Most workers earning the minimum wage are no longer teenagers seeking additional spending money. According to the Bureau of Labor Statistics, the median age of fast-food workers in 2014 was twenty-eight, and the median age of women in those jobs, who constituted two-thirds of such workers, was thirty-two. The median age of workers in big-box retail establishments was over thirty. More than a quarter of them have children. These workers are typically major breadwinners for their families, accounting for at least half their family’s earnings.
Needless to say, a higher minimum wage would also reduce the necessity for other taxpayers to pay for the Medicaid, food stamps, and additional assistance these workers and their families need in order to cope with poverty. A study by my colleagues at the University of California, Berkeley and researchers at the University of Illinois at Urbana-Champaign found that in 2012, 52 percent of fast-food workers were dependent on some form of public assistance, and they received almost $7 billion in support from federal and state governments. That sum is in effect a subsidy the rest of American taxpayers pay the fast-food industry for the industry’s failure to pay its workers enough to live on.
Whatever wage gains these workers receive are rarely passed on to consumers in the form of higher prices. That is because big-box retailers and fast-food chains compete intensely for customers and have no choice but to keep their prices low. It is notable, for example, that in Denmark, where McDonald’s workers over the age of eighteen earn the equivalent of twenty dollars an hour, Big Macs cost only thirty-five cents more than they do in the United States. Any wage gains low-paid workers receive will more than likely come out of profits—which, in turn, will slightly reduce returns to shareholders and the compensation packages of top executives. I do not find this especially troubling. According to the National Employment Law Project, most low-wage workers are employed by large corporations that, by 2013, were enjoying healthy profits. Three-quarters of these employers (the fifty biggest employers of low-wage workers) were generating higher profits than they did before the recession. Between 2000 and 2013, the compensation of the CEOs of fast-food companies quadrupled, in constant dollars, to an average of $24 million a year. Walmart, too, pays its executives handsomely. In 2012, Walmart’s CEO received $20.7 million. Not incidentally, the wealth of the Walton family—which still owns the lion’s share of Walmart stock—by then exceeded the wealth of the bottom 40 percent of American families combined, according to an analysis by the Economic Policy Institute.
Another reason for the rise in the number of working poor is a basic shift in the criteria used by the government to determine eligibility for government assistance. As I noted, assistance used to be targeted to the nonemployed. Now, those who are out of work receive very little. By 2014, only 26 percent of jobless Americans were receiving any kind of jobless benefit. Typically, recipients of public assistance must be working in order to qualify. Bill Clinton’s welfare reform of 1996 pushed the poor off welfare and into work, but the work available to them has provided low wages and offered few ladders into the middle class. The Earned Income Tax Credit, a wage subsidy, has been expanded. But here, too, having a job is a prerequisite. Although it’s not necessary to have a job in order to get food stamps, it turns out that a large and growing share of food stamp recipients are employed as well. (The share of recipients with earnings has risen from 19 percent in 1980 to 31 percent in 2012. And since about a third of food stamp recipients cannot work because they’re elderly or disabled, far more than 31 percent of those able to work are employed.)
Overall, the new work requirements have not reduced the number or percentage of Americans in poverty. The poverty rate in 2013 was 14.5 percent, well above its levels of 11.3 percent in 2000 and 12.5 percent in 2007. In effect, the new work requirements have merely reduced the number of poor people who are jobless, while increasing the number of poor people who have jobs.
An additional and perhaps more fundamental explanation for the increasing numbers of working poor is found in what has happened to the rest of America. Some would rather deny such a connection and assume the shrinking middle class and redistribution of income and wealth to the top have no bearing on what has happened to those at the bottom. The question we ought to be asking, according to Harvard economist Greg Mankiw, is “How do we help people at the bottom, rather than thwart people at the top?”
Yet the issues are inseparable. As more of the gains have gone to the top, the middle class has lost the purchasing power necessary for ensuring that the economy grows as quickly as it did as recently as the early 2000s. Once the middle class exhausted all its methods for maintaining spending in the face of flat or declining wages—with wives and mothers surging into paid work in the 1970s and 1980s, everyone putting in longer hours in the 1990s, and households falling ever deeper into debt before 2008—the middle class as a whole was unable to spend more. The inevitable consequence has been fewer jobs and slower growth. Both have hit the poor especially hard. Those at the bottom are the first to be fired, last to be hired, and most likely to bear the brunt of declining wages and benefits.
As the income ladder has lengthened and many of its middle rungs have disappeared, moreover, the challenge of moving upward has become more daunting. A smaller middle class yields fewer opportunities for joining it. Shortly after World War II, a child born into poverty had a somewhat better than fifty-fifty chance of becoming middle class by the time he or she was an adult. Today, 43 percent of children born into poverty in the United States will remain in poverty for their entire lives.
Some continue to believe that the poor remain poor because they lack ambition. But what they really lack is opportunity and the political power to get the resources needed to realize that opportunity. It begins with inadequate child care and extends through primary and secondary schools, which helps explain the growing achievement gap between lower- and higher-income children. Thirty years ago, the average gap on SAT-type tests between children of families in the richest 10 percent and bottom 10 percent was about 90 points on an 800-point scale. By 2014 it was 125 points. The gap in the mathematical abilities of American kids, by income, is one of the widest among the sixty-five countries participating in the Program for International Student Assessment. On their reading skills, children from high-income families score 110 points higher, on average, than those from poor families.
The achievement gap between poor kids and wealthy kids isn’t mainly about race. In fact, the racial achievement gap has been narrowing. It’s a reflection of the nation’s widening gulf between poor and wealthy families, of how schools in poor and rich communities are financed, and of the nation’s increasing residential segregation by income. According to the Pew Research Center’s analysis of the 2010 census tract and household income data, residential segregation by income has grown over the past three decades across the United States.
This matters, because a large portion of the money to support public schools comes from local property taxes. The federal government provides only about 10 percent of all funding, and the states provide 45 percent, on average. The rest is raised locally. Most states do try to give more money to poor districts, but most also cut way back on their spending during the recession and haven’t nearly made up for the cutbacks. Meanwhile, real estate markets in lower-income communities remain weak, so local tax revenues are down. As we segregate by income into different communities, schools in lower-income areas have fewer resources than ever. The result is widening disparities in funding per pupil, to the direct disadvantage of poor kids.
The wealthiest, highest-spending districts are now providing about twice as much funding per student as are the lowest-spending districts, according to a federal advisory commission report. In some states, such as California, the ratio is greater than three to one. What are called “public schools” in many of America’s wealthy communities aren’t really public at all. In effect, they’re private schools, whose tuition is hidden away in the purchase price of upscale homes there, and in
the corresponding property taxes.
Even where courts have required richer school districts to subsidize poorer ones, large inequalities remain. Rather than pay extra taxes that would go to poorer districts, many parents in upscale communities have quietly shifted their financial support to tax-deductible parents’ foundations designed to enhance their own schools. About 12 percent of the more than fourteen thousand school districts across America are funded in part by such foundations. They’re paying for everything from a new school auditorium (Bowie, Maryland) to a high-tech weather station and language arts program (Newton, Massachusetts). “Parents’ foundations,” observed The Wall Street Journal, “are visible evidence of parents’ efforts to reconnect their money to their kids”—and not, it should have been noted, to kids in another community, who are likely to be poorer.
As a result of all this, the United States is one of only three out of thirty-four advanced nations surveyed by the Organization for Economic Cooperation and Development (OECD) whose schools serving higher-income children have more funding per pupil and lower student-teacher ratios than do schools serving poor students (the two others are Turkey and Israel). Other advanced nations do it differently. Their national governments provide 54 percent of funding, on average, and local taxes account for less than half the portion they do in America. And they target a disproportionate share of national funding to poorer communities. As Andreas Schleicher, who runs the OECD’s international education assessments, told The New York Times, “The vast majority of OECD countries either invest equally into every student or disproportionately more into disadvantaged students. The U.S. is one of the few countries doing the opposite.”
Money isn’t everything, obviously. But how can we pretend it doesn’t count? Money buys the most experienced teachers, less-crowded classrooms, high-quality teaching materials, and after-school programs. Yet we seem to be doing everything except getting more money to the schools that most need it. We’re requiring all schools to meet high standards, requiring students to take more and more tests, and judging teachers by their students’ test scores. But until we recognize that we’re systematically hobbling schools serving disadvantaged kids, we’re unlikely to make much headway.
In all these ways, poverty among those who work and their political powerlessness are intimately connected.
15
The Rise of the Non-working Rich
As the ranks of the working poor have swelled, so too have those of the non-working rich. Although constituting a far smaller group, their incomes have soared in recent years. They do not need to work because they have ample earnings from income-producing assets such as stocks, bonds, and real estate. Are they “worth” it? To be sure, some of the non-working rich have accumulated their assets through their own savings, based on work that has been “worth” it to the extent we have already examined. When these assets increase in value, though, their current owners are rarely responsible. Assets appreciate for many reasons, such as population growth, limits on the supply of a valued commodity, or, as we have observed with share prices, changes in the incentives and bargaining relationships underlying a corporation. Politics and policy can play significant roles here, as well. For example, the value of a house or apartment building may rise dramatically because people are drawn to a neighborhood by virtue of improved schools and better public transportation or, alternatively, because buyers have more money due to the relaxation of lending standards.
A growing portion of the non-working rich have never worked, however. They have inherited their wealth. Their good fortune lies in being born into families that not only give them every advantage when they are young but also bequeath to them sufficient wealth that they continue to have every advantage regardless of what they do or fail to do for the rest of their lives.
The “self-made” man or woman, the symbol of American meritocracy, is disappearing. Six of today’s ten wealthiest Americans are heirs to prominent fortunes. As I’ve noted, the Walmart heirs have more wealth than the bottom 40 percent of Americans combined.
And this is just the beginning. America is on the cusp of the largest intergenerational transfer of wealth in history. A study from the Boston College Center on Wealth and Philanthropy projects that $36 trillion could be passed down to heirs in the half century leading up to 2061. A U.S. Trust bank poll in 2013 of Americans with more than $3 million of investable assets shows a significant generational divide: Nearly three-quarters of those over age sixty-nine and a majority of boomers just below them are the first in their generation to accumulate significant wealth. For the rich under the age of thirty-five, however, inherited wealth is more common. This is the dynastic form of wealth that, as French economist Thomas Piketty reminds us, has provided the major source of income for European aristocracy for centuries. It is about to become the major source for a new American aristocracy.
The reason for the rise of the non-working rich should by now be apparent. As income from work has become more concentrated, a relatively small number of very wealthy Americans have invested their income in capital assets. They have also invested some of it in politics—either directly, through their own contributions and connections, or indirectly, through their corporations, trade associations, and the managers of their financial portfolios. In consequence, the rules of the game have favored their accumulation of wealth. By 2014, the compounded result of these capital investments and corresponding political investments was to concentrate wealth even faster than to concentrate income.
Consider that in 1978, the richest 1 percent of households accounted for 20 percent of business income. By 2007 they accounted for 49 percent. They were also taking in 75 percent of all capital gains. By 2014, the value of the stock market was significantly higher than it was before the crash of 2008. Accordingly, the top was earning substantially more from their investments and acquiring even more of all capital gains.
Both political parties have been complicit in this great wealth transfer, but Republicans have encouraged it more ardently than Democrats. For example, family trusts used to be limited to about ninety years. Legal changes implemented under the Reagan administration led many states to extend them in perpetuity. So-called dynasty trusts now allow super-rich families to pass on to their heirs money and property largely free from taxes, and to do so for generations. George W. Bush’s largest tax reductions, in 2001 and 2003, helped high earners but provided even more help to people living off their accumulated wealth. While the top tax rate on income from work dropped from 39.6 percent to 35 percent, the top rate on dividends went from 39.6 percent (taxed as ordinary income) to 15 percent, and the estate tax was completely eliminated.
Barack Obama rolled back some of these cuts, but many remained. Before George W. Bush was president, the estate tax applied to assets in excess of $2 million per couple, at a rate of 55 percent. By 2014, it applied only to assets in excess of $10 million per couple, at a 40 percent rate. House Republicans sought to go even further. Representative Paul Ryan’s so-called road map eliminated all taxes on interest, dividends, capital gains, and estates. By 2013, only 1.4 out of every 1,000 estates owed any estate tax, and the effective rate they paid was only 17 percent.
Meanwhile, the tax rate paid by America’s wealthy on their capital gains—the major source of income for the non-working rich—dropped from 33 percent in the late 1980s to 23.8 percent in 2014, putting it substantially lower than the tax rate on ordinary income. Another large and well-hidden benefit enjoyed by heirs to large fortunes is found in a tax law providing that if the owner of a capital asset whose worth increases over his lifetime holds on to it until he dies, his heirs do not have to pay any capital gains taxes on that asset’s appreciated value. These so-called unrealized gains have become a major source of dynastic wealth in America, generating ever-greater value as they pass from generation to generation, without incurring any capital gains taxes. They now account for more than half the value of assets held by estates worth more than $100 million.
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p; Yet the specter of an entire generation that does nothing for its money other than speed-dial its wealth management advisors is not particularly attractive. Nor is it good for our economy and society. It puts more and more of the responsibility for investing a substantial portion of the nation’s assets into the hands of a small number of people who have never had to work for their incomes and have no idea how average people live and what they need. It is also increasingly dangerous to our democracy, as dynastic wealth inevitably and invariably accumulates even more political influence and power.
These growing accumulations of wealth by people who do not work for a living are sometimes justified by their philanthropic generosity. Undoubtedly, super-rich family foundations, such as the Bill & Melinda Gates Foundation, are doing a great deal of good. Wealthy philanthropic giving is on the rise, paralleling the rise in super-rich giving that characterized the late nineteenth century, when magnates (the aforementioned robber barons) such as Andrew Carnegie and John D. Rockefeller established philanthropic institutions that survive today. We are living through what Professor Rob Reich of Stanford University (no relation) calls “the second golden age of American philanthropy.”
It is their business how they donate their money, of course. But not entirely. Donors can deduct such donations from their taxable incomes, and the charitable foundations or endowments that receive them do not have to pay taxes on the income they generate. In economic terms, these deductions and tax-free earnings are the equivalent of government subsidies. In 2011, the last year for which good data are available, they totaled an estimated $54 billion. As Reich has pointed out, these public subsidies are doled out typically under the watchful eyes of the wealthy people who made the donations, without any accountability to the public. If you do not approve of how the wealthy are allocating their charitable dollars, you are out of luck. To put this into some perspective, $50 billion is more than the federal government spent in 2011 on the Temporary Assistance for Needy Families program (what’s left of welfare), school lunches for poor kids, and Head Start put together.
Saving Capitalism Page 15