The Death of the Middle Class
I love capitalism and the idea that you can generate unlimited wealth. This is the reason why the U.S. is one of the richest countries in the world, with its GDP growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been rising, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, because there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as a form of income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the great recession that began in 2008. Lower income levels impact consumer spending and economic growth; therefore, lower income levels mean lower GDP growth and an extension of the current recession.
The median family income plummeted to an inflation-adjusted $45,800 in 2010, compared to $49,600 in 2007, according to the Survey of Consumer Finances published by the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into lower consumer spending by the middle class as income levels fade.
What is worrisome is that the recession resulted in a greater disparity in incomes between the poor and the rich. It’s common for the chief executive officer (CEO) of a large company to earn multiples of regular workers. According to the American Federation of Labor and Congress of Industrial Organization (AFL-CIO), the average CEO of an S&P 500 company earned $12.9 million in 2011, which is 380 times higher than the average income of a worker in the U.S., which was $33,947.
In America, the rich are getting richer, while the poor are getting poorer. With more than 30 million Americans using some form of food stamps—which also impacts consumer spending—there is a great disparity of income in this country. The same is true in other countries, such as Brazil, Russia, and Venezuela.
The income gap is widening. In 1962, the top one percent of income earners had a net worth of 125 times the median household, according to the Economic Policy Institute. The income gap surged 288 times in 2010 and continues to increase. This means less consumer spending from the middle class. President Obama realizes this and wants to remedy the situation. Of course, the gap will continue to be significant, as the rich have a much larger base of wealth to work from and can accelerate the growth of their net worth much quicker. Making two percent on $10.0 million is a lot better than making two percent on $1,000.
Whatever your views on income distribution, and there will be some who feel the current tax structure is correct, the problem is that income disparity inevitably causes societal issues. In the long run, this cannot be good for America or consumer spending.
Perhaps a flat tax would work?
Some argue this system wouldn’t work. For those who are in this group, take a look at Hong Kong, which is the center of wealth and consumer spending in Asia, and you’ll see a flat tax structure could work.