that might help.

  • Tax capital gains at the same rate as any other form of income. People work and get taxed, if ‘money works’ then tax it as well.
  • Close the special tax advantage loopholes which allow ‘investors’ to play with Dark Pools, exotic funds, and other Wall Street creations which serve to minimize Wall Street risk and place the general economy in a volatile financial environment.
  • Don’t fall for simplistic solutions like the Flat Tax, which is simply one more way for the top 1% to get a break while the wage and salary owners continue to pay the freight.
  • Increase the federal and state minimum wages.
  • Increase investment in education and training programs.
  • Encourage union and worker organizations.
  • Encourage American manufacturing with a long term national plan to improve U.S. manufacturing, including the government procurement of items made in America.
  • Avoid trade treaties which impinge on U.S. production, labor, environment, and U.S. sovereignty.

Nor can we assume that any one of these elements will bring Peace and Prosperity – there must be a conscious desire to return to that good old garden variety Capitalism – with an acknowledgement that “financial products” are here to stay – coupled with the encouragement of investment in infrastructure (public and private), production improvements, and research and development.  It’s possible if we can get our noses out of our checkbooks long enough to get a better view of our economic horizons.

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