The wealth gap

Before I set forth on what has spawned the wealth gap in America, here’s a caveat. While I function to a certain degree on intuition, I do my best to validate my intuition with some evidence.

Last week, it was announced that this year’s award in economics went to a trio (James Robinson of the University of Chicago, Simon Johnson and Daron Acemoglu of MIT), who have done extensive research on the inequality of wealth among nations, and how things like institutions, governments and colonialism have affected such inequalities. This research intrigued me because I was curious about the extent to which international wealth gaps mirrored domestic gaps like those in the United States.

Before I cite some of their research, let me intuit for a moment because this is something that I think is at the core of what troubles the economic and political soul of America today.

Generational wealth in America has grown, spawning progeny who were effectively, “born on third base.” I’ve made this point before. If “Jimmy James” inherits a million dollars, sits on it in a stock growth fund averaging an eight percent return over 25 years, he’ll wind up with $6,848,475.20. That’s if he doesn’t add any additional contributions to the initial investment. If he has a job that sustains his family’s needs, you can see how Jimmy James can live well and still pass on millions to his children. Generational wealth; it’s a self-fulfilling material prophecy.

What happens to those who are living paycheck-to-paycheck? Their children don’t benefit from pass-through wealth. And for most of those benefiting from long-term capital gains, their taxes on these “banked” earnings are significantly lower (0 percent, 15 percent, or 20 percent) than taxes on paycheck-to-paycheck middle-class workers’ earnings.

The point here is simply this. Generational wealth keeps expanding the effects of the wealth gap. The top 10 percent of wealth care less about things like inflation, food prices, car prices, energy prices, home prices and mortgage rates. While wealthy families get wealthier, the working, middle-class fights to keep up with inflation and pass anything on to progeny.

In an interview with Geoff Bennett of Public Television, Nobel winner Simon Johnson of MIT spoke briefly about how historically indigenous people in colonized nations were treated very poorly by European colonizing nations with high taxes, state-run enterprises, low wages, and “extractive institutions” like slave trade for example. Many of these extractive practices and institutions have carried on, persisting into contemporary times.

Bennett then asked, “How do you see the role of institutions in economies across the world right now, given the rise of populism and authoritarianism across the globe?”

Simon responded: “So I think there’s a big challenge for institutions, a big challenge for democracy. And part of the problem is that, over the past four decades, we have not delivered on the kind of shared prosperity that was previously promised and that was delivered in the post-war period. So people are disappointed, the middle class has been squeezed. This is a definite problem in the United States, but it’s in other industrial countries also.”

He went on to say: “There’s been a delegitimization of the institutions and a challenge to the way that politics has been organized, the way the economy has been organized. And now artificial intelligence is arriving. This is a major new challenge to economic opportunities for the middle class. It’s an opportunity to do things better, but it’s not an opportunity that we have grasped yet. It’s — right now, it’s a serious challenge.”

Technology and AI?: “Is it helping people primarily with a lot of education, people who can be quite sophisticated in the use of computers? Or is it empowering people who don’t have access and a lot of education to acquire that education, to acquire those skills, to manage their lives better, to be more productive in all kinds of blue-collar and white-collar jobs?… (and) if technologies, undermine the middle class — if the focus of corporate America is replacing people with machines, with algorithms, then we have got a problem, because then you’re going to be pushing even more people down out of the middle class.”

So allow me to go political for a moment. We have a presidential candidate in 2024, Mr. Trump, who is making populist promises to the electorate. A dictionary definition of a populist is: “a politician, who strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups.”

That same populist candidate confesses to having some character flaws. In his own words, he’s described these flaws as simply “childish,” or “personality defects,” again, his words, not mine. Yet the race remains tight. Such flaws in past presidential elections would have meant the quick demise of a presidential candidate. Remember Gary Hart on a boat with Donna Rice? But for many, Mr. Trump’s campaign promises to help the struggling segments of our society appear to override his fundamental character issues. Why? In my view, it’s all about the wealth gap.

Many Trump supporters and epigones say they don’t condone his behaviors, but they think he can nevertheless offer them better economic opportunities. Notably, the nonpartisan Tax Policy Center, says that the proposed extension of his administration’s “Tax Cuts and Jobs Act” (Dec. 2018): “Making the TCJA permanent would cost about $3 trillion over a decade. All households would see their after-tax income increase under such a scenario, but the increase is larger as a percentage of after-tax income for those in the top 20 percent of the income distribution.” He proposes paying for these cuts with tariff revenue.

According to the nonpartisan, non-profit Tax Foundation, “Trump’s reliance on import tariffs to offset the cost of tax cuts comes with major downsides. Tariffs are a particularly distortive way to raise revenue, especially as they invite foreign retaliation. We estimate Trump’s proposed tariffs and partial retaliation from all trading partners would together offset more than two-thirds of the long-run economic benefit of his proposed tax cuts.”

Here’s the bottom line. The middle class has struggled to keep up, especially in the corporate price-gouging aftermath of the pandemic, while the wealthy have benefited from generational wealth, tax policies, and soaring stock values. The middle class is frustrated and many would like to see things turned upside down. Call it shared chaos, and save character for another day.

Yet I believe character is destiny, for people and nations. German author Werner Herzog said it well: “Civilization is like a thin layer of ice upon a deep ocean of chaos and darkness.” My intuition tells me the wealth gap is real. My intuition and integrity also tell me what boxes need to be checked on this November’s election ballot.

Bill Sims is a Hillsboro resident, retired president of the Denver Council on Foreign Relations, an author and runs a small farm in Berrysville with his wife. He is a former educator, executive and foundation president.