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Wednesday, June 24, 2009

U.S. Ranks 75th in Inequality

The U.S. Ranks 75th out of 126 Nations in Inequality

Does inequality within a nation matter to its economic health? is the question. In the U.S.A. the top one percent of households earns more each year than the bottom 60% of households, and that wealthy one percent owns more wealth (has a greater net worth) than 91% of the households. Does this effect the workers in the U.S.? Does it lower their incomes and the quality of their lives? In June of 2009, 27.3% of the nation's children live in poverty. How is this possible when the annual sum of our productive labor (GDP) is valued at more than $40,000 per human being? How could anyone live in poverty in such a wealthy country? This is a question that too many are willing to evade.
The United Nations’ Human Development Index ranks the United States at 15th place, in 2009, out of 177 nations in its composite of rankings for human development, but in the category of “Income or Expenditure Inequality” the U.S. ranks down at 75th place. The inequality measure compares the incomes of the top 20% of households with the bottom 20% of households. All of the advanced economies rank higher than the U.S. In the top 50 nations only Hong Kong, Singapore, Argentina, Chile, Uruguay, and Costa Rica rank below the U.S. When the comparison is the top 10% vs. the bottom 10% the U.S. ranks at 81st place among 126 nations.

Using the Gini index, used by economists to determine inequality, the U.S. also ranks high on the inequality scale, 40.8, compared to western Europe and Japan, nations that score in the mid 20s. Here is a select listing of scores among a wide group of nations to compare inequality.

Nation --- Gini --- 20% vs 20% --10% vs 10% --GDP/capita
Japan------- २४.9 ------३.4 -----------------६.1 ----------------35,484
Norway -----२५.८----- ३.9 -----------------४.5 -----------------63,918
France ------३२.7 -----५.6 ------------------९.1 -----------------34,936
Germany ----२८.3 ----४.3 ------------------६.9 -----------------26,893
U.S. ---------४०.8 -----.4 ----------------१५.9 -----------------41,890
Hong Kong -४३.4 -----९.7 ----------------१७.8 -----------------25,592
Singapore --४२.8 -----९.7 ----------------१७.7 -----------------26,893
Mexico ------४६.1 ----१२.8 ---------------२४.6 -------------------7,454
Brazil --------५७.0 ----२१.8 --------------५१.3 -------------------4,271
China --------४६.7 -----१२.2 --------------२१.6 -------------------1,713
Bolivia -------६०.1 -----४२.3 ------------१६८.1 -------------------1,017

Naturally Japan scores high in the HDI, 8th in quality of life score, because it is an advanced economy and the wealth and income are shared more so than all other countries. Comparing Denmark (14th) with Singapore (25th), while their GDP per capita is roughly the same, their Gini scores and inequality scores are widely different. The benefit of high income is not shared in Singapore, it is sequestered by the ownership class and quality of life lags behind Denmark. Perhaps Singapore’s long-term strategy will change that, but perhaps not. (See Robert Kuttner’s article in Foreign Affairs, October 2008 for a review of the Danish economy as an example of economic justice and progress.)

The U.S. also ranks 2nd in GDP per capita but 13 places lower in overall HDI. In contrast Cuba ranks at 93rd in GDP per capita but 42 places higher in HDI, indicating that Cuba does a lot with a little.

Aggregate Demand --------------------------------------------

Turgor pressure we learn in school biology is the opposite of the word “wilting.” In a metaphor, aggregate demand is to an economy what turgor pressure is to a plant. That is the crux of my argument here. An economy with high inequality has low turgor pressure and will not respond quickly to slumps or wilting since a major portion of its population base is bereft, short, and lacking in economic pressure or purchasing power, and the entire system has to depend on the purchasing demand of the small wealthiest portion to keep the least wealthy section employed.

For example, the income of the "typical" worker is about one third the amount of the "average" worker. The U.S. GDP, July 2008, was $14.2 trillion, with 141 million workers actually working each day of the year; each produced on average $100,000 per worker per year. That covers "average." But the median worker or "typical" worker is in the middle of the income gradient. That is, half of the workers were earning less than $33,000 (the median income), and a good portion of the lower half much less than $33,000. This is inequality of income.

Wealth distribution is even more out of balance. The wealth of the bottom 50% of U.S. households, about 58 million households with real people living therein, is a paltry 2.5% of the total national wealth (See 2006 report of the Federal Reserve, Currents and Undercurrents). The wealth of the top one percent is over 33% of the total national wealth. The ratio of the average wealth or net worth of a household below the 50th percentile line is about one 700th of the wealth of a household in the top one percent. The average wealth for that household below the 50th percentile is less than $25,000, while the wealth of the top one percent averages around $15,000,000. That is wealth inequality.

The major portion of the U.S. population that is lacking in purchasing demand is the lower 60% whose combined annual earnings amounts to 20% of the GDP, and whose combined wealth is, approximately, less than 5% of the national wealth. The article “Striking It Richer” by Emmanuel Saez, professor of economics at U.C. Berkeley, indicates that the top ten percent of annual earners now receive about 50% of the total earnings, compared to 28 years ago when they received only 35%. The top 10% also own about 70% of everything that has a price tag.

Consider this:
16.2% of the labor force earns less than the poverty threshold for a four person family (see, employment analysis from Bureau of Labor Statistics ),

17.7% of workers will be under-employed (involuntary part-time workers) by 2010 -- predicted by the Economic Policy Institute,

10.2% will be unemployed (predicted by EPI).
Depending on the overlap of low-income and part-time workers, in a matter of months between 28% to 44% (call it 33% for convenience) of the labor force will earn very little. The turgor pressure for the economy will be low, to say the least. Let’s see, out of work, not working enough, earning lousy wages --- what does that equal for 28% to 44% of the population and the U.S. economy? That's between 45 million to 70 million workers in a workforce of 160 million.

I’ve recently read (March 2009) the predictions of Warren Brussee about the stock market, how it depends on the ratio of dividends to prices, and the conclusion is that the value of stocks will continue to languish. (Brussee wrote the book The Second Great Depression, Beginning in 2007, Ending in 2020, published in 2005.) The economic commentator John Mauldin also predicts the same in his newsletter of March 4, 2009, titled “While Rome Burns.” And, also consider that the European banks are facing a blow-up owing to the collapse of the economy in eastern Europe. Multiple signs of a very weak and slow world economy. A few years ago I read in a Charles Schwab Company report that about 53% of China’s economy was devoted to export production, and now massive layoffs are occurring in China. Their export market has stopped buying.

Wealth Tax and Public Jobs -- a solution of sorts
A 2% tax on the wealth of the top 1% of U.S. households would yield (.02 X $17 trillion) $340 billion a year. This could be a temporary tax for five years or until the current recession/depression subsides. The tax could be graduated from 0.5% to 2.5%, meaning it would take from 200 years to 40 years to significantly reduce the total wealth of those taxed. We need to create approximately 15 million jobs, and at $30,000 per job, the total annual expense would be $450 billion yearly. Therefore we could not afford to create all those jobs immediately, but would have to do it in steps as the private economy rehires its unemployed workers.

I believe that capitalism functions this way: aggregate demand --- the wages and savings of consumers that give rise to their expenditures --- determines the number employed and their wage rate. Often news commentators announce that 70% of the economy is "consumer driven." That means that 30% is driven by government (public) demand, and the remainder by private demand. In times of sagging private demand, government has a responsibility to revive consumer demand by maintaining high employment. In World War II the government war bond financed employment. In 1939 the unemployment rate held at 20%, and in 1942 it dropped to 2%. Either the government sells bonds to the wealthy households or it must tax away wealth at the top so that workers at the bottom can stay employed, and in times of recession/depression this is an emphatic demand. We have schools, ports, rivers, sewage systems, water quality systems, energy efficiency work and road improvements. The list is very long.

It's time to use the money that is now idle in private accounts --- through a tax on wealth or by raising the income tax to where it was under President Eisenhower (91% tax on income over $3.2 million) --- to improve the country and rebuild aggregate demand in the economy. This is the intelligent use of our human, natural, and capital resources. Whose picture is shown on the dollar bills? Is my picture, your picture, Bill Gates' picture, or some wealthy person's image gracing the currency? No, the money belongs, ultimately, to the ones who printed it --- that is, to the people. It time to engage that wealth in productive enterprise and labor, and avoid having millions of people sitting idle as they watch their lives break into irreparable pieces.

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