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The Trillian Dollar Income Shift, Part 1
Income is being transferred every year to corporations and the wealthy
F or three decades, from 1942 to the mid-1970s, a “great leveling” of incomes between classes in America occurred as the standard of living rose for tens of millions of American workers and their families. American working class families received a share of record gains in productivity. Real wages rose. Guaranteed retirement benefits—private pensions and social security—were greatly expanded. Health insurance plans were negotiated. Medicare was added for the aged. K-12 public education was free and public colleges and universities nearly so. Unions represented 25-35 percent of the work force and typically 60 percent or more in key strategic sectors like construction, manufacturing, and transport. The tax burden for workers rose relatively slowly while corporations and the wealthy still paid a fair share.
Then, after three decades, the hourglass of history was inverted. The great leveling of incomes became, after a brief interregnum from 1974-1978, a “great reversal.” From the mid-1970s until the present a widening income gap began to open up, as it once had in the decade of the 1920s leading up to the Great Depression. From the early 1980s on, income inequality widened, deepened, and accelerated until today well over $1 trillion in income is being transferred every year from the roughly 90 million working class families in the U.S. to corporations and the wealthiest non-working class households.
Today’s widening income gap has finally begun to penetrate the periphery of public debate. From thoughtful analyses of shifting income shares by young academic-economists like Emmanuel Saez of the University of California, Berkeley, to focused commentary on the topic by media-economists like New York Times columnist Paul Krugman, to pop-art economists, pro-business rebuttalists, and panicky editorial page writers of the Wall Street Journal —all acknowledge to one degree or another the growing inequality of incomes in the U.S.
Shifting Income to the Wealthiest
I ncome inequality in America today is not, as one might assume, about the upper 20 percent or even the 10 percent wealthiest gaining an ever-increasing relative share of national income while the middle, the working class, and the poor stagnate or decline in terms of their share of that income. It is about corporations and the wealthiest 1 percent households (the very rich)—even the top 0.1 percent (extremely rich) and 0.01 percent (mega-rich)—accruing for themselves a greater relative share of income at the expense of the rest and, in particular, at the expense of the lower 80 percent income groups in which fall virtually all the 90 million working class families and the government’s estimated 108 million non-supervisory workers in the U.S. workforce.
There are approximately 114 million households in the U.S. today.
The wealthiest 1 percent make up 1.4 million households. They now
receive between 19-21.5 percent of the annual gross domestic product
(GDP) of the United States, depending on the source cited. That’s
up from 8 percent in 1980. Today’s 19-21.5 percent also represents
a nearly full recovery of the roughly 22 percent share of national
income the top 1 percent received in 1928 just prior to the stock
market crash of 1929, the depression of the 1930s, and the great
leveling of class incomes that followed. That same 1 percent today
also hold more than 35 percent of all assets and wealth of the country—about
$17 trillion. They own 51 percent of all stocks and 70 percent of
all bonds, own homes worth more than $3 million and have a net worth
of $6 million. The bottom 50 percent of all households, nearly 60
million families—all working class—in comparison own only
2.5 percent of the country’s total assets and wealth.
The 0.1 percent extremely rich, 140,000 households, did even better than the top 1 percent and the 0.01 percent mega-rich, only 14,000 households, did better than they. Despite the 2001 Bush recession and the dot.com stock bust earlier this decade, since 2000 the number of millionaires in the U.S. rose from 6 to 7.5 million (which excludes home asset values in the calculation), according to a 2006 report by the corporate research firm, the Boston Consulting Group. One hundred new billionaires were also created since 2001.
Meanwhile real weekly earnings of 100 million workers are less today than in 1980 when Ronald Reagan took office—a virtual quarter century pay freeze. According to the U.S. Commerce Department the median (midpoint) households (where male workers earn about $41,000 a year and female workers $31,000 a year) have experienced a decline of 5.9 percent in income the past five years alone. Below the median, 37 million workers and their families now live below the U.S. government’s official poverty level and 16 million of them earn less than $9,800 for a family of 4. Even workers above the median have done poorly. Except for a few years in the late 1990s, college educated workers’ real wages have stagnated, growing less than a half of one percent a year from 1979 through 2005 and actually declining in 2004-05.
For the first time since the U.S. government began to collect the data in 1947, wages and salaries no longer constitute more than half of total national income. In contrast, corporate profits are at their highest levels since World War II, having risen double digits every quarter in the last three and a half years alone and 21.3 percent in the most recent year, 2005, according to the Dow-Jones “Market Watch.” Corporate profit margins are higher than they have been in more than half a century, according to Merrill Lynch economist David Rosenberg. After tax profits are now equal to 8.5 percent of the U.S. GDP—that’s more than a trillion dollars—and the highest percent since the end of World War II in 1945. A June 2006 report by the leading investment bank Goldman Sachs aptly summed it up: “The most important contribution to the higher profit margins over the past five years has been a decline in Labor’s share of national income.”
The $1.09 Trillion Low-End Estimate
T he most telling statistic of what it all means comes from the U.S. Department of Commerce. It states that wages and salaries as of April 2006 constituted only 45.3 percent of GDP, a decline from 50.0 percent in 2001 and 53.6 percent in 1970. Furthermore, as the U.S. government estimates, “each percentage point now equals about $132 billion.” In other words, the roughly 8.3 percent drop in labor’s share by 2005 represents an annual shift in relative income today of about $1.09 trillion. That’s $1.09 trillion that now occurs every year—and it is rising.
That $1.09 trillion shift is equivalent to every one of 108 million non-supervisory workers in the U.S. today writing out a check each year, every year, for $12,100 and signing it over to the 24 million upper-class households—about 40 percent of which would go to the wealthiest 1.4 million families.
Not yet included in the $1.09 trillion annual figure are additional income transfers from labor to corporations as a consequence of: employers shifting a greater share of the costs of health care to their workers in recent years; the destruction and only partial payouts to workers from the discontinuing of tens of thousands of defined benefit pension plans since the 1980s; and the transfer of hundreds of billions more every year in workers’ payroll tax payments (i.e., deferred wages) from the Social Security Trust Fund to the U.S. general budget since the 1980s.
Recently some politicians have also begun to pick up on the theme of growing inequality, sensing as they campaigned in November’s Congressional elections a growing popular discontent of millions who hear every day from Bush and company how great the economy is doing, but know they are personally losing economic ground. As the newly elected Democratic Senator from Virginia, James Webb, no liberal by any means, put it in a recent editorial, “wages and salaries are at all-time lows as a percentage of the national wealth” and “America’s top tier has grown infinitely richer the past 25 years.... The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.” Meanwhile, Fox News pundits squeal “class war, you’re talking class war” at such comments—as if that wasn’t exactly what has been happening.
The Limitations of Government Data
D ebate and discussion on income inequality in the U.S. today almost always refer to one or more of four government data sources: the U.S. Census Bureau, the Congressional Budget Office, and surveys by the Federal Reserve Board and the Department of Labor. Except for one source, the Congressional Budget Office (CBO), they all conveniently do not estimate the income of the wealthiest 1 percent households separately, but lump them into broader groups with the result that the extreme concentration now occurring at the very top of the income scale is blurred and lost in a set of much larger numbers. The Department of Labor goes so far as to define the “rich” as the top third (33 percent) of households with annual income levels of only $70,000 a year. With that logic, Bill Gates and your average dockworker are considered no different in terms of income.
A major failing of two of the survey sources, Federal Reserve and the Department of Labor, is that they are based on interview surveys of the very rich and extremely rich (the mega-rich of billionaires and their near-cousins are never bothered with such government survey requests). Government representatives either call or visit in home with the wealthy and ask them to reveal their most private financial situation. Why the super-rich would be inclined to thus reveal the details of their finances to government interviewers—after manipulating tax shelters and the like as most do and paying numerous lawyers and high-priced accountants large fees to hide their income—is an interesting and grossly naive assumption.
Several of the sources conveniently leave out capital gains income from the totals. Capital gains income accounts typically for 5-8 percent of the IRS’s total revenue collected in a given year, and Bush’s first term tax cuts are calculated to yield $500 billion in accumulated capital gains tax savings and therefore income windfall, for the wealthy in this decade. The best of the four sources, the Congressional Budget Office, includes capital gains and provides for a view of the top 1 percent, but unfortunately grossly overestimates working family incomes and correspondingly underestimates wealthy households’ income by arbitrarily defining 65 percent of all business income as wages. But even these shortcomings are only a part of the picture and problems involved when using the traditional four government sources for estimating and discussing income inequality and the income gap today.
In 1983 about $250 billion in income was reportedly diverted to emerging offshore shelters like the Cayman islands in the Caribbean. According to no less a conservative source than Morgan Guaranty Trust, the preeminent investment bank of the super-rich, today about $7 trillion is stuffed away in offshore shelters from the Caribbean to the Channel Islands and Cyprus in Europe to the Seyschelle islands off the coast of India to Vanuatu, Palau, Indonesia and multiple points throughout the Pacific—and that’s only what’s publicly reported. It is not known exactly how much of that is U.S.-originated tax avoidance and sheltering, but it is probably safe to assume at least 60 percent, or around $4 trillion, represents holdings of U.S. corporations and the wealthiest households. Not too many workers deposit their IRAs in the Cayman Islands or Bermuda nowadays.
A second major shortcoming of official government sources is that none consider the relative shift in income from workers to corporations, despite the fact that working families’ income is being shifted directly to corporations as well as indirectly through the tax system to wealthy individuals.
Ignoring the Corporate Role
M ost of the income held by the top 1 percent households passes through corporations. Corporations pay them interest, dividends, and it is the sale of corporate stocks, bonds, and other assets and securities from which the wealthy receive the predominant share of their income. Similarly, corporations compensate their CEOs and executive management record-breaking amounts that show up in front-page headlines of newspapers on a regular basis. In 1980 the average American CEO made 35 times the average pay of the worker in his company; today that ratio is more than 500 times, according to Reuters. Since 1980, and particularly in the last decade, CEOs, senior management, and others have been allotting for themselves record income gains. In the last five years alone the senior managers (top 5 positions) of corporations in the U.S. have increased their share of corporate income by more than 100 percent, from around 5 percent of profits to more than 10 percent of profits.
However, not all the income shifted from workers to corporations is immediately passed on to the wealthiest households in the form of dividends, interest, capital gains, or to corporate senior management. A significant part of corporate income is retained by corporations; i.e., is not distributed to shareholders, not spent on capital investment, paid out in wages and salaries, or otherwise used for operations. Corporate-retained profits may thus be considered a form of deferred income of the wealthiest households and individuals that will eventually be paid out to them in future years—and the retention of undistributed profits is at record levels today.
None of the current discussion on the widening income gap considers the corporation’s role in the shift of relative income shares.
The Saez & Picketty Analysis
A n interesting first step in this direction has been taken recently by two young French economists, Thomas Picketty and Emmanual Saez, the latter now at the University of California, Berkeley. In their paper, “Income Inequality in the United States, 1913-2002” (updated for 2003), they created a database from U.S. Internal Revenue Service sources on taxes paid by family units dating back nearly a century. Although their results and findings are subject to the various limitations of the IRS data, their database represents a significant advance over the four traditional government sources that have been used to illustrate income inequality in the U.S.
Picketty and Saez focus primarily on the evolution of incomes of the wealthiest 1 percent families over the 90-year period. Their basic conclusion is that there is a three decades fall and then three decades rise in the incomes of the wealthiest 1 percent—i.e., a leveling of income differences between the wealthy and the rest, between 1942-1970, followed by a reversal and growing income inequality after 1978 once again. Their second fundamental finding is that incomes within the top 1 percent are concentrated and skewed strongly to the upper levels—the 0.1 percent and 0.01 percent of those top 1 percent households. Other than some suggestive data for income inequality in the UK, the wealthy 1 percent owners of capital incomes elsewhere in the industrial world have not experienced the same major shift in incomes since 1980 as has occurred in the U.S.
According to their data, after rising sharply in the 1920s the incomes of the wealthy drop significantly in the early years of the 1930s Depression, then further during World War II, and continue to drift downward thereafter until the early 1970s. From 22.5 percent of all incomes in 1929, the income of the wealthiest households falls to 15.56 percent of total income in 1932, remains in the 16 percent range during the Depression, then falls again sharply at the start of World War II in 1942 to 13.44 percent of total incomes. That decline continues from 1942 on for nearly 3 decades until 1970 when it stabilizes at only 9.09 percent. It then remains flat in the 9 percent range throughout the 1970s reaching a low of 9.06 percent in 1978. Thereafter the long, steady climb in income for the wealthiest 1 percent begins anew, continuing for nearly 30 years from 1978 up to the present, at which point the wealthiest 1 percent households have largely recovered in terms of income share to where they were in 1929.
The picture is the same, and even more dramatic, for the wealthiest 0.1 percent within the top 1 percent, and even more so for the wealthiest 0.01 percent within that 0.1 percent.
In terms of today’s households it means 140,000 families realized as much income as the remaining 1,260,000 households and 14,000 of those 140,000 earned in turn about half of the income of those 140,000 families. Roughly the same picture prevails today, with the top 0.1 percent earning about half of the total income of the top 1 percent and the top 0.01 percent earning in turn about half of the top 0.1 percent households’ income. The incomes of the wealthiest 14,000-140,000 families are therefore driving the reversal of income shares of the past 30 years, as well as the current widening income gap. (This overall picture is represented in Table 1.)
The data also shows that the incomes of the wealthy 1 percent have recovered from the 2001 recession, the economic shock of 9-11, the dot.com bust of 2000-02, and other negative developments earlier this decade. Since 2003 the incomes of the wealthiest 1 percent households are once again back on their long-term expansion track that began in 1978-1982. In stark contrast, the 90 million working class families have not recovered at all from the 2001 recession and other economic effects, but have steadily fallen behind from 2001 through 2006. This dual fact is the defining economic characteristic and legacy of the George W. Bush presidency.
Given the foregoing analysis of the income inequality gap from above, the fundamental question becomes what’s determining the income shift of the wealthiest households the past six decades—three decades down and three decades back up?
Unfortunately, that’s a question that Picketty and Saez don’t thoroughly address, despite their otherwise historic work. The decline in the incomes of the wealthiest households, they argue, was due to the external shocks of depression and war. However, causes for the historic recovery of the incomes of the wealthy since 1978 is less adequately addressed. At times they briefly note the possible influence of major changes in the tax structure, such as during World War II or after Reagan’s 1986 tax cuts—the former reducing income inequality and the latter exacerbating it—as possible contributing causes for both the decline and then recovery in the incomes of the wealthy. But their discussion focuses largely on income tax rates—and not to the proliferation of tax shelters, evasion, avoidance, and fraud over the past 30 years and its role in the rise in the wealthy’s income share.
In a later-published version of their work, Picketty and Saez do mention briefly the possibility that tax avoidance and tax evasion may be at play. But income from tax shelters, evasion, avoidance, and fraud simply do not show up in the IRS data used by the authors. Similarly, corporate profits gained at the expense of workers’ income are also increasingly held and/or diverted offshore. Like income sheltered offshore, the IRS data do not pick up the deferred income not fully distributed by corporations to their wealthy shareholders. Corporate retention of profits during World War II is generally acknowledged as having made a significant impact on the decline in incomes of the wealthiest 1 percent during the 1940s, as Picketty and Saez themselves acknowledge. And it appears profit retention in recent years is again at all time highs and may be contributing once again to the underestimating of capital incomes. This contributing factor to income inequality is also not addressed in their analysis.
T oday’s public debate on income inequality has focused on differences in estimating the actual size of the income gap, or else on solutions to the growing inequality that are totally unrelated to its roots causes and origins in recent corporate policies and practices. Limiting discussion in this manner leaves out consideration of more fundamental questions. After narrowing for decades from the 1930s through the early 1970s, why did income inequality re-emerge thereafter? And why has it been widening progressively since the 1980s?
The November 2006 Congressional elections and the retaking of the House and Senate by the Democratic Party places the question of income inequality in America, and the policies responsible for it, once again at the forefront of agenda. An opportunity exists to begin to do something about it. It remains to be seen, however, what will actually be done with the brief window of opportunity. Will the next few years represent a repeat of the similar transition period of 1976-1980, during which great opportunities for defending and even advancing working class incomes were possible, but were dissipated and lost, leading to a resurgence and new aggressiveness by corporate America and its right-wing allies? Or will the next few years look more like 1946-50, when working class families’ wages, incomes, health care, and retirement benefits improved significantly. Whichever the outcome, accurately understanding the root causes of that inequality, which lie in various corporate policies and practices of the last quarter century, is an absolute essential first step that has yet to be taken in the current public debate on the growing inequality of incomes in America.
Part 2 of this article will identify and quantify the leading corporate policies since 1980 that have played a central role in the shift of more than $1 trillion annually from the incomes of the 90 million working class families in America to the wealthiest households and corporations.
Jack Rasmus is the author of The War At Home: The Corporate Offensive From Ronald Reagan To George W. Bush (2006).
Z Magazine Archive
HUMAN RIGHTS - The U.S. Human Rights Network will celebrate its 10th anniversary with the Advancing Human Rights 2013 Conference, December 6-8, in Atlanta, GA.
Contact: 250 Georgia Avenue SE, Suite 330, Atlanta, GA 30312; firstname.lastname@example.org; http:// www.ushrnetwork.org/.
AFRICAN/SOCIALIST - The Sixth Congress of the African People’s Socialist Party USA will be held December 7-11, in St. Petersburg, FL.
Contact: 1245 18th Avenue South, St. Petersburg, FL 33705; 727- 821-6620; info@aps puhuru.org; http://asiuhuru.org/.
SCHOOLS - The Dignity in Schools Campaign (DSC) will host a workshop on the DSC “Model Code on Education and Dignity: Presenting A Human Rights Framework for Schools” at the Mid-Hudson Region NY State Leadership Summit on School Justice Partnerships, December 11 in White Plains, NY.
Contact: http://www.dignityin schools.org/.
ANARCHIST/BOOKFAIR - The Humboldt Anarchist Book Fair will be held December 14, in Eureka, CA.
Contact: humboldtgrassroots @riseup.net; http://humbold tanarchist bookfair.wordpress. com/.
CLIMATE - The World Symposium on Sustainable Development at Universities is hosting a follow-up event to the 2012 Rio de Janeiro symposium. The gathering will be held in Qatar on January 28-30, 2014.
Contact: http://environment.tufts. edu/.
LABOR - The United Association for Labor Education (UALE) will host Organizing for Power: A New Labor Movement for the New Working Class in Los Angeles, March 26-29. Proposals are due December 15.
Contact: LAWCHA, 226 Carr Building (East Campus), Box 90719, Duke University, Durham, NC 27708-0719;lawcha @duke. edu; http://lawcha.org/.
MEDIA FELLOWSHIP - The Media Mobilizing Project is seeking applicants for the first annual Movement Media Fellowship Program. The Fellow will work with MMP to produce the spring season of Media Mobilizing Project TV. MMPTV is a news and talk show that tells the stories of local communities organizing to win human rights and build a movement to end poverty.
Contact: 4233 Chestnut St., Philadelphia, PA 19104; 215-821- 9632; milena@media mobilizing.org; http://www.media mobilizing.org/.
RACE - The 7th Facing Race: A National Conference will be held in Dallas, TX November 13-15, 2014. Organizers, educators, artists, funders and everyone interested in racial equity is invited to exchange best practices and learn about innovative models and successful organizing initiatives. Proposals must be submitted by January 24, 2014.
Contact: Race Forward, 32 Broadway, Suite 1801, New York, NY 10004; 212-513-7925; media @raceforward.org; http://race forward.org/.
VETERANS - They Were Soldiers: How the Wounded Return from America’s Wars - The Untold Story, by Ann Jones, is about the journey of veterans from the moment of being wounded in rural Afghanistan to their return home.
Contact: Haymarket Books, PO Box 180165, Chicago, IL 60618; 773-583-7884; http://www.haymarketbooks.org/.
LIBYA - Destroying Libya and World Order: The Three-Decade U.S. Campaign to Terminate the Qaddafi Revolution, by Francis A. Boyle, is a history and critique of American foreign policy from Reagan to Obama.
Contact: Clarity Press, Inc., Ste. 469, 3277 Roswell Rd. NE, Atlanta, GE 30305; 404-647-6501; email@example.com; http://www. claritypress.com/.
CHILDREN - Fannie and Freddie by Becky Z. Dernbach is about two bumbling villains who gamble away the savings of the people of Homeville.
Contact: fannieandfreddiebook @gmail.com; http://fannieand freddie.org/.
PROTEST/COMIC - Fight the Power!: A Visual History of Protest Among English Speaking Peoples, by Sean Michael Wilson and Benjamin Dickson is a graphic narrative that explains how people have fought against oppression.
Contact: Seven Stories Press, 140 Watts Street, New York, NY 10013; 212-226-8760; info@ sevenstories.com; http://www. sevenstories.com.
CHILDREN - Brave Girl by Michelle Markel and illustrated by Melissa Sweet is the true story of Clara Lemlich, a young Ukrainian immigrant who led the largest strike of women workers in U.S. history.
Contact: http://www.harpercollins childrens.com/Kids/.
FESTIVAL - The 2014 Queer Women of Color Film Festival will be held June 13-15 in San Francisco. The festival is currently accepting submissions until December 31.
Contact: QWOCMAP, 59 Cook Street, San Francisco, CA 94118-3310; 415-752-0868; firstname.lastname@example.org; http://www.qwocmap.org/.
IRAQ/REFUGEES - Ten years after the U.S.-led war in Iraq, thousands of displaced Iraqi refugees are still facing a crisis in the United States. The Lost Dream follows Nazar and Salam who had to flee Iraq in order to avoid threats by Al- Qaeda-affiliated groups and Iraqi insurgents that consider them “traitors” for supporting U.S. forces in Operation Iraqi Freedom.
Contact: Typecast Films, 888- 591-3456; info@type castfilms. com; http://type castfilms.com/.
HUMAN RIGHTS - Lyrical Revolt! III will be held December 4 in Syracuse, NY. The event will feature hip-hop musician Anhel whose album Young, Gifted, and Brown was just released. The event is sponsored by ANSWER Syracuse, Liberation News, and SyracuseHip Hop.com. Performers and artists are encouraged to send submissions.
Contact: email@example.com; http://www.answercoalition.org/syracuse/.
FOLK - Musician Painless Parker has released his album Music for miscreants, malcontents and misanthropes featuring “Fuck Yeah, the Working Class.”
Contact: firstname.lastname@example.org; http://painlessparkermusic.com/.
COMEDY - Political comedian Lee Camp’s new album Pepper Spray the Tears Away has been released.