Money and Class in America: Income Inequality

Abstract

This paper examines the trend and causes of income inequality in the United States over time and explains how Universal Basic Income can be used as an effective policy for solving income inequality. It compares the steadily-rising Gini coefficient value of the US to other economically-developed countries and further investigates how the gap between rich and poor has been reversed throughout the history. On a more profound level, the paper shows how factors including sex and racial discrimination play a role in aggravating the income gap. The main causes of such huge gap are technological change and globalization. As a result of the technological change occurred by 4th industrial revolution, people have been going through mass unemployment, which leaves Universal Basic Income as a promising solution to help revitalize the economy and decrease the income inequality.

For 40 years, the US-led global economy has produced an enormous improvement in human welfare. Since 1981, the proportion of the world’s population living in extreme poverty on less than a $1.90 per day has shrunk from 42 percent to 10 percent in 2015. However, in countries with advanced economies, inequality of income and wealth has surged, and nowhere has it surged more than in the U.S, where reliance on free market forces has been strongest. That magnifies rewards for those at the top and leaves most others behind. The trend helps those with higher levels of education and hurts the less educated. It lifts residents of major cities while leaving those in small towns behind. For growing numbers of Americans, it is harder to get ahead.

The purpose of this paper is to explain why income inequality gap is rising and why previous measures of overcoming economic recessions, such as government funding people to get hired, are not feasible as we enter the stage of 4th industrial revolution. This paper strives to prove how Universal Basic Income can alleviate poverty and increase the number of middle-class workers, stabilizing the unequal income distribution.

Income Inequality

While the U.S is in the midst of its longest economic expansion, nine states saw spikes in inequality from 2017 to 2018: Alabama, Arkansas, California, Kansas, Nebraska, New Hampshire, New Mexico, Texas and Virginia (Telford, 2019). Worsening income inequality has been a huge economic issue in the US, affecting the political realm by becoming a central topic in the 2020 presidential race where candidates came up with differing policies to reduce income inequality. Although income inequality is a universal problem that many countries suffer from, the U.S is notoriously known for its severe income inequality. For example, according to OECD, the U.S has the highest Gini coefficient level among G7 countries, peaking at 41.5 in 2016 (Schaeffer, 2020). The Gini index measures wealth distribution across a population, with zero representing total equality and 1 representing total inequality, where all wealth is concentrated in a single household (Telford, 2019). U.S’s Gini coefficient has been steadily rising for several decades, starting from 0.397 in 1967 to ultimately reaching 0.485 in 2018 (Telford, 2019).

Income inequality has always existed in the US, but the gap between the rich and the poor has not always been as wide as it is today. In the mid-century, a period of economic stability, the richest 1 percent earned 13 percent of all US income while the bottom half earned 20 percent of income. In the 1960s, Americans were still riding a post-war job boom. In the 70s, the lowest paid Americans got a boost from a steadily increasing minimum wage. Sky-high salaries were not as typical as they were today. The 80s was when the tables have turned. The minimum wage stagnated, outsourcing factory jobs was used as a main economic strategy, and the president Ronald Reagan passed huge tax cuts for the richest. By the mid-90s, the earning of the top 1 percent surpassed everyone in the bottom half all together. The rich were on a tear, and even the 2008 financial crisis did not slow them down. Today, the share of income claimed by those at the very top and those in the very bottom are completely flipped from what they were in the 60s. While the bottom 50 percent received 20 percent of national income in 1980, that figure declined steadily to just 13 percent by 2016. Conversely, the top one percent steadily increased their claim on national income, from 10 percent to 20 percent in less than two generations (Niemuth, 2017). Also, average annual income for the bottom half of the US population, adjusted for inflation, has remained at $16,500 for the last 40 years, while the top one percent have seen their average income triple from $430,000 to $1.3 million (Niemuth, 2017). This is significantly concerning considering how upper social mobility is extremely challenging for those at the very bottom. The rich tend to stay rich and the poor tend to stay poor. In fact, just 8 percent of American men at the bottom rose to the top fifth, which compares with 12 percent of the British and 14 percent of the Danes (Deparle, 2012).

There are various causes as to why inequality gap is widening. One of the forces is technological change brought to the digital world. The digital revolution creates tremendous amount of wealth for those acquired with the proper skills and preparation. Those skills include abstract problem solving, interpersonal communication or organizational skills, which are the things that highly educated workers tend to be highly capable of. Simultaneously, it eliminates middle-skill jobs by devaluing a lot of repetitive tasks in offices and production lines, hollowing out the set of job activities available to non-college workers. Instead of human labor, computer software and industrial machines now fill roles from clerical tasks to routine manufacturing that once produced middle class incomes for workers without college degrees. This has pushed the workers without high education downward into engaging in personal services, security, transportation and repair, where their skills are more replaceable with other workers. Consequently, this has created a great, inviting world with economic security for the highly educated while leaving people who do not have high levels of education behind (Harwood, 2019).

Another cause is globalization of the world economies, affected by China’s rise in particular. Competition from emerging economies such as China’s, combined with reduced trade barriers have further reduced prospects for workers without advanced skills, which has had devastating consequences in sector such as textiles, furniture and leather goods. China going from a poor country in perpetual political and economic crisis to a frontier manufacturer with fairly well-educated, highly available skilled labor using modern technology at an unbelievable rate. China’s decision to allow free mobility of labor to adopt western technology and foreign direct investment, and to start trading with the world had a huge effect on the United States since the 90s. The rate has further accelerated since China joined WTO in 2001, entering the market for manufactured goods, which resulted in a huge decline of US manufacturing employment. For example, over the course of just seven years, about 20 percent of all US manufacturing jobs disappeared, and then they fell by another 11 percentage points during the Great Recession. As a result, one in three manufacturing jobs no longer existed that had existed around 2000s (Harwood, 2019).

Behind the unequal numbers of income distribution, there eludes several factors contributing to the widening gap of inequality, such as sex and racial discrimination. The top 1 percent in the US is primarily made up of men. Women-dominated fields such as teaching and waitressing are lower paid. In fact, the federal minimum wage for restaurant servers and other tipped workers has been frozen at just $2.13 per hour since 1991 (Allegretto, 2014). Women are promoted less often than men. They make 82 cents for every dollar that men make (U.S Census Bureau, 2019). The top tier is also very white. Minority groups face systemic racism that has contributed to gaps in education, housing, and employment opportunities. African-Americans make only 78 cents for every dollar white people make (U.S Census Bureau, 2019). Such phenomenon is apparent in regional economies as well. Southern states, which are generally more racially diverse tend to be more unequal in terms of wage levels, while pockets of the West that are more white-dominated tend to be more equal.

There have been economic policies done to solve the problem of unequal income distribution. Some legislators have proposed running the brakes on runaway wealth by raising top income tax rates. Many states recently increased the minimum wage, and some states are closing education gaps by expanding access to early learning programs. However, as the world enters the fourth industrial revolution where automation and Internet of Things are prevalent, those previous policies have become not-so-effective. There has been a huge change brought to the labor market. People engaging in repetitive jobs such as data collecting, lawyers, engineers, and clerks are going through massive unemployment whereas jobs that involve human interaction such as therapists, emergency management, and social workers are not automated. This has further increased the wage gap between rich and poor, generating more inequalities. In this process, the middle-class disappears, which means most people are poor. This is a state of recession, where the supply surpasses the demand of an economy. Supply has been rising due to high productivity wrought by innovation, however, since people are poor, they spend less money, thus leading demand to decrease. In Keynesian economics, what can be done in an economic recession is the government paying people by giving them jobs to sustain their life, like the case of the Great Depression. However, as the market faces 4th industrial revolution, the government cannot hire people since they do not have the necessary skills to survive in the job market. Therefore, an alternative solution that has been on the spotlight is the government simply giving out money to people. Andrew Yang, who was one of the democratic candidates for the 2020 U.S presidential election, proposed an idea called Universal Basic Income (UBI) as a solution for class struggles, which is government paycheck giving 1,000 dollars to every adult in the U.S for affording all necessities. The rationale behind this is to give people money regardless of what they are going through, which would remove the problem of existing welfare systems that keep people trapped in poverty. If welfare recipients make too much, they lose food stamps, free medical care, and housing vouchers. This is a form of structural inequality that prevents the poor from getting enough wealth to move upward in terms of social mobility (Amadeo, 2019). Thus, giving people enough money that they’re above the poverty line will not only reduce poverty, but will also remedy the situation where 0.01 percent get to have more than 90 percent of the wealth.

Universal Basic Income is criticized in that it will disincentivize people to work. Opponents argue that since people are just given with easy money, they will lose motivation to work. Critics take an example of the experiments conducted between 1968 to 1974 in Denver and Seattle, arguing that giving cash to around 7,500 people tended to modestly reduce the number of hours they worked (Samuel, 2020). However, this argument is invalid in that worked less does not mean that they are dropped out of the labor force forever. The apparent decline in labor supply did not come primarily from a reduction in hours worked. Rather, the decline came from longer spells of unemployment. While unemployment is generally bad for one's well-being, UBI resulted in people choosing to remain unemployed for a longer stint, which is more pleasant than involuntarily elongated unemployment. People are waiting longer to find a good job match, or are quitting bad jobs in favor of searching for better ones. Another factor to be considered is people withdrawing from the labor force to pursue more education. This is supported by the data that one study looking at the Seattle-Denver experiments found that UBI increased odds of completing high school by 11 percent (Matthews, 2014). In the long run, all this will connect people with more pleasurable and rewarding jobs, increasing the well-being of the people. Thus, although people are constantly fed the idea of a doomed society in case UBI gets implemented, what can happen instead is the “Scandinavization” of the society, achievement of higher standards of living.

Conclusion

Overall, we can conclude that continuing with the previous economic policies to solve income inequality is not suitable for today. Although certain states have been going forward with their regional policies, adjusting the minimum wage and such, there is no federal consensus in the U.S on the matter of reducing income inequality. Considering how the presidents of America have been completely getting rid of the economic policies set in a previous regime and implementing a whole new one, it is concerning whether America will be able to continue their decade-long economic expansion or fall into an unemployment crisis. Ultimately, closing the gap between the rich and the poor will require agreement from an increasingly partisan government, as well as societal shifts to combat sexism and racism in employment.