It is becoming harder to back the claim that the economy isn’t doing well because the private sector isn’t doing well. The evidence from this article further falsifies Governor Romney’s opinions claiming the private sector is in a disastrous state. If wealth was distributed more evenly, we might not see as many people in America desperate for jobs, or Americans working longer hours than ever before just to survive and fulfill their basic needs. The private sector does not need fewer taxes and fewer regulations. It needs to be restructured in a way that fairness can be restored.

Despite the cries from the wealthiest 1%, Obama is doing this country a favor by raising taxes. The wealthiest people at these corporations are making money at increasingly easy rates, while the rest of America suffers through working long hours for the lowest relative wages this country has ever seen. It is time for a restructuring of this economy and it starts with the re-configuration of corporations. The government needs to step in, because the market is not restoring these imbalances.

Henry Blodget put it most accurately when stating, “Our current system and philosophy is creating a country of a few million overlords and 300+ million serfs. That’s not what has made America a great country. It’s also not what most people think America is supposed to be about.” (With all of this said, we must still consider how this “equality” would affect individual’s incentives. One can only hope that these high earners woudn’t just relocate to a more “tax friendly” country.)

Capitalism: The Relationship Between Politics and Economics

By: Adrian Nardella and Luke Rebecchi.
Edited by: Jonathan Burns and Benjamin Virkus

By now, after decades of incessant repetition, free markets and capitalism are inextricable. Taken together or standing alone, these words sanctify a tradition of economic thought and political action. We consider capitalism a synonym for free markets and freedom. But might there be unspoken benefits of capital and its owners? As noted by Karl Marx, capitalism implies an imbalance that favors business owners to the dismay of laborers. The revolving door between big business and politics may explain why this balance emerged. More appropriate are its effects as seen throughout the modern world today.

Recent policy reflects the imbalance mentioned above. In the same year Bill Clinton signed the North American Free Trade Agreement (NAFTA), which promoted trade across the southern U.S. border, construction of a border across Mexico commenced. The message is clear, and continues to resonate: we do not grant labor the same rights as the owners of capital. Last week, The New York Times ran a three-part series on state/local government-issued tax expenditures for businesses. In order to attract ‘job-creators’ to their district, local governments have annually forgone over $80 billion (a conservative estimate) in taxes. When governments grant big business money to turn the lights on, it is done under the guise of protecting ‘job-creators’; conversely, when governments grant poor laborers money to work, it is condemned as buying votes and sustaining lazy welfare mothers. Through the use of political rhetoric, politicians justify the promotion of job creation as an acceptable tradeoff to forgo revenues (taxes). These are the same revenues used to fund social and economic programs which provide assistance to the under-privileged “laboring-class” of society. In essence, our current political system is designed to contribute to the underlying imbalance embedded within a capitalistic system. The fact that corporate America might be receiving favorable treatment, dare I say welfare, is anathema.

As Milton Friedman noted in the first sentence of Capitalism and Freedom, “It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem”. At some point, the curious must question why capitalism deserves to be the predetermined derivative of free markets. Unfortunately, (as Friedman further elaborates) politics and economics are an interconnected and powerful vehicle. Although our current political system favors big business above all, it is an interesting concept to conceptualize a declaration of allegiance to free market labor amongst America’s elite policymakers. Rectifying this thought against the classical theory that equates the power of capital with labor within the same function, might provide more power to the lower classes of society. Only then, will local governments be forced to provide ‘job-creators’ with incentives other than those that solely impact the same laborers politicians claim to protect.

Should Puerto Rico Become the 51st State of the United States of America?

By: Luke Martin and Nikki-Lynn Marshall.

A major point of contention in the 2012 US election was the possibility of Puerto Rico achieving statehood. Such an action has been considered numerous times in the past few decades, but 2012 marks the first time that the referendum has proven to be successful, making such a discussion more critical than ever. However, before any legislation can be pursued the social and economic ramifications of Puerto Rico becoming the 51st state must be thoroughly examined.

In terms of the benefits of Puerto Rico’s statehood, political parties and businesses alike are envisioning the future economic benefits of a Puerto Rican state. Not only do both democrats and republicans support Puerto Rico’s statehood, but president Obama has publicly expressed his support for Puerto Rico’s statehood. In his article ‘Make Puerto Rico a state: it’s good for business’, Gregg Easterbrook argues that Puerto Rico should be the 51st state because such a move would have a positive economic impact on both the US and Puerto Rico. He points out that Puerto Rican citizens already enjoy a number of the benefits afforded to Americans, such as the ability to freely move to the US. A formal move towards statehood would allow the US to collect not only income taxes from residents, but also corporate taxes from businesses operating in Puerto Rico. From a political standpoint he also points out that such an action would extend the democratic process in the US, as Puerto Ricans would be able to vote in US elections and would contribute the same amount of electors as Oregon (7).

When examining the positive effects of Puerto Rico’s statehood, Hawaii is often used as a parallel case, credited as a success. Many argue that the example of Hawaii proves that allowing an economically weak country to become a state can benefit both the US and the state itself. Prior to its statehood in 1959, Hawaii was an economically weak country, lacking in economic growth as well as public institutions. However, in 2012, Hawaii now boasts one of the highest GDP per capita’s of the US states and has significantly contributed to the US economy through it’s image as a safe, US tourism destination. Thus, many argue that allowing Puerto Rico to become a state will reform Puerto Rico economically, as well as contribute to the overall US economy.

The negative impacts of Puerto Rico statehood however must also be considered. While a small majority voted in favor of Puerto Rico gaining statehood it was in an unbinding referendum with dubiously constructed questions. In all prior referendums in 1967, 1993 and 1998, the proud islanders voted against becoming a state. The social and economic implications may suggest statehood is not in the best interest for either the USA or Puerto Rico. Economically Puerto Rican’s median household income is half of the poorest American state. This would likely necessitate an increase in government aid and other social services. And in a slowly recovering economy, government spending needs to be frugal in order to diminish the national debt. The Puerto Ricans themselves may have personal reservations for wanting to join the USA. As it currently stands the citizens of Puerto Rico do not pay federal income taxes. Obviously as a state they would be obligated to pay taxes and thus receive less income.

The social dilemmas of Puerto Rico joining the USA are also substantial. Many Puerto Ricans fear that becoming a state would catalyze an erosion of the unique Puerto Rican culture. Their language, food, and customs would all suffer a pervasive infusion of American influence. America is known as the melting pot, and Puerto Ricans fear that their culture would vanish like the Native American tribes before them. Another concern is that just 20% of Puerto Ricans speak English fluently, thus, many wonder how Puerto Rico can assimilate when so few speak English and their culture is so unique.

The island of Puerto Rico has been in a statehood purgatory for over a century. Up until the 2012 referendum the Puerto Rican people had been content to walk the line between territory and statehood. But it seems now Puerto Rican’s yearn for official statehood. And it is our opinion that it would be in both the US and Puerto Rico’s best economic and social interests to embrace each other with open arms.

Inequality Across the Globe

By:Alyssa Dizoglio and Franziska Meinherz.

According to the article “For richer, for poorer” in The Economist, socioeconomic inequality is one of the largest growing problems of our time. Unfortunately, is not a problem that will easily go away. The inevitability of inequality is more evident than ever. Comparing the first American Gilded age to the second, it would seem that inequality had diminished instead of increased. During the first Gilded Age, the wealthiest Americans, like George Vanderbilt II, had estates that were 300 times larger than the average American dwelling. However by the second Gilded Age, the gap had narrowed, and even some of the wealthiest individuals’, like Bill Gates, homes are only a mere 30 times larger than the average modern American home. However the improved living standards of the middle and working classes masks the dramatic concentrations of wealth held by the top 1% in America, a figure that has only increased over the past 30 years; the share of national income held by the richest 1% has doubled since 1980. Furthermore, the share of income going to the top .01% has quadrupled. It is hard to look at these figures and not see the inevitability of inequality.

While the concentration of wealth at the top is certainly staggering in America and many countries across the world, this does not mean that the entire world has become more unequal in the past 30 years. In fact, global inequality has begun to fall recently as poorer countries converge (catch up) with richer ones. In the 19th and 20th century, global inequality increased as richer countries industrialized, allowing them to grow faster than poorer countries. More recently though, that pattern has shifted and global inequality has started to fall despite the fact that inequality within many countries has only risen.

When inequality first started to rise after industrialization, people weren’t all too worried about it. Simon Kuznet suggested an inverse U shaped correlation, known as Kuznet’s Curve between economic growth and inequality saying that inequality first rises with the beginning of industrialization, but that it then starts to decrease because society wants social policies to be implemented. Kuznet’s prediction seemed to hold until about the 1980’s when inequality started to rise again. Despite the rise in inequality, politicians, economists and the general society remained largely unconcerned with the issue. Only around 2001 with the dotcom bubble and subsequent recession did inequality become a top political issue perceived as potentially dangerous. Not only did fairness become an important concept, but the possibility that inequality leads to political instability became obvious. This had already been proved in earlier decades in Latin America, which had long been the most unequal continent, and which also experienced much political turmoil throughout its history.

While some societies are more concerned about the potential of increasing inequality than others, the reality is that increasing inequality is inevitable without some sort of government intervention. The article suggests that the problem can be solved by prohibiting abuse of financial resources through cronyism, which is certainly true in areas such as Latin America. However, not even in these countries would this policy be enough to keep inequality from rising further on a global scale nor would it serve to lift the poorest of society up from the rest, especially when considering that in many countries, the US included, nepotism and other forms of corruption are not the main cause of inequality. It is very unlikely that without government policies regarding income distribution the problem of inequality can be solved.

The impact of income inequality in the US

By: Samantha Weinberg and Franziska Meinherz.
Edited by: Nikki-Lynn Marshall and Paulius Kosmarciukas.

In the last decade, the subject of inequality is one that has been a growing concern to developed countries. Presently, the US as well as other countries fear that an increase in income inequality will be detrimental to their economic growth. However, according to Diana Furchtgott-Roth in the article “A Big Gap Means There is Room to Move Up” inequality isn’t an obstacle to economic growth, but rather a consequence.

Roth argues that, as economies grow people will inevitably become wealthier, leading to an uneven distribution of wealth. This inequality however can spur further economic growth because the possibility of moving up incentivizes people to invest more effort. Furchtgott-Roth argues that the key to growth is job mobility rather than income equality. She proves that inequality can work as an incentive, whilst redistributive taxes may discourage growth using the example of Great Britain. In Great Britain, an increase in the top tax rate was shown to not increase revenues as predicted. Therefore, based on the argument that job mobility, rather than income equality furthers growth the focus should be on improved education rather than a change in the tax system.

Often people claim that inequality lowers growth because the poor don’t have the means to start climbing up the income ladder. But, according to Scott Winship in his article “Inequality is not what we imagine”, this doesn’t hold for developed countries such as the US. Inequality in the US as well as other developed nations is due partly to the increase in two-earner couples. Having multiple wage earners in a home creates a greater income disparity between households. Yet the US is far from facing mass poverty, which is associated with lower growth, due to the US’s higher living standard. The rising inequality is therefore mostly due to the wealthy families which get richer at a much faster rate than the lower income families.

We therefore agree that income inequality is clearly a result of economic growth, which the evidence supports in many instances, such as in the example of China. However, inequality is still a prevalent issue in many countries that needs to be addressed. This is because inequality can be an obstacle to growth if job mobility cannot be guaranteed and in countries such as the US. For the US in particular income inequality has recently become a more a prominent issue due to the economic recession and the present precarious situation for the lower income classes, who, due to rising costs of education have found it harder to climb up the social ladder.

Is income inequality too big to ignore?

By: Yannai Shmerer and Luay Kanaan.
Edited by: Nikki-Lynn Marshall and Paulius Kosmarciukas.

In Robert H. Frank’s 2010 New York Times article, “Income Inequality: Too big to Ignore,” he provide several explanations for the rising income inequality in the United States by looking at the 100 most populous counties in the country. He begins by analyzing the three decades that followed WWII and points out that they were decades in which incomes across the board rose both equally and rapidly. He then follows this discussion by looking at the last three decades (1980-present) and points out that in this period the income share of the top 1% rose from 8.9% to 23.5%.

In the article, Frank uses the results obtained from his working paper “Expenditure Cascades” to stress the importance of income equality. His studies show a strong positive correlation between income inequality and financial distress in terms of divorce rates and the commute times. As the gap between the upper and lower tail incomes in the economy widens, divorce rates increase and commute times get longer as a result of urbanization and booms in the housing markets. Even though the data collected offers a stable ground for argument, the extent to which increases in the divorce rates were primarily fueled by financial distress depend on the country’s sociopolitical and economic stance at that time. Thus, a cross-sectional study between divorce rates and income inequality should look at year-specific cohorts to correct for any lurking variables such as the impact of war, political unrest, or age at marriage.

The financial distress among the middle and lower classes that Frank talks about leads to those classes rejecting public expenditure legislation that would ultimately benefit the working class. This rejection is borne out of a fear of an increase in taxes for those already in financial distress. Frank uses “crumbling roads, weak bridges, and an unreliable rail system” as examples of issues that the rejected public expenditure would help to solve.

One of the points that Frank both opens and closes with is the idea that economists are reluctant to talk about rising income inequality, claiming they argue that it is a subject better left to philosophers not economists. Frank dismisses this argument and calls for something to be done about income inequality: “maybe we should just agree that it’s a bad thing - and do something about it.”

Despite some minor inconsistencies with Frank’s paper, his argument is as sound as it gets. Unlike other economists, he is willing to take on rising income inequality almost a year before the “Occupy Wall St” protests began. He also acknowledges that it is, in fact, a problem that needs solving. However, he doesn’t really offer much of a solution. One fairly obvious solution would be to increase taxes on the top earners of the country while simultaneously lowering taxes on the middle and lower classes.

Inequality and Future Growth (or lack thereof)

By: Jonathan Burns and Kyle Peabody.
Edited by: Nick Tourville.

Income inequality has been growing in America for decades now. For years, it was something people were aware of, but beyond the fact that “the rich are getting richer,” not much was known about the phenomenon. Now, new evidence is emerging that the level of inequality in the United States has reached a point where it could begin to hinder future growth (if it hasn’t already).

According to the International Monetary Fund, job creation and economic growth could be slowed by as much as a third due to the growing inequality in the United States. For years, many saw the growing inequality as a result of preferential tax treatment to income vehicles that “the rich” frequently benefit from, such as investments. Now that research suggests that the inequality that we have amassed could stunt growth, organizations such as the International Monetary Fund and Organization for Economic Cooperation and Development are lobbying for both changes to tax structure and spending programs to reverse the disparity of income.

Large differences in income can have many problems for nations, such as political unrest – be it violent uprisings in the Middle East or movements such as the Tea Party or Occupy Wall Street in the United States. Most economists – and both Presidential candidates Mitt Romney and Barack Obama – agree that a strong middle class is an important part of a healthy economy and drives economic growth. At the same time, most recognize that the growing inequality is coming mainly at the expense of the middle class. Without corrective policy measures, such as more fairness in the tax and spending code including reductions in loopholes and subsidies, there is likely to be slower job and economic growth in the United States, which coupled with the inequality itself, could spill over into social issues as well.

Indeed, while much of recent literature on the issue of income inequality has been negative, one must not forget that there is another side to the coin. Some economists have maintained that this inequality is not necessarily as bad as it seems. First, some analysts have questioned the actual data used. They argue that it omits in-kind benefits, nonsalary benefits, and taxes, which are disproportionately borne by higher-income families. Thus, they argue that the data is skewed and shows more inequality than there is actually is. Second, there is the argument that while acknowledging the growing inequality, the large increases at the top will benefit the rest of society as a whole. These benefits would include improved living conditions, technology development, and overall growth of the economy. Essentially, while the poor would remain poor, their lives would be better off than they were before. In reference to these rapidly growing incomes of the top 1% and the stationary incomes of the 99%, some appeal to the saying “a rising tide lifts all boats”. However, as described earlier, new research suggests this inequality has the potential to stunt growth, if it hasn’t already. With this stunted growth, there would not be any “rising tide to lift all the boats”. Rather, with the “tide” unchanged (or perhaps even lower), a small portion of boats would just become much bigger boats.

Lowrey, Annie. "Income Inequality May Take Toll on Growth." New York Times: October 16, 2012.
Harbin, Christine. "Income Inequality is Not a Problem: The Free Market is Making All Americans Richer (Debate)." PolicyMic.