Income inequality is a very hard concept for a lot of Americans to grasp. After all it runs counter to our national mythology of unlimited freedom and opportunity.
The concept also gets caught up in politics, some ideologues and pundits; mostly on the left, have latched on to the idea because it fits in neatly with their prejudices against capitalism and the free market. To make matters worse many of them take this complex concept and dumb it down with simplistic “bash the rich” rhetoric. Not surprisingly some politicians; most notably US Senator and Democratic presidential candidate Bernie Sanders (I-Vermont), have latched onto this watered down and warmed over Marxism because it provides a simple narrative to peddle on the campaign trail.
The worst of these pundits are academics like Joseph E. Stiglitz and Paul Krugman who abuse their positions as Nobel Prize winning economists to push their brand of economic and political orthodoxy. The problem with this rhetoric is that it reduces a complex and destructive phenomenon to a shallow cliché that is easy to ignore.
Numbers prove that Income Inequality is Real and a threat to Economic Growth
Here are some numbers that show income inequality is not only very real but a threat to our economic future:
- The percentage of Americans with no credit cards in 2014 was 29%, up from 22% in 2008 and 20% in 2006, according to a Gallup Survey cited at creditcards.com. If these numbers are correct nearly 10% of Americans can no longer quality for a credit card or feel they cannot pay off the balance.
- The chart above indicates that Americans in the age 19 to 29 demographic, the so-called Millennials, owned fewer credit cards than their parents or grandparents.
- The rate of homeownership in the United States is now at a 20 year low 63.4% according to the Federal Reserve Bank of St. Louis. The Fed’s chart indicates that the rate of ownership in the United States in the second Quarter of 2015 was at the same rate it was in 1965 – 63.4%.
- Around one in 13 (7.7%) or 9.6 million American households did not even have a bank account in 2013, The FDIC estimated.
- More than 20% of African-American and Hispanic households did not have bank accounts in 2013, CNBC reported.
- Most unbanked households had a bank account at some point in the past but lost it usually because they did not have enough money to cover the cost of overdrafts, CNBC reported. Others could not afford to pay the high fees some institutions charge.
- Many people stopped maintaining savings accounts because of low interest rates.
- Around 20% of US households or 24.8 million had a bank account but also utilized alternative financial services such as payday or cash loans, The FDIC reported.
- The amount of money held prepaid debit cards a bank alternative in the United States grew to $570 billion in 2014, The Economist
- The number of Americans on Food Stamps was roughly 47 million in January, 2015, according to CNSNEWS.com. January 2015 was the 38th month in a row when more than 46 million Americans were using the benefit.
- The percentage of Americans identified as “middle income” was lower in 2013 than it was in 1967, The New York Times reported. In 1967 53% of Americans were considered middle class in 2013 the number was 43%.
- The percentage of Americans identified as “upper income” was lower in 2013 than it was in 2000, The Times In 2000 25% of Americans were classified as upper income, in 2013 22% of Americans were described as upper income.
- The percentage of Americans identified as lower income was higher in 2013 than in 2000, a Times chart shows us. In 2000 31% of Americans were defined as “lower income” by 2013 that number had risen to 34%.
- Nearly half of all US Households admitted they could not cover an unexpected expense of $400 or more without selling something or borrowing money, The Economist noted.
The High Cost of Income Inequality
The long term implications of these numbers for the economy are frightening. People with no credit cards have less spending power, they will buy less, which reduces the level of economic activity and the amount of sales tax that government can collect. It also makes people at greater risk for falling lower on the economic scale because they will have a harder time covering emergency expenses.
A person who has no credit cards might have to use all the money in his or her savings for an unforeseen expense such as a car repair or a trip to the emergency room. If he or she has no savings the person might have to decide between fixing the car he or she needs to get to work or paying the rent.
That individual might also have to turn to alternative finance such as a high interest payday loan. The average interest rate on a payday loan in some areas was 322% while the average credit card charges 15%, The Economist reported. To make matters worse the average user of such loans took them out 10 times or more and paid more than $458 in fees.
Those that do not own a home cannot take advantage of home equity loans or lines of credit. Persons without bank accounts cannot take out a mortgage, get a credit card, buy stocks, cash checks, use electronic bill pay or send money to others. Nor can they take advantage of next generation payment solutions such as Apple Pay.
The Gulf within Our Communities
This brings us to the real damage done by income inequality the growing gulf between the classes within our communities. If you go to the average American town or city today the difference between incomes becomes readily apparent.
You will see some middle and upper income people who are doing quite well they drive new cars and may even have a boat or an even an RV parked in the driveway of their new ranch house. Yet you will also see people driving broken down old cars or riding ancient bicycles to the food bank to pick up the groceries for the week or the month. There might also be a few beggars or obvious homeless people even in the most affluent areas.
The changing commercial landscape provides the most dramatic evidence of the increasing income inequality. The payday lender sits across the street from Whole Foods, while the dollar store opens within sight of the bustling Mercedes dealership. The food bank and the furniture rental store a visible from Chipotle.
The divisions within our communities are stark and they are growing. Increasingly the middle class are living far better than the working poor. A police officer, a prison guard, a school teacher, a store manager or a firefighter might have a new car, a nice house to live in, a retirement account, health insurance, cable television, and a new smartphone meanwhile a cashier at the dollar store relies on food stamps to feed her children. A mortgage broker or a successful car salesman might enjoy a $100,000 a year income and a country club membership while home ownership is now an unimaginable luxury for the guy who sweeps the floors.
Some classes of people such as government workers may have more rights than others. Government workers in many areas often enjoy lavish pensions, high salaries, health insurance and little or no chance of being fired all guaranteed by a generous union contract. Meanwhile the workers at Walmart labor for less than $10 an hour with no health insurance and run the risk of being fired for saying hello to a union organizer.
This is the most destructive kind of income inequality not the difference between the 1% and the average American that Stiglitz and other leftists love to rant about. To the Walmart cashier the one percent are faces on TV while the police officer with his bass boat and the car salesman in his new Mercedes are an everyday reality.
Such inequality increases economic, social and political disparities with the community. A cashier forced to work three jobs has no time to participate in local politics while the local realtor or schoolteacher does. The working poor have less time to give to churches or volunteer in the community, they often less say on what goes on in their hometowns. Nor can they take advantage of opportunities.
The gulf grows because of those who profit from inequality the city employee who becomes a slumlord, the mortgage broker who starts making predatory loans on the side or the convenience store owner that opens a check-cashing store. Some of these people do make money but they create an almost feudal situation by inflicting something akin to debt peonage upon the working poor.
If such developments continue more and more American communities will come apart along racial and class lines as Ferguson and Baltimore already have. The terrible situation in the African American communities of the inner city or poorer suburbs will become the norm for Americans of all races and colors.
How Income Inequality Hurts Corporate Profits
Such inequality will at some point threaten corporate profits because Americans will have less money to buy with. Consumers with credit cards spend less which lowers retail sales and sales tax meaning that stores sell less employ fewer people and buy fewer manufactured goods from suppliers for example.
More simply put those with less money buy less. That hurts everybody because there are fewer jobs for truck drivers, warehouse workers and all the others in the retail supply chain. The whole economy shrinks and income inequality gets worse because there are fewer jobs and less money in circulation.
This has a devastating long term effect upon companies and the entire economy. As these revenue growth figures from April 30 and June 30, 2015 indicate:
- Discover Financial (NYSE: DFS) .14%.
- MasterCard (NYSE: DFS) .93%
- American Express (NYSE: AXP) -4.02%
- Kroger (NYSE: KR) .27%.
- Walmart Stores Inc. (NYSE: WMT) .09%.
- McDonald’s (NYSE: MCD) -9.52%
- Wendy’s (NASDAQ: WEN) -3.27%
- JC Penney CO (NYSE: JCP) 2.72%
- Kohl’s (NYSE: KSS) .59%
All but one of these companies either reported revenue growth of less than 1% or negative revenue growth. These are all companies that depend upon the middle class and their revenue is not growing. Many of these companies are still making money right now but how long can that continue with income inequality growing?
We need to start addressing income inequality now if we do not to see widespread economic stagnation and political unrest. It is time that Americans of all political opinions had a serious adult conversation about income inequality and what we can do about it before it is too late.