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August 14, 2014

S&P identifies problem--income inequality--but gives same absurd solution that most economists do

By Marc Jampole

S&P joined the growing army of experts and organizations that say income and wealth inequality is growing in the United States and that it's hurting the economy. Like many others, though, S&P believes the way to reverse the trend is through education. The article explodes this myth and proposes that raising taxes and the minimum wage will go a long way to undoing the damage that wealth inequality is inflicting on our economy.


Standard & Poor's, the agency that rates financial instruments, has released a report that demonstrates that inequality of income is a drag on the American economy. S&P predicts that the economy will grow at an annual rate of 2.5% over the next 10 years, which is .3% lower than it predicted five years ago. S&P says that this more than 10% drop in growth rate derives from the great inequality of income and wealth that exists today, which has made the economy more prone to boom-and-bust cycles.

S&P joins the growing list of economists of all political persuasions to recognize that income and wealth inequality is growing and that it is a bad omen for the economy.

And just like many of the other distinguished boffins who have chimed in on the subject, S&P thinks that the way to reduce inequality of income is through education. It's amazing how many economists and pundits--conservatives and progressives--think that education is answer.

No one except Thomas Piketty has cared to dismantle the argument that greater equality of wealth is connected to education, and Piketty approaches the issue from the causal end: the argument that education has caused inequality of wealth. Piketty postulates that it's not the fact that some people are much more highly skilled than others that has led to growing inequality of income, but social custom and the low rate of income tax which gives executives more incentive to line their own pockets.

But I haven't read anyone try to refute the assertion that education will reduce inequality of wealth because it will enable the newly educated employees to become more productive.

Yet this ridiculous argument is child's play to dismantle: Even if everyone gets a PhD, someone has to flip the burgers, dig the ditches, sweep the floors, clean the bed pans, check out people at the grocery store and work the drive-through car wash. As it turns out, most of the new jobs created since the Great Recession started are at the low end of the skill and wage ladder.

It doesn't matter how educated one is if one works in a job that's poorly compensated. Moreover, if enough people get the education and training needed for a job with a higher wage, the wage for that job will fall because of the increase in the supply of qualified candidates.

There are only four ways to make wages more equal:

1. Cut what we pay the highest compensated professions, such as hedge fund managers and executives of large corporations.

2. Raise taxes on the income of these highly compensated workers.

3. Raise salaries of lower paid workers.

4. Provide lower paid workers with government benefits, which in a sense subsidizes their employers by paying for some of the living costs off low-paid workers.

I like the combination of two and three: Tax the wealthy more and pay workers more. In fact, if we taxed the rich what we taxed them in 1950 and pay workers the purchasing power they had in 1950, we would find wealth inequality return to what it used to be in the golden age of American equality between about 1946 to sometime in the mid or late 1970's.

S&P gives the standard rightwing reasons for warning against raising taxes to reduce inequality of wealth: that it reduces the incentives to work and that businesses will hire fewer workers. Why anyone ever believed that business ever hire workers just because they're cheaper is beyond me; only good businesses survive, and good businesses only hire when they need someone, whatever the salary. I suppose that those who believe that increasing taxes reduces the incentive to work would all turn down a job because the take home pay was $4 million instead of $5.4 million.

Like the argument that education will diminish wage inequality, the idea that raising taxes reduces the incentive to make money is so absurd that the true wonder is why anyone would still try to slip these logical absurdities by the public. And yet the mass media continues to lap it up like the lapdogs they are when it comes to reporting macroeconomic news.

If the S&P really wants to reduce inequality of income, it should call for the following:

Raise the minimum wage to $15 an hour

End all right-to-work laws and shorten the time before employees vote to affiliate with a union

Raise income tax rates on incomes over $150,000 and institute an annual wealth tax.

I'm basically talking about returning things to the 1950's. The reason the rich have gotten so much richer while the rest of us have stagnated is because of policy changes. All I'm proposing is changing it back to the way it used to be.

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Authors Bio:

Marc Jampole is a well-known poet and public relations executive and a former television news reporter. He writes the OpEdge blog, which covers politics and social trends from a progressive perspective.