You should feel broke, because you are

There has been a lot of handwringing over rising income inequality in the U.S. While most of the prescriptions for change have focused on long-term efforts, politicians, both liberal and conservative, have ignored the obvious solutions. There have been ideas put forward, but they simply nibble around the edges of the issue. The underlying problem is our unwillingness to address the real need, which is a fundamental restructuring of taxation.

Wage earners in the U.S. are in distress. The Federal Reserve reported that inflation adjusted income for 90 percent of working Americans fell 5 percent for the years 2010 through 2013, while economic growth for the country was cumulatively up 9 percent. While all of that increase did not fall into the hands of the top 10 percent of earners in the country, it is clear that a substantial portion did. This most recent evidence of decline is not new; wages for the middle and lower classes have been stagnant or down for the past 40 years.

The fundamental problem has two roots. First, business has not shared productivity gains with workers since 1973, and second, the current tax system does a poor job of reallocating resources to offset the disparity between growth of the economy and accumulation of capital in the hands of elites.

{mosads}There is growing concern that the widening gap in income inequality is getting worse. We now have evidence confirming that the economic recovery that began in 2009 has not done anything to change the increasing disparity between the top 10 percent and everyone else. These latest Federal Reserve statistics simply substantiate the growing plight of the middle- and lower-income classes in America. While this income decline comes at a time when inflation has been rising at slower rates, there is no question but that Americans are being pinched.

Free-market types would have you believe that the accumulated wealth of the top 10 percent will result in business expansion and new jobs will emerge. Greater wealth results in investment by the wealthy and that creates jobs and the competition for workers forces employers to pay more. According to this prescription, the inhibitions to this process are the high federal corporate and individual tax rates, the uncertainty of government policy initiatives and the burden of social welfare expenses. If these barriers were removed and power placed in the hands of individuals to make their own choices, prosperity and fairness would result. While many conservatives will confess that there are corporate tax loopholes, subsidies or tax breaks that should be rationalized, the general consensus seems to be that favoring business, lowering taxes, reducing the size and involvement of government in the economic sphere is the fundamental policy orientation required for prosperity.

It does not seem to dampen their enthusiasm that the period from 2009 to the present is living proof that this policy orientation is flawed. Record performance in the stock market has failed to provide a resurgence of economic growth, primarily because the wealthy have taken their accumulated gains and held on to most of them, resulting in less than acceptable job growth and further downward pressure on wages.

Unfortunately, this free-market approach has dominated political policymaking for the past 25 years. The disposition to favor the wealthy over the average worker has created the growing gap between economic elites and middle- and lower-class citizens.

Liberal prescriptions to rectify the imbalance are characterized by proposals, much like those offered by Alan Blinder (a Federal Reserve member from 1993 to 1996, during the George W. Bush and Clinton Administrations):

• Provide quality pre-K education for children whose families could not otherwise afford it.
• Improve the K-12 grade school system, especially in low-income areas.
• Provide much more vocational education and apprenticeship programs.
• Raise the minimum wage.
• Tilt the playing field in favor of, rather than against, unions.
• Run a high-pressure economy via a more stimulative fiscal policy.
• Increase the generosity of the Earned Income Tax Credit, especially for workers with no children.

While such suggestions are constructive, the fundamental problem has not been addressed, namely, the problem lies in the fact that the concentration of wealth and the policies that advance, permit or promote unbalanced accumulation of wealth do not promote long-term economic growth and stifles democratic institutions.

The challenge for the future is to find political actors who will articulate policies to rebalance resource distribution — that is, promote ways to better balance the needs of a healthy economy and the acquisitiveness of its more successful or fortunate players. Several ideas are on the table; penalize CEOs who don’t share productivity gains with workers or who allow earning disparities to get out of hand; increase inheritance taxes; impose transfer taxes on financial transactions; treat all income as ordinary income and address it with graduated rates; impose an annual asset tax; reduce the use of regressive taxation techniques (sales tax, gas tax, Social Security deductions, etc.) and provide broad-based meritorious access to low-cost or no-cost education and training.

These are not capitalism-destroying ideas and none of them need be developed or imposed to permanently inhibit the entrepreneurship and creativity that drives individuals and the economy. What is desired is a basic redistribution of some of the wealth, so the wealthy are not as wealthy; that inherited wealth is limited and that the lower 90 percent of wage earners better participate in economic growth. The pragmatic outcome of income redistribution is a more stable and prosperous economy.

Accompanying a restructured tax system also requires a recognition that America has arrived at a point in history where not everyone in the labor force is needed to support the economy. The simplest start toward accommodating this development consists of mandatory paid holidays, minimum time periods for paid vacations and paid maternity and sick leave.

The average wage earner has to recognize that none of these changes will be willingly accepted by the current cast of political and economic elites; that government at the state and national levels is unduly influenced by economic elites; and that the current stock of political actors has not embraced either the severity of the problem nor the importance and need for wholesale change. For that, average wage earners will have to find ways to join forces and impress the need for change on a reluctant establishment. Talk about a tall order!

Russell is managing director of Cove Hill Advisory Services.