Introduction
Wealth inequality is an economic principle that has existed since the earliest economies, but it was manageable as only the ruling elite largely held the wealth. However, with the emergence of capitalism, particularly in the Industrial Era, where virtually anyone could break through, the gap has gradually increased. The primary counterargument is that capitalism allows anyone who either works hard or has great business ideas to reach wealth, so it serves as an incentive while promoting innovation. The rich-poor divide is part of the global trend, previously associated with economically underdeveloped countries with high levels of corruption.
Now, developed industrial nations such as the United States find themselves facing this prominent socio-economic issue. Wealth inequality is a detrimental concept to social well-being as financial resources become concentrated in the hands of the few at unprecedented levels while leaving the majority struggling and starving for basic needs, becoming worse over time and with the government currently having modest solutions largely in the form of a social safety net.
Background
Wealth (economic) inequality is the unequal distribution of total assets and net worth (assets – liabilities) among residents of a country. There are many means of measuring inequality. One is income, which is how much money is earned from wages and other employment-related pay (bonds, stock, bonuses). There is the Gini coefficient, measuring inequality across the whole society; the lower it is, the better equality there is.
While most OECD countries have a score below 0.32, the U.S. index is at 0.38 (“How is Economic Inequality Defined”). People in poverty are those in the lowest socio-economic class, having very little wealth and usually unable to access goods and services that represent an acceptable standard of living. Another measure of inequality is the poverty gap, representing “the ratio by which the mean income of the poor falls below the poverty line” (“Poverty Gap”). The poverty gap helps to identify the poverty level in a country for the population aged 18-65, which commonly increases as the wealth divide grows.
Statistics
The gap in wealth has been a gradual process since the industrial revolution and the rise of large businesses and monopolies in the late 19th and early 20th centuries. In the modern era, the period between 1950 and 1980 had relatively low inequality, but it began to rise rapidly since then. With the establishment of stock markets, the rise of corporations, and subsequent instruments to create wealth, the divide has further increased. Notably, as seen in the graph below, the lower income wealth first increased but then drastically decreased to pre-1983 levels by 2018, largely due to a series of economic crises, including the Great Recession of 2009.
Meanwhile, the upper-income bracket has increased its wealth by 85% over the same 40-year period and now has a 79% share of U.S. aggregate wealth while making up a small portion of the population. In 1989, the richest 5% of U.S. families had 114 as much wealth as families in the second quintile, $2.3 million compared with $20,300. By 2016, this ratio had increased to 248” (Horowitz et al.). Approximately 37.2 million Americans are living below the poverty line, with rates jumping to 11.7% in 2020 in combination with the effects of Covid-19 (Long). At the same time, as the wealth divide increases, the poverty rate increases.
Causes
The causes of poverty are consistent of multifaceted factors based in institutional and social influences that directly and indirectly create a repeating pattern of living that propagates poverty. Most poor families consist of blue-collar workers, whose jobs heavily depend on volatility of the labor market, such as the availability of positions and wages paid. Manual labor workers are usually paid little, easily replaced, and many tasks are being automatized. Unemployment rates are traditionally much higher for low-skill workers. Furthermore, education is an indicator associated with poverty. The better the education statistically results in better income in the future labor market.
Those with lower levels of education such as a high school diploma/GED will remain at the bottom of the income ladder. At the same time, they cannot earn enough to send themselves or their children to college, highlighting the cyclical nature of poverty. Demographics may play a role as well, such as single-parent households are significantly more likely to be under the poverty line, with 40.7% of being in poverty, while only 8.8% remain for married couples (Haveman).
Meanwhile, the rise of economic inequality is tied to a range of macroeconomic factors including globalization, technological shifts, the decline of the working class and value of the minimum wage. As mentioned, people at the lower levels of the economic ladder experience limited economic opportunity and mobility in the context of rising inequality. This is known as the Great Gatsby Curve (Horowitz et al.). As a result of the inequality, those that are disadvantaged have less political or union influence, become geographically segregated by income, and usually lack the access to basic needs such as quality education and healthcare.
The phrase “the rich get richer and the poor get poorer” is not a cliché, but a reality under an economic process known as wealth concentration. The rich create new wealth which remains concentrated in the hands of the already wealthy households, because they have the leverage and resources to do so (Leung). However, then economic inequality is a vicious cycle for most individuals since not everyone has the capability to ‘break out’ with the next great idea (ironically in the modern era, even those small companies that do try to develop something innovative oftentimes get bullied out of the market by the large firms).
At the same time, the adage of ‘working hard’ is no longer relevant as will be discussed in the next section, as one can never earn enough at minimum wage to even come close to breaking out of poverty with the rates of inflation, and the threat of layoffs or robotization of low-skilled labor.
Minimum Wage
The current federal minimum wage in the U.S. is $7.25, increased for the last time in 2009. This period of 12 years represents the longest period that the minimum wage has not been raised, despite the inflation rate increasing 27.86%. The inflation rate means that prices have increased for good and services. Therefore, the purchasing parity of $1 is nearly 30% less than it was 12 years ago, while the wages have remained stagnant.
While some states have raised the minimum wage, the majority will not budge until there is a federal mandate. In many of the households in poverty, adults work at or near minimum wage, some even below it is relying on tips despite the practice being highly controversial. As a result, with passing years, the purchasing parity and ability to survive of these households at minimum wage decreases, pushing them further into poverty rather than economic opportunity. Recent proposals by experts and the Congressional Budget Office suggested that “the $15 federal minimum wage would have boosted the earnings of low-wage workers and decreased poverty” (Parrilla and Liu). However, realistically, many metro areas in the United States have such high costs of living that sustainable living wage for a family is over $20 an hour.
The Issue of Race
Race is an unfortunate indicator of poverty and strongly affected by inequality. This is largely due to the social history of the U.S. which placed African Americans in slavery, and after the Civil War, strongly limited any potential opportunities for development or wealth creation for any minority. “Racial identity is a measurable, significant, and persistent predictor of labor market outcomes” (Wilson). Black workers are more likely to be unemployed, regardless of their level of education, being almost 2:1 ratio compared to whites. The black-white wage gap is at 26.5% on average, larger than it was 40 years ago.
Wage inequality persists at both hourly wages as well as salaried employees, with the ratio between black and white bachelor’s-degree holders at 77.5% (Wilson). Not all minorities have low incomes and are prone to poverty. Asian households have higher incomes than other ethnic groups, but this is due to a significant portion of Asians immigrating to the U.S. for high-skilled labor jobs or have wealth from previous generations. Meanwhile, black and Hispanic have the highest poverty rates, 28 and 25 percent respectively (Haveman). This is largely attributed to wage discrimination combined with lower school attainment or skill training persistent in the cycle of poverty.
Difference Across States
Poverty levels can often differ significantly between states, and even within the state itself. The U.S Census Bureau collects and analyzes data periodically from each state, publishing an official poverty rate based on a pre-tax income threshold based on cost of minimum diet and household members. However, the official poverty rate has been criticized for not presenting a realistic picture of the ongoing status quo. “As federal welfare spending increased dramatically over the past 50 years, many critics point out that the official poverty rate may not provide the most accurate picture of how many Americans are struggling financially” (Comen).
Therefore, since 2011, the Bureau publishes a supplemental rating highlighting differences between states. The supplemental poverty rate in California is considered the highest at 18.1%, states in the median are typically around 11-12% such as Virginia, Delaware, Colorado, while the states with lowest supplemental poverty rates are in the 6-8% bracket (Comen). The supplemental rate is calculated on the range of factors which ultimately influences the difference between states such as variations in cost of living, expenses for healthcare and food, taxes, and anti-poverty subsidies. It is expected that locations with ultra-high costs of living such as California and New York and relatively aggressive taxes will have higher poverty rates despite expansive anti-poverty measures.
U.S. Government Interventions
The U.S. government in cooperation with state governments runs a range of anti-poverty programs in the attempt to reduce the inequality gap and provide the fundamental needs for families meeting the poverty threshold. Some of these credits include Social Security, refundable tax credits, Supplemental Assistance Nutrition Program (SNAP), Temporary Assistance for Needy Families (TANF), child credit, school lunch programs, unemployment payments, and housing subsidies, among others. “Despite the effectiveness of these programs, however, the official poverty rate is widely believed to grossly underestimate the true level of economic deprivation in the United States” (Frohlich et al.). While these efforts are helpful, they are largely considered to be a ‘drop in the water.’
Covid-19 Impacts
The COVID-19 pandemic has unfortunately contributed strongly to increased poverty levels and the wealth divide. Multiple closings, slowdowns of the economy led to more than 20 million Americans to lose their jobs. Meanwhile, price hikes on basic products, increased or backed up rents, and for many, the healthcare costs began piling up, resulting in rapid deterioration of economic well-being for many households.
At the same time, the wealth of the richest elite increased by more than $1 trillion as stocks rebounded and demand for consumer and tech products increased during lockdowns. “But many billionaires—who often have much of their wealth tied up in individual companies, or portfolios of investments in things like private equity and hedge funds that are not available to average Americans—are faring much better” (Peterson-Withorn). The instruments used to create wealth such as received a boost from the stock market, while the lower and middle-class who have little access to the market either practically or financially, were left behind.
Sustainable Solutions
The issue of poverty and the wealth gap is evidently complex. There are no simple solutions, and it will require a multifaceted approach. One attempt is being made by Pres. Biden and the Democratic party through their multitrillion spending package. It aims to tax the ultra-rich and corporations, so that a greater share of their commercial wealth is used for the government programs.
At the same time, the package seeks to improve a range of social safety nets and infrastructure with the hopes of supporting the households in poverty, proving opportunities for education or vocational training, ensuring greater access to fundamental services, and providing jobs working on the various infrastructure upgrade projects (Iacurci). However, this deal seems unrealistic in the current political partisanship, and will likely be severely cut back.
It is critical to focus on priority areas to achieve sustainable development. “Addressing economic inequality would almost certainly require strengthening social protection systems, addressing low wages and creating decent jobs” (Shaheen). It is also expected that many of the ultra-wealthy will come forth to resolve the issue in the context that it becomes an existential threat. Already a range of the billionaires have pledged their fortunes either in life or after their death to addressing issues in inequality or those that may help to reduce it indirectly. However, it is recommended that a more unified and concrete strategic approach is developed by the government and relevant organizations to promote solutions to wealth inequality.
Conclusion
The wealth divide is crippling the United States in many ways. The country cannot economically and socially prosper and remain a strong democracy when the few have such tremendous wealth while many struggle to feed their families. It is an economic, political, and moral crisis of modern capitalism which must be addressed. Despite being a well-developed nation with jobs and infrastructure, even the middle-class find themselves deeply in debt and living paycheck to paycheck, that is not to account for homeless and those living below the poverty line.
There are no easy solutions to poverty and inequality, but more radical measures must be taken by the government, including from members of both parties regardless of their ideology. Furthermore, the ultra-wealthy, those who have the money that could not be spent in several lifetimes, should come forward and pool their resources towards addressing the issue in a meaningful manner. This can range from raising wages from the bottom-up in their various enterprises to social safety nets in the form of healthcare, food safety, and other key social needs.
Works Cited
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Frohlich, Thomas C. “Progress in Fighting Poverty in America Has Slowed Despite Recent Economic Recovery.” USA Today. 2018. Web.
Haveman, Robert. “Causes of Poverty.” Institute for Research on Poverty, 2013. Web.
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“How is Economic Inequality Defined.” The Equality Trust, 2021. Web.
Iacurci, Greg. “How Biden’s $3.5 trillion economic plan compares to LBJ’s Great Society and FDR’s New Deal.” CNBC. 2021. Web.
Leung, May. “The Causes of Economic Inequality.” Seven Pillars Institute. 2015. Web.
Long, Heather. “Nearly 8 million Americans Have Fallen into Poverty Since the Summer.” The Washington Post. 2020. Web.
Shaheen, Faiza. “Reducing Economic Inequality as a Sustainable Development Goal.” NEF, 2014. Web.
Parilla, Joseph, and Sifan Liu. “A $15 Minimum Wage Would Help Millions of Struggling Households in Small and Mid-Sized Cities Achieve Self-Sufficiency.” Brookings. 2021. Web.
Peterson-Withorn, Chase. “How Much Money America’s Billionaires Have Made During the Covid-19 Pandemic.” Forbes. 2021. Web.
“Poverty Gap.” OECD iLibrary, 2021. Web.
Wilson, Valerie. “Racism and the Economy.” Economic Policy Institute. 2020. Web.