A Financial Times article, “$740-bn pay gap threat to US recovery”, provides information that tends to explain the hesitant recovery from the sharp recessions from which our economy has hardly recovered.
It is pointed out that in post war years, 63% of US national income went to compensate workers. Today it is only 58%. If the share had remained at 63%, “workers would earn an extra $740bn this year, about $5,000 per worker…”
Furthermore, this goes against the normal pattern during recessions. In the past workers shares actually increased and profits decreased!
It then points out that rather than earnings dropping and labor share increases per the normal pattern, the reverse has occurred. “Profits in the corporate sector now earns 25-30 per center greater than they were before the recession.”
It hypothesizes, “The decline in the labour share, along with a shift of labour income towards higher earnings, may be an important part of why the US economic recovery is sluggish.”
We may be facing a long term trend as a result of technological progress and the availability elsewhere in the world of inexpensive labor. But there is a fair and simple solution.
Since capital is receiving a far greater earnings, for which there is little reason to invest, and labor is earning much less and thus consumer spending is restricted, we need only increase the Federal Income Tax from our near historic low of 35% on the share of earnings over $250,000 a year to say 50% on over $500,000, still a low number as compared to the 1950s and 1960s. The individual income tax has been the largest single source of federal revenue since 1950, averaging just over 8 percent of GDP.
The government would be able to invest more in infrastructure and education, among other things and, as a result, more people will get back to work, creating a virtuous cycle.
Somehow over the past three decades the general population has fallen prey to the self serving canard that “Government is the problem” and we should live in a winner take all economy. We are not a business but rather a country, hopefully a social democracy. Our goal should and used to be the well being of all our people. We have a mixed economy whereby government has played a vital role in the past with canals, highways, unemployment compensation, social security, basic research, education and so forth.
Rich people used to pay high taxes with far less whining than we hear now. They paid up to 80% in the 1950s on their top income. The most they are required to pay now on earnings above $250,000 s 35% and 15% as capital gains. Why?
The other equally serious problems are the folly of a health care system which costs at least 6% of Gross Domestic Product more than all other advanced nations and achieves mediocre results except for the privileged, and the senseless wars and the massive defense budget for the benefit of the military industrial complex.
Tragically, excessive campaign finance funding courtesy of the Supreme Court’s “Citizens United” ruling will make resisting powerful interests groups all the more difficult.
