BUD BREWER
One Man's Opinion
Disparity in Income – Fair or Unfair?
October 31, 2011: The popular theme you hear today from some individuals, politicians and the liberal media is that the top 20% of income earners have seen their income grow by more than 250% during the last 25 years while middle class incomes have grown less than 40%. On its surface this fact suggests a terrible inequity in how the free market capitalistic system works. Many folks are beginning to question the propriety of those people who are apparently more competent, higher educated, more creative or have more useful skills, etc., to be rewarded based on a pricing system keyed to demand for their services. We hear this argument more and more by liberals among the politicians or those individuals who feel left behind or those that just have not made the effort or are unable to make the effort to compete in a world where values are based on a free market system. So what do we make of this? Should we ask our Representatives to pass some legislation that will create a special tax on anyone whose income has increased at a rate that is more than the rate of increase in the median income of the lowest 80% of taxpayers? How much should this surtax be, 20%, 30%, or more of the excess? How will it help the lower 80% of taxpayers? Other than give the middle income or lower income taxpayer some satisfaction that the spread between high earners and middle or low income taxpayers has been artificially narrowed and the Government has more revenue temporarily to spend on public projects, etc., it seems to me such a solution to the perceived problem would have enormously adverse consequences over the long term. This disparity may continue to widen as the relative achievement of our population comes from the product of fewer and fewer of our citizens working or serving in a global market. At the same time more and more of America’s workers who have enjoyed relatively high incomes have been laid off as companies expanding into multinational markets have found that the same productivity is available in the developing countries by workers in those countries at a much lower price.
What is really behind this discrepancy? It looks like corporate managements are pursuing efficiency by forcing their domestic workforce to compete with increasingly competent workforces available in developing countries all over the world. With the globalization of markets and increasing multinational operations by America’s largest corporations, the domestic worker is having difficulty demonstrating that his value is really worth the difference between what would otherwise be paid to a foreign worker in a foreign country. The American Unions have done a great job for the last 60 years negotiating with managements to get them to agree to offer higher hourly wages plus increased benefits, like health care, paid vacations, retirement benefits, etc. to their workers. Managements had to raise their product prices to offset the increase in these wage costs or they introduced automation of some worker functions that led to some increase in worker productivity, modest lay-offs or just reduced needs during any expansion. As the global markets began to offer greater opportunity for business in emerging countries, it soon came about that management had to make decisions whether or not it made more sense to remove or relocate all or some part of their labor intensive production to geographical locations where the cost of that labor would be significantly less. This progression will not change until there is parity in compensation among the workers for comparable skills in every part of the global economy. Neither the Executive branch nor the Congress can do much to change this process without interdicting the natural market forces of demand and supply of the American worker. Their answer is to subsidize wage earners, set tariffs on imports, or hire more low skilled workers in the public service sector while offering them retraining at tax payer’s expense.
Low skilled labor has been over paid in the U.S.A for years primarily due to the power of the labor unions to interrupt the production lines of a company and thus cause the threat of considerable expenses never to be recovered. As a result, management would give in to the demands of the Union and just use their pricing power to adjust to the higher cost of production. In the domestic market, this struggle worked pretty well for companies as they were able to maintain their profit margins. Yet by adjusting prices to maintain profit margins the products of these companies will or have become uncompetitive in foreign markets where demand is growing faster. As long as the primary consumer and worker or producers of products were the mainstay of the domestic market, the economy grew and everyone gained. But with the start of globalization of markets 25 years ago, all this changed. The ability to make a product offshore and import it back to our domestic markets at a more competitive price had a positive impact on domestic revenues for a while however slowly but surely the big multinational companies began to see a growing market for their products in foreign countries and by manufacturing them in those markets using much lower wage rates indigenous to a specific country they were able to tap into a new and growing consumer demand at a price that was affordable because of the low cost of labor in that market.
Over these last 25 years, the downgrading of the U.S. worker has limited growth in their wages and benefits. The value of their output has been rationalized to a Global standard determined by increasingly equally skilled workers in developing countries. Some companies have even been unable to sustain domestic production thus causing an increasing number of unemployed people with limited skill and few jobs. 2008 and the housing collapse exacerbated this to a point where we now are unable to generate good high paying jobs for relatively low skilled workers.
Ok, now we understand why the middle to lower income workers have had little to no growth in their income over the past 25 years but why have the wealthy done so much better. The basic answer is those individuals who are better educated, more creative, have an entrepreneur spirit, have a special talent or just work harder, save more and invest successfully are just more likely to experience growth in their earning capacity. There are some business men and women who can manage a department, a division or a company so as to generate larger and larger revenues and profits leveraging capital with efficient productive capacity, even sometimes located in foreign markets. The Actor who performs in movies or on stage with such imaginative skill as to be able to attract large audiences will gain relative wealth in accord with their skill. So will the super athlete in professional sports, or an author of popular books, or a creative high tech engineer like Steve Jobs. The value of their output is determined by the same market place as the individual worker whose income has grown little for 25 years. It is this market that allows the potential for any individual to receive fair value for his productive capacity. Some receive great value and are few in number. Others who are producing relatively unspecialized work for which there is global competition will receive considerably less income for their production and when you compare the difference of that income with that of the most talented, most creative and most successful, you will find that Disparity even grow higher.
Thank god that we have individuals who create relative value and can benefit from offering that value in a free competitive market. It is that market that allows the output of those unique individuals to be enjoyed by all of us and create real wealth for themselves, for their beneficiaries and even for the rest of us by being able to use, enjoy or benefit from what they do.
One Man’s opinion—Bud Brewer
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