President Obama declared Income Inequality to be the “defining issue of our time.” But Income Inequality has been around and existed since the dawn of time, since mankind was created. How can it be THE DEFINING issue of OUR times?

Funny, there have been so many “defining” issues: jobs, the economy, healthcare, global warming, and more. It seems that he “pivots” from one defining issue to another one as soon as he fails on the previous one. I naïvely thought that if you are a president, a DEFINING issue is the ONE issue that you focus on for the entirety of your presidency; not one that suddenly comes to you five years into your presidency.

I have no doubt that the president thinks that Income Inequality is a bad thing. That adds to the long list of views he is wrong on, bad policies, wrong solutions, and total incompetence of his administration.

In order to analyze this issue, let’s start with some facts:

  1. Income Inequality is the natural state of things. I will go further and say that “greed is good.” Without it we would all be dead. I mean that literally. If we were all equal we would have zero incentive to work; we would not try to get better, we would just lie in bed and die. The fact is that the form of government that aspired to income equality—communism—IS dead and practically passed from the world. Why? Because it is not natural and not sustainable. We all want to be better than the other. So quit moaning about it.
  2. Income Inequality has been on the rise for a long time but its rise escalated and the gap widened materially during the last four years under President Obama. It would be nice if he recognized it.
  3. The only times when Income Inequality reduces is when the economy is booming and growing fast. This clearly has not happened under Obama.
  4. Income Inequality in the U.S. is materially affected by globalization. The fact that there are billions of cheap workers around the world competing with the U.S. labor force contributes heavily to the weak “pricing power” that U.S. labor has, and as such, favors capital. This can also be shown by the increase in corporate profit margins.
  5. In real $ terms, median household income in the U.S. in 2012 was $51,371, a 4.4% decrease since 2009. In 2007, the median household income was $56,189. It dropped significantly in 2008 and 2009 due to the recession and reached $53,760 in 2009. What is unusual is that since the recession ended in the second quarter of 2009, it continued to reduce further. Clearly whatever policies the Obama administration was promoting did not help this trend.
  6. The U.S. is in a pretty good place when comparing Income Inequality to the rest of the world. Its Gini Coefficient (the best measure of Income Inequality although far from a good or reliable one) is below 50% with 0% representing totally equality and 100% the ultimate inequality.

Looking at all the above, it is clear that Income Inequality is NOT the defining issue of our time and that the president has not helped it at all during his time in office. It is also not, based on past experience, a vote winner in elections. I am sure that the suppliant media always standing at the president’s beck and call would do their best to change that by carpet bombing us with stories, coverage, and one-sided facts, but ultimately in the voting booth, we want to be BETTER than our brothers. We do NOT want to be equal to them.

Having said that, there is one statistic that is of concern and should be considered: The share of corporate profits out of GDP has been growing now for the last thirty years and has reached a level of about 11% as compared to about 6.5% average over the last fifty years or so.

Back in the middle of the 1800s, the first industrial revolution generated riots and much social upheaval. We are now in the throes of the second industrial revolution generated by the amazing advance of technology on the one hand, and globalization on the other hand. The combination of the two allows capital to replace expensive labor with cheap labor or with no labor—by utilizing technology. This generates more and more profits and higher return on capital investment. There comes a level at which this is not healthy for a functioning democracy and will cause social upheaval.

The lessons of the first industrial revolution are that at the end, such revolution benefits consumers at large- society- by increasing the standard of living through higher productivity, but it is a legitimate role of government to help in restoring the balance between the return on equity, corporate profit margins, and labor pricing power.

The question is, how does government do that? The answer is exactly the opposite of what Obama has done: Free the markets and create the environment for fierce, aggressive competition.

The Obama administration’s policies have caused the free market to stall. The recovery from the recession of 2008 is very slow, much slower than was to be expected. The atmosphere of hostility to business, the shattering of the rule of law, and the huge amount of additional regulation and crony capitalism have all contributed to make the market less competitive. If firms do not have to compete, they will not lower their prices and will have great returns on equity without the need to increase revenues. Lowering of prices generates more demand, causes firms to sell more and to need to produce more, and thus hire more labor. Unless the market will be cut loose from all the shackles put on it by Obama, competition will not be rekindled and demand for labor will not be strong.

Globalization is a force for good. There is both empirical and research-based proof of that. It does not, however, go without some dislocation and creative destruction. The best thing government can do to alleviate these painful adjustments is to make the market as free as possible and to create a good social safety net. The market will do the rest. It will take time but it will reach equilibrium.

In the meantime, here is my suggestion to greatly reduce the Income Inequality.

First some facts:

  • As mentioned above, median household income in the USA was $51,371 in 2012.
  • In 2012, the poverty level in the U.S. was defined as a family of four earning less than $23,050.
  • The U.S. budget for 2013 was about $3.5 Trillion. Of this budget, 60% or $2.1 Trillion related to entitlement programs.
  • The budget deficit for 2013 was about $600 Billion or so.
  • U.S. population is about 315,000,000.
  • By definition, 157,500,000 live below the median income.
  • According to the census bureau, about 16% or about 50,000,000 people live at or below the poverty level.

So, my solution:

  • Eliminate all, 100% of ALL, entitlement programs, thus saving $2.1 Trillion!
  • Take $600 Billion of those savings and eliminate the budget deficit!
  • Take $250 Billion of those savings and eliminate corporate tax. Make it zero, thus VASTLY increasing the competiveness of the U.S. which will allow the free market to do what it does best—create a boom and like the rising tide that will “lift all the boats.”
  • Take the reminder of the savings, $1.25 Trillion, and distribute it in cash to the 157,500,000 people living below the median income with a strong bias toward those living at or below poverty level.
  • As an example, give each household living at or below poverty $10,000 per annum per person so that the prototypical family of four will get additional $40,000! So if before that household had an earning of $20,000, it will now have earnings of $60,000, which is already above the current median income.
  • That would leave the remainder 100,000,000 people or so earning below median income to receive $7,500 per person and if we use the same typical family of four, that would be $30,000 surely pushing them well above the median income.

This sounds too good to be true and for sure it has some major problems in achieving it, BUT it is achievable if this country had a real leader, a forward courageous thinker who was prepared to lead and understood the way things worked.

Let me explain how I created something out of nothing. There are three elements to my proposed reform: 

  • Telling people living above the median income level that they will get ZERO out of the entitlement programs spending. A big part of the entitlement spending goes to people who earn above median level income, via Social Security, Medicare, etc. The notion that these programs are the Holy Grail and should not be touched is nonsense. That is the KEY to resolving the problem. Of course, in reality, one cannot do so in one fell swoop as I suggested above. One will probably need to start it slowly by graduating the effects so that people already on Social Security and Medicare will continue to receive those benefits without change. Those close to it will have a small reduction and the elimination will affect only people who are say 50 years and younger. The ability of the U.S. to bridge the fiscal gap (between an all-out elimination and the gradual one) is beyond doubt. With such a fundamental reform as mentioned above, the market will be happy indeed hungry to buy U.S. debt as the long-term outlook for the U.S. will be hugely improved. This proposal is, in effect, what is known as “means testing”: Something that is CORRECT, FAIR, and ABSOLUTELY necessary. It is critical; THIS is the real defining issue of our times—means testing of entailments. Warren Buffet should NOT get social security even if he then turns around and gives it all to charity. The popular notion that “it is my money, I paid for it—is rubbish! It is a tax like any other tax and should be put to use where it does the most good.
  • In fact, a big portion of the so-called additional income that families living in poverty will receive as a result of my proposal is already being received by them; programs such as food stamps, unemployment, ObamaCare, and on and on. The problem is that it does not count into the household income and as such does not show in the Income Inequality statistics. The Income Inequality is significantly lower due to all these transfer payments. But in reality these people do not feel as if they earn that much. Food stamps are not cash. You cannot spend ObamaCare’s subsidy on education or on vacation. The freedom of people to do whatever they want with their money will, on the whole, increase their satisfaction and their happiness. Of course there will be the minority of cases who will abuse that money and who will die or whatever; there will be the horror story here and there. But we have these stories now too. You cannot save all the people all the time. Overall people will be happier the market will be freer and the economy will grow strongly as a result, and thus create additional incomes for everyone.
  • The elimination of government bureaucracy dealing with all these entitlement programs will free a significant amount of cash to give to the people. I do not have exact statistics here but I am absolutely sure that of the $2.1 Trillion of total entitlement spending, AT LEAST 10%-15% is wasted on administration, fraud, and inefficiency. Thus, about $300,000,000 will be transferred to the people in addition to what they are receiving today. That alone is worth $6,000 for each person living in poverty or $24,000 for the typical family of four—DOUBLING their income. This is a net benefit.

In practice such a reform will have to be more nuanced and researched to provide a fair solution and get to the right number and gradual steps to achieve the desired effects. But in principal it is sound and doable, except that we lack real leaders, people with vision and courage who are willing to think outside the box, take a political risk, and LEAD.

It is strange that in the annals of the world, the real great leaders who come so infrequently are mostly those that excel in conflicts, wars, and foreign affairs type crises—Washington and Churchill are two such examples.

Where is the Regan/Thatcher team of our generation?