Abacus: Modern Wealth Inequality in America

The growing awareness of wealth inequality in the United States has appeared to reach a peak in recent months during the COVID-19 pandemic; as the US attempts to overcome an economy that has seen a staggering number of businesses shut down due to lockdown restrictions and an unemployment rate that has not been measured in decades. People that may have previously been unmindful of inequality in the world’s richest country have since become more conscious of it.

The story of the wealth imbalance in present-day America is not determined by the global spread of a deadly virus, but such a crisis has helped expose the difficulties of the lives of people living in poverty, ranging from the exhaustion of savings to evictions from homes; a survey from April found that just 23% of low-income Americans have enough savings for three months’ worth of living expenses and that not even half of middle-class citizens have enough funds for expenses for the same time frame.

It is crucial that people in positions of power, namely those with the ability to pass laws, such as members of Congress, scrutinize some of the policies and incidents that have occurred from past years that helped widen the wealth gap: doing so could allow for one to better understand how to improve the lives of those in the lower class.

In studying the modern history of wealth inequality in America, one important fact should be noted: inequality partially stems from natural and inevitable origins. This cause-and-effect scenario prevails specifically with regards to globalization and progress in technology.

Globalization, in particular, has become a polarizing topic of discussion among politicians, with one view of the issue favoring the economic growth it helps accelerate, and a different perspective denouncing the hardships it tends to cause workers of select industries.

Inequality partially stems from natural and inevitable origins

With some firms gaining easier access to more refined technology and a greater ability to build plants and factories in foreign countries, international commerce has become more popular as businesses seek the cheapest ways to produce their output. For example, an American car company, such as General Motors, may find that it could manufacture its cars at a lower cost in a less developed country where workers tend to be paid less than in the US. When domestic firms move their production abroad, workers that would have otherwise been employed are typically forced to search for jobs in other industries, even if it means undergoing new training.

The 2019 documentary American Factory presented insights into the nature of international commerce; in it is portrayed the Chinese manufacturing company Fuyao buying an assembly plant previously owned by General Motors in Ohio. The purchase allowed for American workers to receive new job offers after years of extensive searching for work, but it did not provide the safe heaven some workers may have wanted, as low wages and disputes with Chinese workers prevailed.

(Credit Netflix/ “American Factory”)

Conversely, globalization has been a source of strong income growth for higher-skilled workers, such as those working in technology and engineering. Consider that some of the biggest technology companies in the world, including Amazon, Apple, Facebook, Google, and Microsoft, are based in America; their foundation required the ingenuity and innovation of inventive entrepreneurs and engineers in the United States.

In a competitive industry filled with firms that seek to consistently invent new products, thus requiring the talents of proficient creators and designers, these workers are typically paid relatively lavishly. From this point of view, enhancements in science and technology have helped better the lives of people partaking in society, while also creating additional lucrative positions of employment.

Access to the education that helps prepare students for work in technical fields is not evenly distributed among Americans, especially along racial lines: during the 2011-2012 school year, just 57% of black students had access to a full range of math and science courses, a lower rate than all other races with the exceptions of Native Americans and Alaskan Natives. In contrast, 81% of Asian Americans and 71% of whites had access to such coursework.

This trend of increasing global competition has hence created a workplace that demands the expertise of capable professionals while also driving out stable employment opportunities for the less educated, creating a divide in opportunities for the two groups. Yet, competition and technology are not solely to blame for wealth inequality; government policy has also played a role.

Government intervention in the economy and society has always been impactful in deciding human tradeoffs and wealth distribution, especially as it pertains to how the government spends and taxes. Dissent on optimal tax rates, especially for high-income earners, has become explicit in discussions on inequality. Many economists and academics have assessed the significance of the historical declines in the marginal tax rate for the highest income earners, a rate that only affects each dollar earned after a specific income.

After remaining over 90% for much of the 1950s and early 1960s, the highest marginal income tax rate began a downward trend that continued into 2020, where it currently stands at 37%. The historical reduction of this rate has come under question among economists, especially from the point of view of a cost-benefit-analysis: some analysts believe that the added gains that come with saving additional income for very high-earning individuals would not outweigh the societal benefits that would come with distributing that income to the less fortunate in the form of social programs.

After all, a given increase in income of say, $500, is much more meaningful for those living in poverty than it is for millionaires. Research done by the Tax Foundation estimated that if a marginal tax rate of 70% were put into effect for incomes in excess of $10 million, an additional $189 billion in revenue could be raised by the government over the next decade.

Moreover, an analysis done by the Economic Policy Institute showed similar revenue results, with one focus given to the tax cuts of 2001 and 2003: the lowering of marginal income taxes during these years led to a recovery of just 1% of the total cost of the cuts, a sign that the tax decreases did not lead to the high economic growth that the policies’ advocates had anticipated.

While raising taxes on the highest earners may be important to closing the wealth gap, there could be more done to better the lives of the less fortunate. Government spending and transfer payments have been a source of examination for their consequences on inequality and economic growth. In particular, advocates of lessening the gap between the rich and the poor have commended policies that explicitly aid individuals in low-income brackets, such as funding for healthcare and food programs.

Furthermore, spending on education has become a progressively popular idea to help narrow the wealth gap and enhance growth. A research paper produced by Timothy Goodspeed found that increases in education spending had a positive association with growth and contributed to a decrease in inequality.

Interestingly, Goodspeed also found that higher taxes on income and corporations could in some cases have no effect on growth, supporting the notion that levying additional taxes on high-income earners and sizable corporations would not be as costly as some might expect.

By and large, most economists, including strong proponents of free-market capitalism, believe in some form of wealth distribution to help the poor. Even Adam Smith, the 18th-century Scottish economist long considered to be the “father” of capitalism, argued in favor of supporting low wages and restricting profit gains for the highest income seekers to better enhance the welfare of the lower classes.

Goodspeed, like most other economists and researchers, has acknowledged that much exploration is yet to be done into specific policies that have an effect on economic growth and income inequality. In examining a heterogeneous country with more than 300 million citizens such as the United States, it would be hard for any study to fully account for all possible incentives and motivations on the part of human behavior.

Nevertheless, governmental economic policy should be more directed towards aiding the poor while simultaneously maintaining high growth rather than strictly focused on diminishing inequality. Looking at policies of past times that assisted the poor while also working to deal with inescapable events and circumstances such as globalization can help assure a better society for everyone.