It Doesn’t Have to be this Way

January 27, 2016

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It doesn’t have to be this way–with US inequality back to the levels of our Robber Baron Era, around 1925. There are other ways to craft and manage and sustain an economy without this becoming the end point.

Consider Germany, for example–a modern, developed, sophisticated and thriving nation, 4th largest economy in the world, with per-capita GDP of $48,000 (vs our $55,000). Germany’s unemployment rate is 5% (ours is 6.2%). 65-70% of the German population are Christian. The workforce is highly skilled. We have a lot in common with Germany and its population.

Germany’s population is 81 million. Ours is 324 million. Germany’s Chancellor Angela Merkel is trying to uphold the German constitution which obligates Germany to accept an unlimited number of immigrants. So far, Germany is estimated to have accepted 57,000  from Syria, approving 93% of applicants. In contrast, the US is struggling over whether to accept any immigrants whatsoever from Syria. A country one fourth our size is likely to take in more Syrians this year than we will take in refugees from all countries, according to Bloomberg News.

This post isn’t about refugees, but it is about compassion and fairness. Germany (and much of the EU) has a much bigger social support system (in economics, called “transfer payments”) than does the US. Our inequality is not markedly different from Germany’s before transfer payments. But, after Germany’s 25% of GDP in social support payments and our 16%, the real inequality of the US is far greater than that of Germany. Here is the comparison for the highest income categories, after transfer payments, with income including capital gains for both countries, for the 47 years from 1961 to 2008, the latest comparable data available.

Date                                         1961                           2008           % Increase

Top 1 %         Germany             13.3                           14.52                9.1%  

Top 1%          US                       10.64                         20.95             96.9%

Top .1%         Germany               5.6                            6.51              16.2%

Top .1%         US                          3.65                         10.4             184.9

Top .01%       Germany               2.2                             3.07            39.5

Top .01%       US                          1.38                           5.03            337.0

Source: World Wealth and Income Database: http://www.wid.world/#Database

There is no reason to think the comparison will be less dramatic when a 2015 comparison is available, because there has been significant worsening in our inequality since 2008. But setting that aside, compare the very modest change in the German highest income levels share of the total German national income, to the shocking change (in red) in the US. Most of that has happened since 1980, when conservative economics began a gradual and steady increasing control over our economic policies.

In the US now, the top 400 individuals have as much wealth as the entire lower 50% of our population. That bottom 50% had 3% of our wealth in 1989, but today has only 1%.

Across the entire spectrum of incomes, the comparison is perhaps best summed up by the “Gini index,” which most economists use as a primary tool to compare inequality between populations. Germany’s Gini index is 30.1, while the US Gini is 41.1, according to the World Bank. On this index, 30 is considered low and 40 is considered high.

Another result of our US economic policies is that we now have one of the highest poverty rates among developed countries. We have 17.5% in poverty. Germany has 8.9% (as of late 2000s). One of the underlying factors causing this is that with the transfer payments we do have, the bulk are increasingly oriented to those who are working, leaving the unemployed with little support, leading straight to poverty, homelessness, and worse.

Conservatives try to depict Liberals as seeking a 90% tax rate on the rich, and complete equality for every decile of income. That does not characterize the Liberals I know. We want room for motivation, for reward to the smart and the hard working. We like capitalism–but not the capitalism we have developed and reinforced across the last 30 years. I bet most Liberals would be happy to have a balance like Germany–an ultra rich class that has 15% of income going to the 1%, with a Gini index of 31%, and with a tax rate of 47%. Liberals fully recognize and value the need for motivation for entrepreneurs as well as those who want to work harder to advance. And, I think it would be a very good place for Conservatives to live and thrive, also!

All we need is for the pendulum to swing back gradually toward a fairer and more sustainable balance between the rich and the rest of us. There are many ways to gradually move the pendulum back, while still maintaining incentive to the creative and hard working. A carefully developed social support system is one way. Ratcheting back the power of big money in politics is another way. Giving organized labor more bargaining power is another way. Even fixing our roads and bridges is beneficial to the middle class and lower–so they can afford housing farther out and still get to work and back.

Marco Rubio likes to taunt his Democratic opponent, by saying “Sanders would make a good President–of Sweden (forgetting Sweden doesn’t have a  President).” He goes on to say we don’t want to be like Sweden (or Norway or any other country). This is America.

Well, America is not doing very well at the moment. If we can’t look around and discern that sometimes others perform better than we, we’re blind and even more at risk.

It is possible to have a healthy and vibrant nation with greater opportunity and equality, with only slightly higher taxes, and with abundant opportunity for the creative and hard working to build their wealth. Germany is one example.

 

 

 

4 thoughts on “It Doesn’t Have to be this Way

  1. Nelson Robert says:

    Dale,
    As usual I enjoy your thinking. Perhaps the difference between us and Germany is where we put our money. The U.S. spends 3.1% of GDP on “defense”. Germany 1.1%; per capita spending on defense in the U.S. is $1821, Germany $541. No wonder social programs are the orphans.

    Like

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