US Income and Wealth Inequality, Mobility, and Educational Opportunity
1. What is the difference between income and wealth? Clearly define the two.
Wealth is based on a person’s/households assets held at a single point in time. Income is based on money received over a period of time. The difference between income and wealth is the time it takes to build them. Wealth is more significant when determining and understanding income and wealth inequality. This is because wealth generates income. The video, Is America Dreaming?: Understanding Social Mobility, explains how different social groups vary significantly and how they vary in the possibility of the different group reaching the top. As of 2012, the top 20% of people in America possessed 59% of the wealth. If a person is wealthy they can live off their wealth for a long time or forever. They would not need a steady income. They may have gained wealth from many assets or from inheriting money. There is inequality in America because of the difficulties for certain classes to get better jobs that would have higher incomes. An example given in the article Income vs Wealth, What’s the Difference? it explains how a person who is debt free, frugal and saves money will tend to be wealthy even if they have a low income. However, a person who has student loans and is making a high income may not be wealthy because they are having to slowly pay back this loan with their income. They make a lot of money but are having to give a majority of it away to pay back the loan.
2. What is the empirical story on income inequality and wealth inequality in the US in the post WWII period (1945 and later)? Making use of numbers and or graphs (note that you can screenshot if you properly cite), tell me what has happened to both income and wealth distribution in the US over the past 50- 60 years. Are the same trends occurring like this in other countries?
Fig. 1 Difference between the actual wealth and income distribution and the estimated distribution. Graph from Ariely, Dan. "Americans Want to Live in a Much More Equal Country (They Just Don't Realize It)." The Atlantic. Atlantic Media Company, 02 Aug. 2012. Web. 03 Dec. 2017.
At the end of WWII, the economy was growing and incomes were rising quickly. The middle-class incomes were rising dramatically. The income gap between high, middle and low class stayed the same until the 1970’s (Stone, “A Guide to Statistics on Historical Trends in Income Inequality”). By the beginning of the 1970’s the economy slowed and the gaps got wider. This is where the income for middle and lower-class families slowed and the higher-class incomes grew faster. The people at the top were seeing most of the income. As the article, The Limping Middle Class explains, during the Great Prosperity (1947-1977), the rich took home very little income. This allowed for the middle class to grow and spend because their wages increased. They consumed more, which led to an increase in job openings, which resulted in shift right of demand. This meant many people were working however the prices(inflation) were high. In the 1981, the Great Regression hit meaning growth slowed and wages were stagnated. The US suffered major losses. What led to this happening was the productivity in creating new technologies. The economy was booming with new innovations but wages began to flatten because certain jobs were becoming obsolete or could be done faster with technology.
Recently, as of 2010 the top Americans (5th quintile) have 32% of the wealth distribution and the poorest have 11%. This graph came from the article Americans Want to Live in a Much More Equal Country (They Just Don't Realize It) and it shows how Americans want the wealth distribution to be and the reality of the distribution. Later the article goes on to explain how Americans are ignorant and do not realize how the wealth distribution is skewed towards the top 1%. When they realize this, they want the wealth and income distribution to be a more uniform, equal distribution. Americans will then want the government to do something about the wealth and income inequality. Until then the gap between the upper class and middle to lower class with be extreme. The United States is struggling to balance the classes while other places in Europe are not. Europe provides a “near-free” university program to help citizens continue their education. This means people have the abilities to go out and gain more skills to help increase their chances of living off a higher income.
3. Given your reading and research, what do you think are the primary reasons for this rise in inequality? Be concrete, using research and evidence.
Many Americans agree they want wealth and income distributed in a more equal way. In order to try and fix the problem one has to look into the causes for the rise in inequality. The primary reasons for the rise in inequality are due to technology, trade, and institutions (Baranoff). There is an on-going argument for increasing education to keep up with the skills people need in the job market. Also, it is important to increase job training opportunities so employees that do not have the skills can build them. All these proposed solutions that help develop skills will create equality and people will get better jobs. The problem lies in the lack of quality education and training for workers.
Another reason for the rise in inequality is trade and globalization. The rise in offshoring and increases in trade has resulted in many jobs being taken over seas that were originally in the US. This leads to decreasing employment. If the jobs were brought back to the states more people would have jobs and therefore be making an income and the income inequality would decrease.
The third reason could potentially be institutions that have been de-unionizing, deregulating, and changing policies (Baranoff). This has caused declines in wages and employment. The government needs to intervene with fiscal policy to increase wages and unionization.
4. Are we a country that is highly unequal but where everyone (including the poor) can easily get rich if they work hard? Or are we now a country where the poor stay poor and “the rich” basically stay rich, from generation to generation? In your answer, include discussion of educational opportunity and economic mobility <(define this in your answer). How is education connected?
In the article “Equal Opportunity, Our National Myth” it discusses the problem with America promoting equal education opportunity and economic mobility. The US is highly unequal and even if you work hard, in many situations the poor stay poor. It is not impossible to climb up the socioeconomic ladder but it is difficult. Brookings Institution found that Americans out of the bottom fifth of income earners only 58% get out of this category (Stiglitz, “Equal Opportunity, Our National Myth”). This has largely to do with educational opportunity. Children are more dependent on their parents’ income and education to help them reach their goals.
Economic segregation did not end after WWII. The income gap by the 1980s was beginning to widen meaning there was a big difference in educational opportunity. The poor could not afford to send their kids to private school and the rich could. There was a substantial change in the achievement gap being 30-40 percent when comparing rich and poor kids in 2001 (Stiglitz, “Equal Opportunity, Our National Myth”). This meant that the rich were being given many more opportunities to enhance their education with supplements like camps and tutors.
Some people believe that the funding for education has decreased over the last few years and unless that changes it will continue to get harder for low income families to afford college. It is becoming harder and harder for families to improve their economic mobility. “Economic mobility is usually measured in income and determines an individuals’, families’, or other groups ability to improve or lower their economic status” (The Audiopedia, “What is Economic Mobility?”). Unless families can receive better education so they can get better jobs then they will suffer and stay in the same income bracket until there is a way for them to get more education.
5. What are the implications of all this to you in terms of the effect on the US? Include a discussion of the long run economic and “social” health of the US. What should be done, if anything? What are some “policy implications” in your view? Feel free to take any position, but back it up with concrete thinking and logic.
The implications that come with continuing on this path of income and wealth inequality are that it will “diminish our economic standing and stability” as a country (Stiglitz). This could mean many people will live in poverty because without quality education the low and middle-class will not be able to compete in the job market. In terms of trade, if the US continues buying and manufacturing overseas money will be going out of the US economy instead of circulating in it. This would mean people would be living on low incomes because many would be unemployed because of lost jobs due to technology and better productivity overseas. The US must continue to innovate and provide high quality education to create innovators. In the long run income inequality leads to slower growth and financial issues. As said in the article “Income Inequality and Educational Opportunity” they must start by creating policies that make sure kids are healthy and are getting the education they need. Children must have the right healthcare and nutrition. The republicans think giving out more money will not help. However, democrats believe in expanding and giving money to poor schools to provide extra-curriculars and summer programs.
In the “long run” the economy will benefit from putting more money into the education system because an educated population means more innovation and higher incomes. If the government does not put more money into the education system to make sure people find jobs and gain skills, people will start relying more and more on government programs like Medicaid and unemployment benefits. The social health of the US economy would struggle.