The Wealth Gap #1

Originally published in the May 2015 issue of PSX: the People Exchange eMagazine.

This is the first in a series of articles on the subject of the gaps in wealth and income and the implications for people and the organizations that employ them. This month, we will start with a discussion on why it happened, looking at an array of authors, economists, pundits, and politicians to see where they agree and where they disagree. In subsequent months, we will look at the global scene and end our series with some ideas on how (and if) this problem (if it is one) can be solved or even should be, and the implications for organizations and HR executives in particular.

It’s not just the Frenchman and economist Thomas Piketty or the Nobel Prize winning economist Joseph E. Stiglitz who are talking about the growing gap between the Rich-y Riches and the rest of us, it’s everybody. And the current statistics and forecasts are nothing more than dramatic…

Income inequality between whites and blacks, between men and women, between younger and older workers has existed here in the US pretty much… forever. So too has wealth inequality in that there were always fewer wealthy folks holding a bigger piece of the pie, than the rest of us.00 wealth gap 1

Why then have both these subjects entered the national dialogue and debate? It is because of the great recession. Since 2009 the economy has shown signs of rebounding. Everything from job creation to real estate prices have started to rise from the depths of the 2008 debacle. Even though the US has created many jobs over that time, wages have not returned to pre-recession numbers. And as we described in our September 2014 PSX article Part Time Recovery (for Economic Reasons) we now have a vastly larger number of workers who are UNDER-employed, in many cases working part time jobs since no full time positions are available. The Bureau of Labor Statistics found that 18.5% of workers are part time (meaning working 35 hours or less at one or more jobs). This number is down from its high in 2010 but not nearly back to pre-recession numbers.

This part time expansion has hurt US workers across the board, but there is another issue facing women: the gender gap in pay. According to the World Bank, in the US (as of 2013) just over 46% of the labor force was made up of females, and as we know (and shared in our story that ran in April PSX ) women are paid 77 cents on the dollar compared to men (these numbers are worse for women of color). The New York Times points out that “…after nearly five years of payroll expansion and 11 million new jobs, real incomes have barely budged for the vast majority of Americans. And so far, the wealth generated by the growing economy has not trickled down.”

One bright spot (if you can call it that) in the income inequality discussion is the minimum wage, currently set at $7.25. There have been increases for federal hourly workers and, with this past election, many states opted to increase minimum wage generally to something around $10 per hour. But have you ever really thought about what that means? For an hourly worker clocking 40 hours per week (and many do not) that is an increase from about $15,000 to about $20,000 per year (or $1,250 to $1,700 per month). Not much for an individual to live on, let alone a family.

At the same time, the attention of the “movers and shakers” (think the 1%) has turned from value creation to personal wealth creation. And, according to a study conducted by Oxfam with results released in January of 2015, “the richest 1 percent are likely to control more than half of the globe’s total wealth by next year.” In December of 2014, the Pew Research Center wrote that “[the] wealth gap between America’s high income group and everyone else has reached record high levels … with a clear trajectory of increasing wealth for the upper-income families and no wealth growth for the middle- and lower-income families.” (Even Andy Borowitz ran an article in The Borowitz Report, his humorous and satirical column for The New Yorker, titled “Richest One Per Cent Disappointed to Possess Only Half of World’s Wealth.”)

So what do folks have to say about how and why this has happened?

Let’s start with everybody’s recent favorite economist and author, Thomas Piketty. His bestselling book, Capital in the 21st Century, when translated into English, became an instant (and long lasting) best seller. (Note that Piketty’s title is a nod to Karl Marx’s Das Kapital, but also bear in mind that Marx’s other famous book is The Communist Manifesto). Not to get all “Freedom Fries” over this, but when did we Americans get all gaga over a Frenchman’s point of view? But Piketty does make some solid (and frightening) arguments about how the Wealth Gap came to be (some 400 years ago), came to be not (in the early 20th century), and came roaring back again in the 20th century, and continues unabated today.

Piketty’s book, nearly 700 pages in length, is both understandable and well researched with solid historical data to support his views (in a nutshell and according to the New York Times book review) that capitalism drifts towards inequality, because “capital” such as assets, real estate, and stocks are mostly owned by the wealthy (capital) and these rise in value faster than the growth of the economy (where the everyday folk gain the resources to live on). Piketty points out that this process was reversed in the first half of the 20th century (because of WWI and WWII), but now wealth inequality is returning to pre-war levels. Piketty’s stance is that this is bad and should be fought with radical policy measures, one of his favorites is a global tax on wealth.

Mr. Piketty’s “left leaning” policy recommendations certainly rubbed The Economist the wrong way resulting in their suggestions that he “ignores tradeoffs and costs” and fails to consider “other ways to redistribute capital”. They end by dismissing Piketty as a social ideologue and suggest that his recommendations present a “poor blueprint for policy.” Good thing Piketty is an economist and not a politician.

Here in the USA, the wealth gap is not just blamed on the ability for the wealthy to increase their wealth themselves through sound investments, etc.; but tax policy (harkening back to Piketty’s recommendation) is pointed to as a significant contributor. State and local tax policies are pointed to as highly regressive forcing the poor(er) to pay a high(er) portion of their income in taxes. On the Federal level, the capital gains tax, which is where most ultra-wealthy find their taxable income, is very low at 15% (even under Reagan, though he was a Republican, you will remember, it was 28%).

So with money that begets money and lower taxes, the wealthy are in pretty good shape. But it doesn’t end there. According to Seeking Alpha, the Federal Reserve policies such as TARP, qualitative easing and zero loan programs to Wall Street also contribute to this gap by supporting the wealthy companies and thereby their executives at the expense of “Regular Joe” taxpayers.

An article published in Forbes last October said, “Economists and politicians blame [wealth inequality on]… tax codes, the cost of healthcare, the welfare and benefit systems to care for the bottom 10%, rising costs of education versus the increased demand for more highly educated employees, the aging of the population, and so on.”

We believe that the future debate will drift from describing the current condition, to a general acceptance of the academic findings i.e. “the current state.” Then the debate will move on to defining the “desired state” and then ultimately focus on the most appropriate process to get from where we are to where we want to be. Too many people are jumping to a proposed solution for how to get from here to there without defining where “there” is.

If we continue to focus on the stand-in issue of how much of the wealth should be held by the top “x” percent, we won’t address the core issue. That core issue is to determine and articulate our shared values and beliefs associated with the living conditions and opportunities we want all citizens of our country and the world for that matter to enjoy. To borrow from Voltaire it is not inappropriate to point out that “with great wealth comes great responsibility”.

There is no doubt in my mind that the dialogue over the next months leading up to the 2016 elections will color, popularize and polarize this issue with various slogans from various politicians, and there will be many $10,000 a plate dinners for the faithful “1%’er” while the “99%” crowd will look for another candidate that will promise and with luck deliver “change we can believe in.”

The result of this, we predict will be a very public dialogue on individual tax policy. But less easy to see is that it will have a significant impact on tax and regulatory policy for organizations. If the wealth of individuals and organizations – not just their incomes – is taxed annually (as suggested by Piketty) there will be, no doubt, a significant deployment of wealth across individuals and organizations.

In the coming months we will put on our predictive hats and discuss the implications for employees, organizations and HR executives regardless of whether you are republicans or democrats.