- Income has increased across all income levels since 1979. However, the gaps in total earnings between the nation’s highest and lowest earners is getting larger.
- Incomes of middle-class families have remained relatively flat over the last two decades, but spending and subsequent debt has increased.
- The cost of living is inflating.
- This means less discretionary income for the majority of society, and the funding for public goods and services is being cut to compensate.
- This creates an America in which the cost of an adequate or suitable quality of life has risen faster than the ability to pay, presenting systemic challenges.
Income has increased, but earnings are collecting in the top income brackets:
Inequity is stemming from the fact that the majority of earnings are collecting in the top income brackets. This money is generally not recirculated through the economy, but instead is being invested into retirement savings.
Spending has increased in every income bracket:
Perception plays a large role in the spending habits. “Concerns about relative consumption lead to ‘positional arms races,’ or expenditure arms races focus on positional goods” (Frank, Pg. 3). For Frank, the utility provided by a good diminishes if everyone else has it. This leads to a feedback loop in which if Person A buys a good, their neighbor Person B will soon follow suit to catch up. This leaves relative ownership constant. Meaning on aggregate neither person A or person B is ahead.
The cost of living has inflated; American’s are taking on debt to compensate:
Americans also spend out of necessity. The cost of basics like education, food, healthcare and home ownership are increasing faster than household earnings. Meaning families are spending more as percentage of total earnings on the necessities.
Middle and Low-Income families have been relying on debt to fill the gap between income and spending. A 2014 Morgan Stanley Report states:
“Over the past several decades as growth in income slowed, middle and lower income households increasingly relied on debt to help fuel consumption. The expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality. In particular, credit card balances and home equity based lines of credit – namely mortgage equity withdrawals – exploded” (Zetner, 2014 pg. 19).
Debts from household spending is further compounded by rising cost of tuition. Parents and students are taking out debt in the form of student loans to cover the rising costs.
Less discretionary income and cuts to public goods:
Increasing pressure on relatively shrinking incomes is leaving the American family with less to spend on discretionary and public goods. Tax policy on a federal and local level has been adapting towards progressive policies, but overall tax adjustment is subject to governmental time lags.
Frank states, “Growing financial destress experienced by middle-class families appears to have reduced their willingness to fund additional public services or even to pay for existing ones” (Frank, pg 98). The logic of why there is a lack willingness to pay for public goods becomes clear when we consider that the short term needs of the American household are being paid on credit. While real, the negative externalities that occur when road quality, air quality and other public goods are underfunded are less visible and pressing than those that occur when people can’t afford access to food, water and shelter.
Systemic problem need system solutions:
The 2014 Morgan Stanley report observes, “The maximum taxable earnings subject to payroll taxes are capped at $117,000 in 2014, which means that higher earners do not face the payroll tax on all of their wage income. Moreover, lower-income groups tend to rely on wages for the majority of their income whereas higher-income households receive a greater share of income from investments” (Zetner, 2014 pg. 12).
Rising inequity is harming the middle class because they are carrying the burden of the nation’s funding needs, even though they are earning relatively less. Wealth disparity is a reflection of inequity in our tax code and fiscal policy. Solutions must address both micro behavior, and macro forces. That means distinguishing the needs of the many from the desires of the few, and designing tax policies to correct the imbalance.
Frank, R. (2007). Falling Behind: How Rising Inequality Harms the Middle Class. Los Angeles, CA: University of California Press.
Zetner, E., Campbell, P. (2014). US Economics Inequality and Consumption. Retrieved from http://www.morganstanleyfa.com/public/projectfiles/02386f9f-409c-4cc9-bc6b-13574637ec1d.pdf