Warning signs

from David Ruccio

The signs are ominous: more than four years into the supposed recovery and average incomes of the majority of the population remain far below their peak. in 2012 (the last year for which data are available at the World Top Incomes Database), the average income of the bottom 90 percent was $30,439, much lower than it was just before the crash ($34,816, in 2007) and lower still than it was at the beginning of the millenium ($35,800, in 2000). It’s no wonder, then, that the share of national income going to the bottom 90 percent continues to fall: from a peak of 56.89 percent in 2000 to 54.33 percent in 2007; now it’s down to 51.84 percent. With no signs that it’s going to turn around anytime soon.

The warning signs of rising inequality are now so stark even the Economist has focused on “labour’s share lost” and the difficult decisions it poses:

The tricky bit is understanding how—or whether—the bulk of the population will receive its purchasing power if not through wages. One possibility is broad redistribution. Society could set a basic income that rises with economy-wide productivity, and as workers’ potential earnings fall below that reservation level they cease working. An alternative (or maybe complementary) policy might be to encourage broader ownership of capital, either as part of standard labour compensation or in lieu of some other income subsidy.

It’s not a sure thing that labour’s share will keep dropping. If it does, however, society will face some very difficult decisions.

PIMCO’s William Gross is also worried about the plight of labor and how the “Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income” have been ignoring the problem.

Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you’ve been privileged to make. In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent “1%” grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living. Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the ‘40s, ‘50s or ‘60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, “build that,” you did not create that wave. You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions. You’ll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You’ll just have to write a little bit smaller check.

The fact is, the current recovery has been a one-sided affair—favoring the profits of large corporations and the incomes of a tiny minority of individuals and households at the top at the expense of everyone else. The question is, how much longer can it continue before it blows up in their—and our—faces?