Writing Project 2

Michael Soliman

ENG 112

Writing Project 2

Sunday, December 14, 2014

Economic Inequality in the United States

Economic inequality is described as the gap between the rich and the poor in income and wealth in other words economic inequality is called wealth gap. President Obama defines economic inequality as the “challenge of our time” (RUGABER). There are many debates about economic inequality, and how bad it is. Some people say that economic inequality is a growing social problem. Other people say that inequality is important for investment. Other opinions argue that too much inequality is destructive, and it can prevent long term economic growth. This essay would explain the problem of economic inequality, and its bad effects on the society. In addition, it would propose solutions to the problem. Moreover it would offer justification for the proposed solutions.

 Three decades ago, people of the United States of America experienced symmetric growth in their income. No matter how much they made, their income experienced the same growth rate, but since 1980, people who are richer experienced high growth in their income while the income growth dropped for the poorest 20 percent. The richest one percent of the country experienced an economic growth of 31 percent from 2009 through 2012 while the economic growth for the average person was 0.4 percent only (RUGABER).

The top one percent of the country consists of lawyers, bankers, and the founders of successful companies. The average income for an individual from the top one percent was at least $394,000 in 2012 with economic growth of 22.5 percent. The average middle class made about $56,080 in 1999 and it dropped to $51,017 by 2012 (RUGABER). Some economists argue that economic inequality is important to reward people who work hard and show talent, but the wealth gap that we are experiencing now is too wide that it introduces threats to the economy. Economic inequality can slow the economic growth of the country because the richer save more than other do. Also economic inequality causes carless borrowing. Studies show that “gross household debt was relatively stable the 1960s and the 1970s and since the 1980s has jumped out of proportion with real activity, rising between 1981 and 2003 from 66% to 113% of disposable personal income” (Lacoviello 930).

 In addition economic inequality limits social mobility. Limited social mobility means that if one is born in a poor family, one will likely be poor throughout one’s entire life and the opposite is true so if one is born in a rich family, one will likely become rich. Countries that show economic equality such Sweden and the Scandinavian countries have more social mobility than the United States. In the United States, “A child born in the 20 percent poorest families has only nine percent chance to reach top 20 percent as an adult” (RUGABER). Studies show that inequality leads to stress and status anxiety which might lead to depression, and stress related health issues (Booth). Also studies show that economic inequality decreases the trust between the individuals. People experience more trust between each other when there is economic equality (Brown).

There are many solutions to the economic inequality problem. One of the solutions to the economic inequality problem would be raising tax rates for wealthy people. In 2013, President Barack Obama made economic equality a priority. He succeeded in imposing higher tax rates on income above $398,350 (Rugaber). Economists Emmanuel Saez and Thomas Piketty argue that raising tax rates for the wealthy people up to 50 percent, or 70 percent or even 90 percent would solve the economic inequality problem (Lowrey).

Another solution for economic inequality would be raising the minimum wage. In 2013, President Barack Obama proposed raising the minimum wage in order to decrease the gap between the rich and the poor by suggesting a higher minimum wage rate of $10.10 per hour. The Economic Policy Institute recommends this proposal by arguing that “Raising the minimum wage would help reverse the ongoing erosion of wages that has contributed significantly to growing income inequality” (Cooper). The economist argued that despite the small increase in the minimum wage, it would hike pay, and it would not introduce any threats to jobs.

One of the solutions would be passing a maximum wage law which “would limit the amount of compensation an employer could receive to a specified multiple of the wage earned by his or her lowest paid employees” (Hanley). Hanley argues that in 2011 the average income of a company CEO was 380 times the average income of American worker which was $34,053, however, in 2010, the average income of the American worker was $26,364. Hanley argues that the increase in income of the average American worker was because the rich’s income was going up, but the gap between the employers and the employees also increased. As an example of application of maximum wage, if the law required the employer not to earn more than 100 times his lowest paid employee, and if the lowest employee earn $25,000 per year, the employer should not make more than $2.5 million per year (Hanley).

Another solution to the economic inequality is to impose general limitations on rent-seeking and to raise the taxation on rent-seeking. Rent-seeking means that people are competing to increase their share in existing wealth without creating wealth. For example, a college want to give away $10,000 scholarship to a student who writes the best essay. The amount of giveaway which is $10,000 is called a rent. Suppose the college has 100 students, and each student is competing with the other students for the best essay. If the student worked on the essay for 15 hours, and the pay rate per hour is $8, then the total amount of effort lost in seeking the rent is $12,000.

The best solution for the economic inequality problem would be applying maximum wage law, and raising taxation on the wealthy people. The maximum wage law binds the income of the employer with the income of the employee by a factor. The average income of employee increases because the average income of the employer increases, and they will experience the same growth rate. Raising taxes on the wealthy people would mean putting money in the pockets of the middle class, and more money for the middle class would mean higher demand on the goods that business sell. More demand would mean more supply for these goods, and more supply of goods would mean that these goods such as staples would be better in quality, and they would be cheaper.

Economic inequality introduces many threats to the society. It harms the economy and slows its growth. Inequality has many harms on society such as social immobility which means that one has little chances to change one’s economic condition as an adult. Inequality reduces the trust between the individuals as researches shown that people trust each other in measures of their capital. Countries that shows economic inequality have higher rates of crimes and homicides, and their habitats experience psychological problems such as depression. There are many solutions to the economic inequality such as imposing higher taxes on wealthy people, raising the minimum wage, implementing maximum wage, and limiting rent seeking, but the most effective solution would be combining the implementation of maximum wage and raising taxes on wealthy people. Raising taxes on wealthy people would help the economy to move as money goes to the middle class and that means that the common goods would be cheaper and better. Also implementing the maximum wage ties the average income of the employer with a factor to the average income of the employee, and that would help greatly in imposing economic equality.

Works Cited

Booth, Robert. "The Spirit Level: How 'ideas Wreckers' Turned Book into Political Punchbag." The Spirit Level: How 'ideas Wreckers' Turned Book into Political Punchbag | Books | The Guardian. Theguardian, 13 Aug. 2010. Web. 1 Nov. 2014.

Brown, Mitchell, and Eric M. Uslaner. Inequality, Trust, and Political Engagement (2002): n. pag. Worldbank. Worldbank.org, 29 Aug. 2002. Web. 1 Nov. 2014.

Cooper, David, and Doug Hall. "Raising the Federal Minimum Wage to $10.10 Would Give Working Families, and the Overall Economy, a Much-needed Boost." Economic Policy Institute. Economic Policy Institute, 13 Mar. 2013. Web. 02 Nov. 2014.

Hanley, Lawrence J. "A Maximum Wage Law?" The Huffington Post. TheHuffingtonPost.com, 03 Aug. 2012. Web. 02 Nov. 2014.

"The Logical Floor." The Economist. The Economist Newspaper, 14 Dec. 2013. Web. 02 Nov. 2014.

Lowrey, Annie. "For Two Economists, the Buffett Rule Is Just a Start." The New York Times. The New York Times, 16 Apr. 2012. Web. 02 Nov. 2014.

Rugaber, Christopher S., and JOSH BOAK. "Wealth Gap: A Guide to What It Is, Why It Matters." The Big Story. Ap.org, 27 Jan. 2014. Web. 01 Nov. 2014.

Lacoviello, Matteo. "Household Debt And Income Inequality, 1963–2003." Journal Of Money, Credit & Banking (Wiley-Blackwell) 40.5 (2008): 929-965. Business Source Complete. Web. 1 Nov. 2014.