K

A topic of conversation these days is the impact of Covid 19 on distribution of income. Numerous articles point out that the stock market is healthy and benefiting rich people, while lower income people’s jobs and wages are bearing the economic brunt of Covid.

We now have a letter to illustrate these impacts, the K. It suggests that the upper part of the K has fortunes rising for rich people; the lower part shows incomes falling for everyone else.

As in many things that have to do with poverty and distribution of income, I cannot take exception with the facts. Surely those at the lower end of the income distribution are subject to disproportionately negative impacts when the economy tanks. Last-in-first-out is an inventory term but applies well to employment and jobs. Often those most recently hired in an expansion phase are the first to go when things turn down. Those hired near the ends of expansions are generally people who were not the first choices of companies.

Even though we agree largely on the facts, the issue is always what to do about them. Here is where it gets really messy. What do we do in this country to reduce the impact of economic downturns on our population? Surely people will be injured by recessions. How do we share those burdens better?

Answering that question is messy because it involves both politics and economics.

We have a progressive tax system that was supposed to be part of the answer. If you make more money this year, you might be bumped up to a higher tax bracket. The richer you get, the more money the country takes in to distribute.

That seems straightforward except for the fact that the tax code is wacky. As we have read lately, rich people in America sometimes seem to pay no taxes at all. If we like a progressive tax system, then why let them get off the hook? Write-offs like those that let you deduct charitable donations are designed to satisfy other goals. Let’s not list all those write-offs here. Argue about this one or that one – but let’s be clear that a lot of them exist and they often do a lot of good. A rich person who chooses to take advantage of these write-offs can reduce how much she owes in taxes. 

To have more money for lower income families, perhaps we should get rid of these write-offs. That becomes a very economic and political decision. What if preventing a write-off lowers how much money people contribute to not-for-profit institutions? Who gets hurt? That’s economics. But there is also the political dimension. How do we pass legislation to get rid of write-offs? Which ones do we end?

Write-offs are one of many challenges. What about the stock market? Those writing about inequalities point out that rich people have done well lately as evidenced by the stock market. Surely the stock market has bounced back, but like many other economic dimensions of the economy since last January, it has also taken a hit.

But what about the stock market? Is it really owned by Richie Rich and no one else? I don’t think so. One economic reality is that you are not going to own stocks if (1) you don’t save and (2) you don’t work for an institution that puts money into stocks for you. More than half of the population in the USA own stocks. Many of them are very rich. But many have great pensions earned by working for the government and private companies. Still it's only about 50% of the population.

It is not surprising that poor people – who don’t work for companies with good pensions and who often earn so little that they have very little to save – don’t own many stocks or other financial and real assets.

That is a main source of inequality – the stock market’s performance favors those who own stocks. What do you do about it? To answer that question, we are back to economics and politics again. How do we help those at the lower end of the income distribution have permanently higher incomes? How do we help them to earn more and save more without throwing the baby out with the bathwater? Or in political terms, how do we get government to agree on effective ways to accomplish this?

To those who point a boney finger of blame at one party or at rich people, I challenge you to do less pointing and more hard thinking about how we effectively help those with lower incomes earn and save more. Wouldn't it be nice if our programs attacked the real causes of poverty and moved people permanently to higher levels of income and wealth? Or is it sufficient to transfer money to them so that they can continue to live on the edge of poverty. While some people may never be able to live through their own efforts, I am guessing that the situation of most poor people can be improved by helping them overcome obstacles. That sounds better to me than helping them stay poor forever.