The Inequalities of Income Investment Growth

As the 2016 United States election is fast approaching, the debates on wealth inequality has once again captured the public’s attention. The society is divided in its opinion of whether the government is responsible for allowing the leading financial institutes and business tycoons to accumulate their affluence within a lax regulatory environment. Others argue that the imbalance of income distribution between the rich and the poor are just simply part of the capitalism package. In order to understand the roots of wealth inequality and to review some of the key concepts that are fundamental to these discussions, former Reuters editor Chrystia Freeland’s "Plutocrats" is a riveting account on the rise of plutocracy.

As civilization has evolved, economic inequality has existed since the feudal era and has made its place in modern society. It is a dilemma that examines the gap between the low wealth of the middle-class worker and the profitable earnings of the monopolizing upper-class business owner. It is a socio- economic issue that can best explored through the lens of the conflict theory; thoroughly explaining as to how the wealth gap came to exist and the consequences of such an economic state on the interaction between the middle-class worker and the wealthy businessman.

In William Domhoff’s article, Wealth, Income, and Power, he examines wealth distribution in the United States, specifically financial inequality. He concludes that the wealthiest 10% of the United States effectively owns America, and that this is due in large part to an increase in unequal distribution of wealth between 1983 and 2004. Domhoff also states that the unequal wealth distribution is due in large part to tax cuts for the wealthy and the defeat of labor unions. Most of Domhoff’s information is accurate and includes strong, valid arguments and statements. However, there is room for improvement when identifying the subject of what is causing the inequality.

In today’s capitalist economy, where economic transactions and business in general is centered on self-interest, there is a natural tendency for some people to make more than others. That is the basis for the “American Dream,” where people, if they worked hard, could make money proportional to their effort. However, what happens when this natural occurrence grows disproportional in its allocation of wealth within a society? The resulting issue becomes income inequality. Where a small portion of the population, own the majority of the wealth and the majority of the population own only a fraction of what the rich own. This prominent issue has always been the subject of social tension

There is no doubt that wealth inequality in America has been escalating quickly; the portion of total income earned by the top one percent has doubled since the beginning of the 1970’s. The wealthy are the main beneficiaries

Furthermore, when analyzing the different classes, and the distributions of wealth and income in the United Sates; for instance, the upper, middle, and lower classes – it is an astronomical amount of wealth that the top 1 percent acquire. It is also noted by Johnson & Rhodes (2015), “that income and wage inequality have risen sharply over the last thirty years” (pg. 228). Equally important to this, is how the average change in income is divided in Americas quintiles and the widening gaps. For example, in Table 5.2, while the lowest fifth quintile increased from $11,128 to $11,361 – a difference of $233.00 from years 2006 to 2012; the highest quintile increased from $289,446 to $319,918 – an exponential increase of $30,472 (pg. 229). With income inequalities at this rate, it is difficult for the majority of the United States to experience upward social mobility. Pursuing this further, in a line stated by Johnson and Rhodes (2015), “The wealthiest Americans can live on the dividends from their investments without having to touch the principle or work for a salary” (pg. 230). From this, it is visible to see how society has compartmentalized different levels of functions to keep a so called balance for the greater

This time saw much prosperity for certain areas, such as the stock market. Investors were receiving astonishingly high returns on stocks and were seeing their incomes skyrocket. Overall, during the 1980s real GDP per capita increased by 23% and the value of the stock market almost tripled. However the economic choices Reagan made—transferring the weight of taxes from the rich to the poor—had unfairly redistributed the wealth in the nation. Along with the great prosperity came the equal suffering on the part of the lower class who felt the pains of Reagan’s policies. The wealthiest ⅕ of Americans’ income soared by a rate of 14%, while the poorest ⅕ of Americans’ income declined by 24%, widening the gap between the social classes.

Nau then explains how there are three hypotheses to the shift in economic power toward the investors and their concentration and growing income share during the decades of 1990s to 2000s. In the first place, Nau presents the hypotheses that the income concentration of the wealthiest was being driven by investment gains. At the same time, he presents that also at this time, top-income households took on the title of investors imitating their behaviors and characteristics. Finally, his third hypothesis states that both the contribution of investment income-to-income inequality increased relative and changed to non-investment income.

From the 1880s-1920s America went through a period of industrialization that shaped the world we live in. As America’s economy was forming, so was each social class. The wealthy elite had the ability to capitalize on new technology and the middle class had a more stable life with prosperous jobs; however, in contrast, the unskilled poorest workers primarily factory workers, worked and lived in the most abhorrent conditions with barely enough money for a small meal. The wealthy elite—primarily the people that had money, and made more money in this era— possessed the ability to capitalize on newfound technology and other small capital gains which led to their monumental success. For example John D. Rockefeller who was an up and coming grain dealer, went into the kerosene business and his firm—standard oil of Ohio—was Cleveland’s leading refinery.

The highest earning fifth of U.S. families earned 59.1% of all income, while the richest earned 88.9% of all wealth. A big gap between the rich and poor is often associated with low social mobility, which contradicts the American ideal of equal opportunity. Levels of income inequality are higher than they have been in almost a century, the top one percent has a share of the national income of over 20 percent (Wilhelm). There are a variety of factors that influence income inequality, a few of which will be discussed in this paper. Rising income inequality is caused by differences in life expectancy, rapidly increases in the incomes of the top 5 percent, social trends, and shifts in the global economy.

Also income is less concentrated than wealth. Also the Federal Reserve’s Survey of Consumer Finances (SCF) is the main source to obtain information related the allocation of wealth for household. The SCF income distribution received approximately a third of all income in 2013 data also shows that the top 3 percent of the, while the top 3 percent of the wealth distribution held 54 percent of all wealth (Stone, et al).  Similarly, the top 10 percent of the income distribution received a little less than half of all income, while the top 10 percent of the wealth distribution held three-quarters of all wealth. In fact, the average wealth has amplified over the past 50 years, but it has not developed equally for all groups

Capitalism has been the central force behind the growth of the United States’ progressive economy. Within such advanced economic system the chances of economic disparity are significantly high. In fact, over the past three decades there has being a steady increase in unequal wealth distribution among the economic classes. To sustain the current unequal wealth distribution among the classes of the American population, there are numerous factors that influence and shape this trend. For some members of the population it is alarmingly disturbing to know that recent statistics have shown that, “In the US [alone] the wealthiest 1% of its population owns more than the bottom 95 %” (Gutman). As for the difference in economic wealth, it resulted

Wealth in relation to the upper class is defined not as income, but “the value of everything a person or family owns, minus any debts” (Domhoff 2005). Income according to Domhoff, “is what people earn from work, but also from dividends, interest, and any rents or royalties that are paid to them on properties they own” (Domhoff 2011). Those who own a great deal of wealth do not derive it from income, although they may have a high income resulting from the returns on their wealth. (Domhoff 2011) As for the power the upper class wields on politics, the economy and the government, it is indirectly carried out “through the activities of a wide variety of organizations and institutions. These organizations and institutions are financed and directed by those members of the upper class who have the interest and ability to involve themselves in protecting and enhancing the privileged social position of their class” (Domhoff 2005). This description of the upper class by Domhoff provides the basis for the argument that it institutionally exist - an organized, cohesive group set apart by its wealth and power.

The explanation for income inequality has been a controversial topic for economist. In effort to explain this Thomas Piketty wrote his New York Times best seller “Capital in the Twenty-First Century”. In the nearly seven hundred-page book he analyses the past events in the Europe and United States Economies and using that data to create new methods for explaining current economic events. With this he concluded that if rate of return on capital were greater than real economic growth there would be significant income inequality (Holcombe 2015). However, there is some controversy on his evaluation and interpretation of the information. This essay will discuss how Piketty came to this conclusion, the arguments against his interpretations, and

As a Economics book, The book Capital in the Twenty-First Century is written for all Economics scholars and Econ major students all over the world. Since the book is mainly talking about the wealth and income inequality in the United States and Europe since the 18th century, it is a great reference for scholars who is writing papers about wealth distribution and income inequality. In addition, since the book was announced to be made into a documentary movie, it will be an original reference for those who are interested in the movie.