Building an Economy that Works for Everyone

To restart the American economy, end trickle-up economics for the rich

Imagine giving an extra 5% of the nation’s total annual income to the residents of Wasilla, Alaska starting in 1980, and you’ve got a good grasp of income inequality in the U.S. today. Thanks to lower tax rates for the rich and growing income inequality, $650 billion in wages that would have gone to middle-class households since 1980 has instead been siphoned off to just 5,934 households at the very top of the top 1%.

While household income for the middle class has remained flat, income inequality has increased.  In 2010, median household income was $49,445 – a slight decrease from 1997.  For the top 1%, average income increased from $517,713 in 1997 to $1,530,773 in 2011.

As wages stagnate, middle class families are struggling to keep up with the rising cost of health care, gas and groceries. According to Raghuram G. Rajan, a former IMF chief economist, household debt has doubled as low and middle-income families attempt to bridge the ever-growing gap between income and expenses.

A recent IMF report found that nations with more equitable income distribution are more likely to enjoy longer periods of economic growth. Jonathan D. Ostry, the co-author of the report, suggests that future US periods of growth may only last one-third as long as they did in the 1960s, when our income gap was smaller.

Barry Ritholtz, CEO of the investment research firm Fusion IQ, notes that the Dow took 50 years to return its pre-Depression peak, as millions of potential investors avoided the stock market for a generation. “You’re going to lose a generation of investors,” says Ritholtz. “And that’s how you end up with a 25-year bear market. That’s the risk if people start to think there is no economic justice.”

America’s wealth is being concentrated into the hands of fewer and fewer people – at the direct expense of middle-class families and our economy as a whole.  The rich’s rising tide has neither lifted middle class boats nor kept the economy flowing smoothly.  While some argue raising taxes on the top one percent will hurt the economy, billionaire entrepreneur and venture capitalist Nick Hanauer sums it up perfectly:

I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small…An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.

This post by EOI volunteer Pete Stewart

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