Inequality has many tendrils

Between the years of 1952 and 1986, the richest one percent of Americans took home about 10% of the nation’s income each year. Starting in the mid-1980s, the share began to rise, reaching 18.3% in 2007. It had previously peaked at 18.4% in 1929 before the Great Depression. Then as now, it was an indication of a troubled economy. As the current recovery continues, the rich continue to get richer as wealth inequality continues to rise in the United States. During 2009-12, the incomes of the top one percent grew by 34.4% while the other 99 percent saw a rise of only 0.4%. The national wealth share of the 400 richest Americans increased from one percent in the early 1980s to three percent in 2013.

The U.S. economy grew at its weakest pace in two years during the first quarter of 2016 as the nation’s gross domestic product expanded by a measly 0.5 percent. Economic growth for the year is expected to be about two percent. Economies expand when they produce more valuable goods per person. Unfortunately, American labor productivity only grew by 0.6% during 2015. Productivity’s low growth rate is a big contributor to the problem of stagnant wages. Another complicating factor is the shrinking American workforce. In early 2007, 66% of Americans were in the labor force. Today, the labor force participation rate is 63%.

Several economists believe our low productivity growth is caused by the lack of inventions that boost growth. Others think the economy is doing a poor job of shifting people from obsolete and declining fields to more productive ones. Another exasperating trend is that the rate of new business startups has fallen steadily since the late 1980s. Small company creation is at its lowest point since the 1970s. Analysts also see signs that the increase in inequality may be partially due to economic inefficiency. Some of the wealth is not being created as a result of beneficial innovation, it is generated by exploiting market power.

Over the past 10 years, the profits of large American companies have been steadily increasing. The majority of American industry sectors have more large firms because the biggest have been buying up rivals. Since 2008, American firms have put together mergers worth $10 trillion. These mergers have saved firms $150 billion in recurring annual costs. As ownership has contracted, the merged companies end up with many of the same shareholders. They also employ similar stringent financial controls. The mergers have allowed large companies to increase market share, cut costs and keep profit margins up.

The return on investment for the most profitable American non-financial firms is at record levels. Since markets require healthy competition to function properly, the high profit margins of large firms across the economic spectrum may be a bad sign. It can be an indication that firms are draining wealth out of the economy, not creating it.

The amount of foreign profits that American firms are holding overseas reached $2.4 trillion in 2015. The money is retained abroad to avoid paying U.S. taxes. The United States currently has the highest corporate tax rate (35%) in the developed world. The administration has proposed lowering the rate, the gridlocked Congress has not acted.

A recent Pew Research Centre poll found that only 19% of Americans trust the government in Washington most of the time. In 1958, when Pew began asking the question, 73% responded favorably. America’s aging population faces some economic uncertainties, 21% of Americans lack a savings account. Among the savers, 62% have less than a $1,000 stashed in a rainy-day fund. More than half of retired people depend on Social Security for the majority of their income and 31% of working Americans have no private retirement savings.

The head of the International Monetary Fund (IMF), Christine Lagarde, thinks that rising inequality casts a dark shadow over the global economy. The IMF has lowered its forecast for global growth in 2016 from 3.4% to 3.2%. The steady slide in global economic growth is discouraging investment, resulting in an increase in the political tensions countries face. As political tensions rise, fixing economic problems becomes more difficult.

In 2004, the emerging counties accounted for 20 percent of the 587 billionaires listed in the Forbes magazine annual survey. In 2014, they accounted for 43 percent of the 1,645 billionaires on the list. It is a real possibility that as wealth continues to concentrate, the people in democratic societies will start to lose faith in liberal, market-oriented government.

There is a degree of disagreement among economic specialists regarding the root causes of inequality. The current high levels of inequality could be temporary, a downside effect of global development. Or it could be the normal state of modern economies grappling with changes like fast paced automation. The differing views reveal how little we really know about the effects of economic forces of long duration. In today’s fractured political environment, those charged with working the inequality issue certainly have their hands full.