The Growing Gap between Rich and Poor
The gap between the rich and the poor has moved to the extreme ends over the last decade. The rich have continues to gain more wealth and grow richer whilst the poor have remained to be poor. The gap between rich and poor depicts the inequality in income distribution between the rich and the poor.
There are various reasons for the increasing gap between the rich and the poor in the society. In most cases, these reasons are related. Research study on gap between the rich and the poor affirms that; culture, innate capability, globalization, education, labor markets, reforms on taxes, government policies, change in technology, gender, racism and differences in wages and incomes as the main causes.
The difference in the wages and salaries is the core reason for the growing gap between the rich and the poor. The job salaries are indomitable by the supply and demand in the commercial market. For instance, when the supply of labor is high and demand for working force is low, the wages for the few available job opportunities will be as well low.
Besides the market related factors that affect the differences in the wages, initiatives facilitated by the government such as tax reforms and policies can also result to increase or decrease in inequality. Social scientists and policy developers argue on the efficiency and effectiveness of the inequality regulations strategies. Some of the governmental distinctive initiatives which can minimize the difference between the rich and the poor involves; educating the public that enhances the skills of the work force supply in order to minimize the wage difference related to education factors.
The implementation of tax reforms programs which will impose relative higher taxes on the rich compared to the unfortunate will be very significant in regulating income differences within the society. Establishment of minimum income legislative initiative will assist in enhancing wages for the unfortunate laborers. An initiative to subsidize product prices will enable consumers to purchase goods and services at relatively low prices. These initiatives will proof to be very vital in reducing the gap between the rich and the poor within the society.
In general, the situation in which only the rich continues to be rich can be reduced in not solved through emphasizing more on education, investing in human capital and economical literacy. The problem has been there for ages and the gap seems to widen by the dawn of each new day.
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A major issue in America today is the growing gap between the rich and the poor, and the popular narrative is that the disparity is caused by capitalism run wild and only the firm hand of government can fix the problem. But what if this narrative has it backwards? What if the growing wealth disparity in America is actually caused by the government?
Take Warren Buffet, a man often at the center of this debate, as not only is he a billionaire, but also a vocal advocate for higher income taxes on the rich. Mr. Buffet’s focus on taxes on income is curious, as he didn’t become a billionaire by earning a high income, but rather from owning assets, like shares in Berkshire Hathaway. Many are aware of his acumen in making investments that have a “margin of safety” – or minimal downside – but few are aware of the greatest source of such safety for Mr. Buffet in recent years, the US Government.
During the 2008 crisis Buffet’s investment portfolio was full of wobbly financial companies like GE and Wells Fargo. In the span of 2 months Berkshire stock – and Mr. Buffets net worth – lost half their value. In response, Buffet invested more in collapsing financial companies like Goldman Sachs, then went public demanding a bailout. The Treasury Department and Federal Reserve responded with program after program to keep troubled financial entities alive, some of them invented specifically for Buffet holdings like GE. Just two years later, thanks to the impact of the bailouts and the Fed’s programs, Berkshire stock rebounded sharply. Mr. Buffet’s investment in Goldman Sachs, which he himself admitted was a bet on the bailouts, made billions and continues to earn him a profit years later.
Mr. Buffet wasn’t the only person that benefited from the bailouts, but wealthy citizens like him, who tend to hold the majority of assets in America, benefited disproportionately. The untold narrative of how Warren Buffet and others like him “get richer” is how they managed to not get poorer, even when their bad investment choices dictated such.
During the same 2 year span when Buffet’s net worth rose sharply, some 12 million Americans went on food stamps. Countless middle and lower class Americans lost their jobs and their homes. Small businesses were wiped out. These Americans didn’t get a bailout. Those that benefited the least from the boom years suffered the most during the bust. When people tell me that the bailouts saved the economy, I like to ask them, for whom?
On March 5th of this year, the Dow Jones Industrials Average recorded an all time high after an impressive rally from the 2009 lows. It’s widely agreed that the policies of the Federal Reserve are a big reason why. Fed Chairman Ben Bernanke often points to rising stocks as a measure of success for his programs. Perhaps he likes to boast about stock market gains because he can’t boast about major jobs creation or economic growth. In the 4th quarter of 2012 our GDP only grew by 0.1%, and the economy can barely create enough jobs to keep up with population growth. The latest report by the Labor Department showed only a paltry gain of 88,000 jobs in the month of March. Personal Income has been falling for years, and we are amid the worse period for wage growth in over a decade. The stock market has done well, but two thirds of all stocks are owned by the wealthiest Americans. Only the rich have benefited from the Fed’s largess.
The Fed has also lowered interest rates, and billionaire Mark Zuckerberg was able to get a mortgage at a rate of 1%. Most Americans would consider themselves lucky if they could get any mortgage, let alone at such paltry rates. Small business lending remains anemic and credit card rates remain high. Mr. Buffet on the other hand just announced a major acquisition financed mostly by cheap debt. Such leveraged buyout deals are lucrative when rates are this low, but ironically by law only millionaires are allowed to invest in the Private Equity Funds that utilize them.
The disproportionate gain by the wealthy from Federal Reserve actions as via the stock and bond markets is captured in a recently published Pew Research Center report on the first 2 years of the recovery. Their analysis reveals that from 2009 to 2011 the mean net worth of the top 7% rose by 28%, while the mean net worth of the lower 93% actually fell. The sharp rebound for the wealthy had nothing to do with their investment acumen, their risk-taking foresight or their hard work, as it was entirely driven by Government and Federal Reserve action.
There is one aspect of Fed action that impacts everyone, even the poor. The Fed’s easy money policies have driven up commodity prices. Despite gasoline demand being near a decade low, and supplies so plentiful that America now exports gasoline, the national price at the pump recorded another record this winter, and Americans are spending a higher percentage of their pre-tax income on gasoline than ever before. High gasoline prices hurt the poor and middle class disproportionately.
The next time you ponder the governments role in the growing wealth-gap, ask yourself this simple question: Since the start of the crisis our government has borrowed over $6 trillion and printed several trillion more. Into whose pockets did that money go?
(For an analysis of how out tax code also contributes to the growing wealth-gap, check out my essay here)