Dispatches from the Potomac#05 | Income Inequality Reaching Unsustainable Levels

For this issue, I would like to take up the worsening of the income inequality, which has been an ongoing problem in the US
From the oldest times, the US is a country with one of the world's largest income gaps. Yet those in the middle or lower class have never really pushed the government to narrow this gap, or denounced the rich. This is due in part to a wide-spread belief that in America anyone who really makes an effort will have a chance for success.

This article was originally written in February for publication in the March 2014 edition of the Marubeni Group Magazine, M-SPIRIT.

Washington D.C. Office General Manager, Marubeni America Corporation    Takashi Imamura

Is the American Dream an Illusion?

Yet these days, the American Dream doesn't seem to be holding up so well. According to a recent poll, 64% of Americans think that “People do not have equal opportunities for success in the US,” almost twice the percentage of those who think equal opportunity exists in the US. In a separate poll, the rate of those who don't believe in this American Dream reached 45%, closing in on the 54% of those who do believe in it.

The biggest reason for more people being let down must be the extraordinary widening of the income gap in recent years. The Gini coefficient, which is a major index showing the income disparity between households, marked a record high in 2012. During the last 20 years, the top 1% of the income bracket increased their earnings by 86%, while the remaining 99% only saw an 18% gain. In real terms after adjusting for inflation, the average earnings for the lowest income class in 2012 was less than it was in 1968. Meanwhile, the people in the top 5% income bracket have doubled their earnings. Additionally, the worsening of the income gap was more notable after the financial crisis. Although the economic recovery after the financial crisis was dependent on FRB's ultra-loose monetary policy and rising asset values, from the point of social stability, this situation is surely unsustainable.

Meanwhile, the rich, who have enjoyed a steady growth of their income, are also voicing concern on the current situation. They fear that the mounting dissatisfaction with the inequality in society overall will increase resentment of the affluent, and they will be made the scapegoat. In fact, according to a recent poll, 54% think that “the rich and corporations should pay higher taxes to support the poor,” while only 35% think that “tax cuts are needed to stimulate economic growth.” The rich are no longer looked up to in society, and there is a growing view that a conflict is emerging between social classes.

Obviously, these changes are also becoming important political issues. Not only President Obama and the Democrats who have always been active on reducing inequality, but also the Republicans, who have traditionally refused government intervention on this issue and appealed for general improvement for the middle and low income class through economic growth, are starting to discuss the income gap problem. Major media are also reporting daily on the abnormal economic inequality from various angles. While these moves are encouraging constructive discussions on the optimal policy for reducing the income disparity, they are also spurring frustration against the society's affluent class.

Inequality Only Solved Through Slow and Steady Efforts

In the State of the Union address this January, President Obama spent most of the time focusing on income inequality. But no effective measures have been found yet. Raising the minimum wage, which the President emphasized and also enforced with a presidential decree, is one of the few possible ways, and supported by people from all sides. Opposition from the Republicans claiming that it only reduces employment, also seem to be weakening. Although most experts acknowledge certain effects resulting from a minimum wage increase, they are doubtful it can improve the income gap. From a microeconomic perspective, there are success cases such as COSTCO, which President Obama praised in his speech and also made a visit to a store. COSTCO pays its employees more than twice the average retail wage, and that leads to high productivity. But, if COSTCO's profits keep growing in the fiercely competitive retail industry, other companies that hire many more people at lower wages than COSTCO may go out of business. So there is no guarantee that the income inequality can be improved for the whole economy.

Furthermore, for a mature and high-income country like the US to continue its economic growth, there is no way but to seek opportunities through higher productivity. This will consolidate industry knowledge and capital, and promote a shift to a new economy that requires fewer jobs. For example, in the photography industry, Kodak, which had over 140,000 employees, went bankrupt in 2012, while the fast-growing Instagram which was acquired by Facebook, had only 13 employees. There are cases like Google which have grown into a giant company with over 40,000 employees, but that takes time. The mass unemployment confusion like Kodak's comes first.

After all, these changes cannot be stopped. So what politics can do is to make people adaptable to the changes by providing support such as education and job-training, and try to keep them from giving up the American Dream. The affluent class must also accept that the society is changing, and make efforts to become respected citizens in that society. This is what the rich-class Americans have been actively doing for a long time. Fortunately, even with such a wide income gap, the majority of Americans still believe in the American Dream. The previously mentioned COSTCO and Instagram were also created by ordinary people and the American society that believed in the American Dream. If these positive changes start happening in politics and society, then the American Dream will live on, and though gradual, the income inequality will improve again, and the dynamism of the US will be sustained.