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Are the rich getting richer and the poor getting poorer still today?
At the onset of globalization, free trade, multiculturalism, and liberal market fundamentals, one cannot help but assume that each and every economy is doing better than before. It leads us to believe that with the growing mobility, aided by advanced skills and technology transfer, and other empowering instruments of a global village, people should be richer or well off. However, this is not often the case. Poor people like the Africans still need foreign aid up until now. Developing countries remain developing. In the micro economic level, one may say that the rich people still become richer while the poor gets poorer. This paper shall try to explore this important and very timely question – are the rich getting richer and the poor getting poorer still today?
According to Novack (2013), there is a breakthrough study which states that the rich really became steadily richer and the poor became more poorer. This study was conducted for the period of 1987 to 2009. The researchers, five economists, one economist was from the United States Treasury and two economists were from the U.S. Federal Reserve, collected data from almost 34,000 employable age households’ 1040s, W-2s and Social Security data. It showed that the income inequality is fixed for a lifetime (Novack, 2013).
These economic experts, who surveyed one out of 5,000 returns submitted to the Internal Revenue Service, discovered that the tax system still reflect the wide inequality between those who are earning high income compared to the poor or those who have less income. This is regardless of the U.S. government’s liberal rates and reimbursible tax credits. This means that even when the government has aided the poor with their income tax deductions, the discrepancies between the income between the rich and the poor remain high. The said inequality was indicated in the data culled from 1987 to 2009 (Novack, 2013).
In a similar study, recent economic data gathered by Emmanuel Saez of the University of California, Berkeley and Thomas Piketty of the Paris School of Economics showed that the leading 1% of the sample studied took advantage of a real income growth of 31% between 2009 and 2012 (The Economist, 2013). This is compared with the increase of less than 1% for the bottom 99% of the sample population. Hence, the income of the bottom 99% actually shrank (The Economist, 2013).
After the Depression, households from different ranges of income took advantage of income growth which compensate their economic losses during the depression. As an outcome, the top 1% only gathered about 28% of complete income increase from 1933 to 1936. However, this time, as the study showed, that the 28% ballooned into 95% since 2009. The hefty income increase was just enjoyed by the top 1% of the sample population. Hence, the share of the rich in the national income was an impressive record of 19.3%, which is greater than both in 2007 and 1929 (The Economist, 2013).
There are many ways of quantifying these studies and the common observations that indeed this is true. However, this paper shall qualify these contentions through the use of economic data and analysis which are quantitative in nature. When we speak of the rich, this pertains to the having plenty of money and possession. Meanwhile, being poor means lacking enough income or money to live at a comfortable standard of living.
Economic Theory: Piketty’s Inequality Theory
In the United States, Thomas Piketty is known in his predictions of persisting economic inequality. He points out, that for the most of history, the return on capital is best understood with the value of land (Piketty, 2014). He illustrated the concentration of wealth with the rich as he cited Downton Abbey. In this story, Lady Grantham did not know of a weekend since her family never worked. Also, even before the wars and between help from wealthy kin and the value of Downton, the Granthams remained rich as ever (Piketty, 2014). In another instance, Piketty cited Mr. Darcy of Jane Austen. Mr. Darcy perpetually collected wealth from Pemberley Mansion (Piketty, 2014). The return on capital in those times was measured in terms of getting for every dollar (or pound) that one invests (Piketty, 2014). This same rate applies in the nineteenth century and even today (Piketty, 2014).
Piketty explains economic growth or “G” which is growing much more slowly as a percentage increase from one year to the next in total output of goods and services in one country (Piketty, 2014). At present, this is measured by the output in the Gross Domestic Product (Piketty, 2014). (This was reinforced by another financial expert, Zachary Karabell of Making Sen$e. He reinstated that much of the economic growth the GDP measures goes to the wealthy, thus, this is not really an indication of how the country has prospered economically but more of the few, rich people who expanded their income or wealth) (Piketty, 2014).
In fact, the long-run tendency of the rate of return on capital to go beyond the economic growth rate is one of the major economic forces that can push toward very high concentrations of wealth and sadly, very wide gap of inequality. It explains the extremely high concentration of wealth in the traditional agrarian society with a landed aristocracy and likewise in the industrial countries of the 19th century up until World War I (Piketty, 2014).
He further explained that historically, growth was close to 0 percent because population was not changing and agricultural production was also stagnant (Piketty, 2014). It was growing by less than 0.1 percent annually. However, the rate of return on capital was usually 4 to 5 percent (Piketty, 2014). Hence, rich people can afford to just live off their wealth since they do not need to produce too much to get enough. This has been perpetuated through time.
At the onset, of the Industrial Revolution, a higher growth rate ensued. The 0 percent rose to 1 to 1.5 percent in the 19th century (Piketty, 2014). This spelled a big difference for the upliftment of the standard of living for many people. But just the same, the rate of return also increased. The former rate of return of 5 percent during the pre Industrial world grew to 6 percent with new industrial capital and investment. Hence, the gap between the growth rate and the rate of return did not alter much compared to the pre Industrial period (Piketty, 2014).
Two important changes did alter the growth and rate of return rates. In the 20th century, there were the succession of World War I, the Great Depression and World War II which all reduced the return to capital to a very low level. This was due to capital destruction brought by inflation, greater taxes to subsidize the war, etc. This lowered the rate of return to capital from 4 to 5 percent to negative or 0 or 1 percent between 1940 and 1945 (Piketty, 2014).
The growth rate after World War II rapidly increased. There was a 4 to 5 percent growth rate annually during the 1950s up to the 1970s in Japan, France and Germany due largely to post-war recovery (Piketty, 2014). Post war period showed a real upward mobility and it has sharply lessened the inequalities of wealth of the pre Industrial world. This was even supported by the large growth rate of labor income during these years. However, at the start of the 1980’s, an economic slowdown was felt and most countries reverted to a productivity growth rate of 1 to 1.5 percent, similar to pre war period (Piketty, 2014).
Piketty aso explained that population (how many children a household has, in a micro sense), skills upgrading, good education background as relative to one’s finding employment and eventually increasing his/her chances of income growth.
Piketty generally explains that the rich gets richer while the poor remains poorer. This is due to the fact that money reproduces itself (The Economist, 2014). In his explanation, the wealth expands since money (which includes physical and financial assets like land, capital, factories, equipment, etc.) grows much faster than the overall economy that supports it. Hence, the inequality of wealth also expands as well. To translate this in common terms, it can be cited that in 2012, the top 1 percent of the U.S. households experienced a growth of 22.5% in their incomes (The Economist, 2014). Back in 1979, these households could just earn an income growth of 10%, according to the Pew Research Center (The Economist, 2014).
This research group also noted that in December 2014, the average uper-income U.S. household held seven times the wealth of a middle income household (The Economist, 2014). This shows the largest income gap in 3 decades, given the data (The Economist, 2014). The upper income households earned at least $132,000 for a household of four family members. However, the Federal Reserve Bank of Saint Louis reported that the real median income stays at $51,900 as it was in 1995 (The Economist, 2014). Suffice to say, middle class income has remained stagnant in various developing countries. It was also found out that income inequality remarkably increased in 17 countries out of the 22 member countries of the Organization for Economic Co-operation and Development, from the period of 1985 and 2008.
Meanwhile, Murphy and Topel contradicted Piketty’s theory by stressing that the present day environment favors more skilled workers and this is where the inequality is coming from (Gold, 2015). The growth in the demand for skilled workers has outpaced the number of skilled workers. Hence, the relative price of skilled labor has increased. This means that there is a relative increase in the income of skilled workers as well. To illustrate, the median income for U.S. doctors from 1983 to 2012 almost quadrupled. It reflected the biggest increase according to the data from the U.S. Bureau of Labor and Statistics. The medical doctors, surgeons, and specialized dentists were among the top ten highest paid occupations in the country in 2012 (Gold, 2015).
The experts also cited technological advances and globalization as the driving forces in the increase in the demand for more skilled workers. This is particualrly true in the service industries (Gold, 2015). For instance, software developers command high salaries, perks and bonuses, stock options, and other benefits.
Other blame the structural elements in the income inequality. According to Larry Summers, the former Secretary of the Treasury during Bill Clinton’s tenure and a current Harvard professor, the constant push for tax cuts and the erosion of union bargaining rights in the U.S. have contributed greatly to the income inequality in the country (CBC News, 2014). He explained that in most economies, particularly in the U.S., the rich gets one formal vote and they are able to secure more wealth and become more powerful through various means. When they are installed in powerful positions or become more influential, they can lobby for policies that can make them more richer (CBC News, 2014).
This view is supported by another economic expert, Mr. James Myles who argues that governments know how to reduce the income equality, mainly through investment in income transfers and infrastructure such as health and education (CBC News, 2014). However, it also lacks the political will to implement great changes or reforms. Myles said that ideas of reforms to close this gap have flourished since the 1990s. These include income redistribution or what is popularly known as social investment, early childhood education, job training for young adults, among other (CBC News, 2014). However, the general public would not want to pay for these economic upliftments.
In addition, Topel and Murphy argue that income inequality is not just widening between the rich and the poor but generally across all the skilled workers’ spectrum. Wage discrepancies take place not between the rich and the poor but between the skilled and the non skilled. They consider the income gap as a skills gap or the gap in the supply of human capital (Gold, 2015). The inability to produce a sufficient pool of highly skilled workers has led to the direct and indirect causes of inequality. In the negative aspect, it makes the non skilled less marketable than the skilled and it also directs the employers to pay more for their skilled workers. In the more positive side, it also means that the non skills are more prompted to enhance their skills to be able to catch up (Gold, 2015). Generally, the skilled workers are exarcebating the general income inequality as they boost their own earning powers.
However, it leads us back to the roots of inequality. In most economies, the rich people have the capacity to provide more education and skills development for their children. Meanwhile, the poor people do not have the capacity to send their children to college. This perpetuates the cycle of poverty and stagnates the income or earning capacities for the poor. The middle class, on the other hand, resort to various debts, in order to send their children to college. As Goldin and Katz put it, the education factor accounts for about 60 percent of the rise in wage inequality in the U.S. from 1973 to 2005 (Gold, 2015).
In another perspective, it cannot be denied that there has been many increases in wealth accumulation in the last decades, as brought mainly by globalization (Lee, 2013). The last few decades have shown the dramatic changes in the living standards for the world’s poor. More than a billion people have go beyond their subsistence level (Lee, 2013). Actually, in real terms, the poor have not become poorer, they have become richer to a dramatic heights (Lee, 2013). In terms of national development, India and China have illustrated many striking advancements. Other nations have seen the enhanced conditions of the poor. In the rich countries, the poor have become richer (Lee, 2013). This is in terms of how much they can buy for the money they earn. In terms of the hours of work needed to buy goods, they are much better off than they were years ago (Lee, 2013). In some cases, what it takes to buy certain goods take workers some weeks but now, it just takes them some days.
Inherently, the gains of the poor is constantly compared with the gains of the rich, and hence, this heightens the income gap. If the poor gain wealth, but the rich gain more, then under the traditional economic comparison, they stil consider the poor as having become poorer (McCabe & Synder, 2013). However, in hindsight, if attaining twice the spending power is called “becoming poorer,” then what does being poor really mean? Like China and India, so many developing countries have climbed up the ladder (like Vietnam, Cambodia, Laos, etc.) (McCabe & Snyder, 2013). These have been made possible by the globalization and the spread of market economics.
Conclusion and Recommendations
The rich have indeed grown richer while the poor has grown poorer. This is in terms of income inequality, as expunded by Thomas Piketty. The economic system has changed tremendously over the last generations. Starting from the pre Industrial times, the wealth gap has remained so much the same. This was stagnant at 4 to 5 percent rate of return and a slow growth rate of 1 percent. However, the growth rate dynamically changed during the Industrial period and during the post War times, when the economies were pushed by the external infusion of capital and investments. In the present context of globalization and global market competition and the overall market efficiencies, wealth has exploded. The sad news is that, only the skilled and more privileged individuals and groups have flourished in these remarkble growth.
This is because many opportunities await those who are highly skilled and those who have capital and financial capacities to earn more. The income discrepancy matters more to poor people. This is because it could mean life and death for the poor. For instance, discrepancy between the income may mean that the poor will eat fish instead of pork, while for the rich, the income ineaulity may just mean between buying a Porsche and a non luxury vehicle. More income may mean just extra luxuries for the rich but it means the difference between starvation and survival for the poor.
A very socially justified recommendation is to tax the rich more. This can reduce the income gap and democratize the privileges given to the rich class. By taxing the rich more, the tax funds may be used to further educate the poor and make them leverage on their knowledge for further improving their plight. A second practical recommendation is for the government to extend more social services in the form of more schools, more hospital and health services, among others. If the poor are able to enjoy these free services, they will not be left out and will have more money to improve their lot.
CBC News. (March 20, 2014 ). Why the Rich Get Richer and the Poor Get Poorer.” Retrieved on March 31, 2015 from, http://www.cbc.ca/news/business/why-the-rich-get-richer-and-the-poor-get-poorer-1.2580263.
Gold, Howard. (March 5, 2015). How Piketty is Wrong – and Right. Capital Ideas. Retrieved on March 31, 2015 from, http://www.chicagobooth.edu/capideas/magazine/spring-2015/how-piketty-is-wrong-and-right.
Lee, Stewart. (June 30, 2013). The Rich get Richer, the poor get poorer The Guradian website. Retrieved on March 31, 2015 from, http://www.theguardian.com/commentisfree/2013/jun/30/osborne-cameron-byron-burgers-coalition.
McCabe, Mark & Snyder, Christopher. (May, 2013). The Rich Get Richer and the Poor Get Poorer: The Effect of Open Access on Cites to Science Journals Across the Quality Spectrum. Retrieved on Macrh 31, 2015 from, http://mccabe.people.si.umich.edu/McCabe_Snyder_RP_2013.pdf.
Novack, Janet. (March 21, 2013). New Study Using IRS Tax Data Shows Rich Are Staying Richer, Poor Poorer. Forbes Magazine. Retrieved on March 30, 2015 from, http://www.forbes.com/sites/janetnovack/2013/03/21/new-study-using-irs-tax-data-shows-rich-are-staying-richer-poor-poorer/.
Picketty, Thomas. (May 13, 2014). How Piketty’s inequality theory explains Mr. Darcy’s wealth. PBS. Retrieved on March 30, 2015 from, http://www.pbs.org/newshour/making-sense/how-pikettys-inequality-theory-explains-mr-darcys-wealth/.
The Economist. (September 12, 2013). “The Rich Get Richer.” Retrieved on March 30, 2015 from, http://www.economist.com/blogs/graphicdetail/2013/09/daily-chart-8.
The Economist. (2014). “Thomas Piketty’s Capital Summarized in Four Paragraphs.” Retrieved on March 31, 2015 from, http://www.economist.com/blogs/economist-explains/2014/05/economist-explains.
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