A growing gap
Published: February 7, 2014
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Satyajit Ghosh, Ph.D. sounds alarm bells about the accelerating economic phenomenon that he believes could eventually threaten the bedrock of America’s free market system.
Dr. Ghosh, who serves as The University of Scranton’s professor of economics and finance, is concerned about the nation’s growing income disparity. He points out that during 2012, the top 1 percent of American wage earners raked in 22 percent of all national income. One-tenth of 1 percent of wage earners grabbed an astonishing 11 percent of all income.
This disparity, according to Dr. Ghosh, is, to some degree, a normal by-product of free markets, even on an international scale. He does not believe the free market system should be vilified for this, and adds that 40 years of government policies, tax code changes, deregulation and loose financial markets all have played a role in the income gap despite whomever controls the White House.
However, Dr. Ghosh also believes that income inequality adds to the nation’s economic woes, the stagnant economy and increasing poverty. “In other countries, the people would be up in arms over an income gap such as ours,” says Dr. Ghosh. “The choice for Americans is to either try and fix this or turn a blind eye.”
Income inequality has been a reality for several decades and has widened since the Great Recession, says Stuart Hoffman, chief economist with PNC Financial Services Group. He blames the income gap on a variety of factors, including the Great Recession itself, but says inequality is not an imminent threat to the economy. “However, it is a problem for any society when income inequality accelerates. History shows that democracy doesn’t last when income equality reaches a breaking point.”
Hoffman blames various factors for today’s income inequality, including the decline of labor unions, changes to immigration policy, poor parenting skills, cultural deficiencies and technological changes that demand changing employee skills. However, above all, Hoffman says that income disparities can almost always be explained by educational under-achievement. “Education is still the bedrock of financial success,” says Hoffman. “It’s true that a college degree is no guarantee of success, but over the long term, education and income do correlate. The labor market is based on skills and talents. America still has a superb college system, and the rest of the world knows it.”
Teri Ooms, executive director of The Institute for Public Policy & Economic Development, voices the belief that capitalism always creates haves and have-nots. This reality has no single cause or simple solution, although the wage gap has widened since the Great Recession. “The only solution for us is to offer equal opportunity,” says Ooms. “All other fixes only are short-term.”
Ooms clearly identifies educational achievement as the key for a wage earner to become one of the haves. This may include traditional college, apprentice or technical school success, as long as the effort is pursued with vigor and bolstered with continuing education.
Ooms also acknowledges that social factors play a role in the income divide. She points out that children living within inter-generational poverty are likely to continue as low-income adults because they lack the skills to pursue opportunities that do appear. “Yes, people make bad choices, do dumb things and free choice doesn’t always create a positive,” says Ooms. “Parenting also is a huge part of a child’s total education.” Ooms adds that the global economy and the associated technology leaps, are moving so fast that what works today for a wage earner may be obsolete in a very short time. “There is no ‘normal’ now,” says Ooms.
Darlene Robbins, president of The Northeast Pennsylvania Manufacturers and Employers Association, says many myths surround the inequality issue. In reality, she says, the American economy actually distributes wealth better than most of the world. Census data since 1979 indicates that annual per capita income has grown $26,000, despite the growth in single-parent households. “It’s vital to understand that wealth differs from income,” she says “The total wealth of Americans has increased despite any income gap. The data is clear. There is much more overall prosperity around than many people believe.”
Gene Barr, president of the Pennsylvania Chamber of Commerce, cites clear evidence that Americans move in and out of various economic classes throughout a lifetime. He says that 20 percent of people earn $250,000 for one-quarter of their life, meaning income inequality data may be an incomplete snapshot in time that fails to capture the ups and downs of an ordinary life.
Barr lists a wide number of causes behind income inequality – automation, federal borrowing, regulatory pressures, an inconsistent tax code, educational failures, and an entitlement belief that every American is supposed to be a winner are just a few.
He adds that during the past 20 years, France, Greece and Spain have become world leaders in a socialistic move to mandate income equality. Yet, economic crashes have also taken place in these countries. “Yes, I want people to make as much money as possible,” say Barr. “But, not through government mandates.”
Nate Benefield, director of policy analysis with the Commonwealth Foundation for Public Policy Alternatives, agrees that real income has declined for most of America’s economic classes. This is a new development since the end of World War II, he says. However, he argues that during the past few decades virtually all Americans have actually increased their total wealth. He disagrees with liberal assertions that the rich become so at the expense of the poor. For the business community, the real issue is slow income growth by virtually all wage classes. “Creative destruction is both real and normal as an economy evolves,” says Benefield. “The horse and buggy died when the car arrived. This is normal, and the change affects wages.”
Kim Hawk, past president of the Northeast Pennsylvania Society of Human Resource Management, blames the income inequality on many factors, such as the loss of steady high-wage but low-skill manufacturing jobs that dominated America’s post-World War II economy. “The fact that so many of our industrial parks are empty tells this story,” says Hawk.
Other factors causing the wage gap include an abundance of lower-paid retail jobs, labor union declines and mass unemployment, she says. This list also includes the housing crash that devastated the economy while putting many people upside down on their mortgages. “The public has had to pay down personal debts, and this has been a real set-back for economic recovery and wages,” says Hawk.
Tim Kearney, Ph.D., chairman of the business department at Misericordia University, urges us to remember the economic conditions of the 1990s. During that time, the country enjoyed nearly full employment and no one seemed to care about income disparity. This fact suggests to Dr. Kearney that it is today’s unemployment problems that have led to this sudden interest in income inequality. He is echoing a common theme running through the national inequality discussion that says when people are employed and don’t fear for their own security, they are less likely to worry about what their wealthy neighbors earn.
He also believes that in 2014, the nation’s economy won’t be strong enough to drive unemployment from the front page. Investment will also remain weak. In addition, examples of America’s income disparities can be found in places other than the much-demonized Wall Street. “Professional sports also presents the classic example of economic haves and have-nots in the locker room, because there are usually just a few players really making the big bucks” says Dr. Kearney. Hollywood is another such example.
Measurable declines in work opportunities fuel America’s income disparity, says Susan Shaffer, a workforce consultant based in Covington Township. She points out that when a worker moves from manufacturing to service, they undoubtedly will see a steep decline in their pay. Arguments about retraining must take into account that educational success requires the proper “connection” with an educational curriculum. “The essence of a healthy democracy is an educated population,” says Shaffer. “As a nation, we’re going the wrong way, and the proof is how reading levels have declined – three grade levels over 20-plus years. This educational decline is creating a workforce with an overall lack of professional and educational competence.”
Tipping the applecart
Jeffrey Alves, Ph.D., dean of the Sidhu School of Business at Wilkes University, says that the American dream has historically envisioned wealth for all citizens. However, today’s rapidly changing world has tipped the globe’s economic applecart. Today, developing countries are getting richer and the resulting income inequality in the U.S. is a symptom of this scenario.
Dr. Alves, like many of his peers, believes that there is there is no quick fix for the divide. The government can’t regulate or legislate a solution, although government action like the post-World War II GI Bill and the low taxes of that era proved to be huge engines for investment and prosperity.
Dr. Alves looks at the nation’s current educational data and pronounces it “deplorable.” The American educational system, he said, is still locked in an old, circa-1950 model that ends with high-school graduation. Now, workers are never finished learning. This reality is why alternative education methods are expanding. He also believes the American wage earner is doing better than should be expected. He points out that, in many cases, graduates at various levels are ill-prepared for jobs in the changing world. American incompetence in fast-moving specialties like data management may be behind some of the growing divide. “However, American productivity is still healthy and we are good at developing new ideas,” says Dr. Alves.
It’s time to recognize that income inequality is a sustainability issue, too.
What does the inequality of income have to do with sustainability? First, income inequality has negative effects on society that leave subsequent generations worse off. Among advanced economies, studies show close correlations between a nation’s degree of income inequality and its rates of homicide, imprisonment, infant mortality, teenage births, and obesity. Beyond blighting many lives, every one of these “social” problems imposes a huge tax on society by increasing the costs of security and healthcare and allocating resources to unproductive uses, like prisons.
Second, the bimodal distribution of incomes is inimical to the consumption behavior businesses depend on to thrive. The evaporation of the middle class, like the disappearance of fish stocks or forests, will be the end of many companies. Henry Ford understood this, paying the workers at Ford more than their counterparts at other industrial companies, reasoning that helping to expand the new middle class was a way to expand the market for Ford’s product. As with other sustainability issues, the social and business consequences are inseparable.
And directly, the trends are literally unsustainable. Between 1976 and 2012 the share of US income earned by the top 1% almost tripled, rising from 9% to 24%. (While this measure fell to 19% in 2009, it has since recovered.) As the economist Herbert Stein once observed, “If something cannot go on forever, it will stop.” It cannot happen that income continues to concentrate until the entire national income is earned by the 1%. If by nothing else, the process will be ended by social uprising. With corporate profits and the stock market booming, business risks becoming a target — of Occupy Wall Street, Congressional scrutiny, or whatever political movement decides it must put a halt to this trend. As an example, last March, 68% of Swiss voters approved a measure giving shareholders the right to block executive and Board pay packages, outlawing “golden parachutes,” and increasing transparency regarding loans and retirement packages, according to the Wall Street Journal. Yes, Switzerland.
As more people begin to see income inequality as a negative “externality” — an unintended but damaging consequence of decisions that businesses make to boost profits — how should managers respond?
Income Inequality Is a Sustainability Issue
by Christopher Meyer and Julia Kirby | 9:00 AM January 28, 2014 HARVARD BUSINESS REVIEW