|This chart shows Americans’ inflation-adjusted income growth for the last 55 years.
It’s not a pretty picture. The rich are getting richer, while everybody else is treading water.
With a chart like this (from a 2016 paper by economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman), it’s pretty easy to see why so many people think America is broken. No surprise a message like “Make America Great Again” would resonate.
I was born in 1965. I remember America being a simpler place. I walked to and from school. I played in the woods, got ticks all the time, and never got Lyme disease. My parents had one car: a 1965 Benz 190D that didn’t have seat belts in the back, let alone air bags. Neighborhood dogs were never fenced in — they roamed. I started mowing the yard when I was 10.
But I was a kid. I was too young to remember the civil rights movement. I didn’t know what Vietnam was. I vaguely remember something about the Munich Olympics. My parents didn’t have a cable bill or an internet bill or cell phone bills. Of course life seems simpler, better, when you’re 12.
I don’t know if there’s a “when I was a kid” logical fallacy, but there should be. It’s pretty typical to remember the America of our youth as some idyllic place, no drug problems, no homeless people. Good and evil were simple: there was America, and there was the Soviet Union.
But now? Oh boy. The U.S. government is the big evil, taking away our freedom with all these regulations, squandering our future with debt, bleeding us dry with taxes while they bail out Wall Street bankers. No wonder the rich are getting richer. The system is rigged in their favor…
Same As It Ever Was
I don’t have to tell you that Congress has been an absolute joke for a long, long time. They flaunt their “eliteness,” refusing to pass real rules on themselves concerning insider trading, for instance. They can sit in committee, get the news on a new rule or initiative, and immediately trade stocks.
(In 2008, one House Financial Services Committee member was in a closed-door meeting with Fed Chief Bernanke and Treasury Secretary Paulson about the impending meltdown. The next day, this congressman is buying assets that would profit from a drop in the stock market. Sad! Very unfair!)
They get premium health care, while citizens get squat. Pensions, raises, stipends — it pays to be in Congress these days. But this is nothing new; Congress has always played by different rules, taking bribes, getting involved in sex scandals and banking scandals, on and on. And all the while, they’re saying they’re going to clean up Washington, do their best to help the American people, blah, blah, blah…
So again, it’s no wonder that income for the 1% has grown 300% since 1980, while income for the bottom 50% of Americans hasn’t changed at all.
But the most amazing thing to me is how successful each political party has been in convincing Americans that their solution is the only one that will work. The Democrats want to tax the rich more and basically give everything away. Remember Bernie Sanders’ promise of free college? Yeah, how was that supposed to work again?
The Republican trickle-down plan is just as daft: cut all taxes and all regulation, and the wealthy and corporations will invest so much that we’ll all get rich. Oh, and cut government spending, too, except on defense. Everyone agrees $500 billion a year is money well spent.
Here’s what’s actually happening: The men and women in Congress know Americans are pissed off that income inequality is so stark (the 1% earn 20% of American income; the bottom 50% earn 12%). And they are trying to use that anger to entrench and enrich themselves. That’s it. They want to stay elite, and they will say whatever it takes.
Meanwhile, the situation on the ground will continue to deteriorate.
The really maddening part is that the fix for income inequality is staring us right in the face.
A Modest Proposal
So, let’s go back to that income chart. Notice that income growth stayed pretty close together until 1982. The question to ask is pretty obvious: What happened around 1982 that caused wealthy incomes to take off?
As I see it, there were two things. First, there’s the S&P 500. The S&P 500 started trading in January 1962 at 71.55. Twenty years later, it was 122.50. That’s a 71% gain — over two decades — or 3.5% a year, on average. And those aren’t inflation-adjusted numbers, either. Money in the S&P 500 just wasn’t growing that fast. It looked like this:
Click Chart to Enlarge
Now, have a look at an S&P 500 chart starting around 1980…
Click Chart to Enlarge
Now, look at the circle on the chart above. You see that green glyph that started that massive run from 119 to 295 in less than 10 years? That’s August of 1982. Do you know what happened in August of 1982?
Well, I’ll tell you. In 1981, Congress passed the Economic Recovery Tax Act of 1981, which cut the top income bracket taxes from 70% to 50%. 5% of that cut came in 1981, and then 10% more came in… July of 1982.
It is no coincidence that the S&P 500 took off the minute the wealthy had an extra 10%–15% of their income available for investment.Now, please, I beg you, don’t make the mistake of concluding that it’s simply tax cuts that make for a stronger economy and better income growth. That’s not the point. The point is that you need a surplus of cash to invest. A 15% tax cut on someone making $450,000 is $67,500 that’s suddenly available for investing.
A 15% cut for someone making $45,000 is $6,750. Sure, that’s good money. But it’s also just $562 a month. Add a car payment and a couple dinners out, and *poof* — it’s gone.
It should go without saying that an income tax cut will benefit the wealthy more than the middle class. It’s simply because the numbers are bigger. It should also go without saying that an increase in wealthy income is not going to “trickle down” into another person’s pocket. That’s just dumb.
The bottom line is this: Investing is the key to building wealth, growing income, and building a better life.
If the men and women in Congress really gave a crap, they’d focus on ways to encourage the lower and middle class to invest a little money every month. Offer up some tax breaks, get some public service messages out for education, get focused on the real issue, and get some real solutions.
Do You Have a Roth IRA?
Now, to be fair, the government has done things to encourage investment. Simple IRAs and especially the Roth IRA are both powerful tools for retirement savings. The Roth IRA was only introduced in 1989. How many Americans really know how it works?
Start young, start now: America has the best companies in the world. And the capitalist system means you can quickly and easily be a part owner and participate in all their success.
You wanna make America great? Then start investing in great American companies.
Until next time,