27 Apr 2022


Causes and Effects of the Wide Economic Gap in the US

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There has been a significant increase in the incomes inequalities in the US over the last several decades, and there are no indicators of a reversal of this trend. The issue of income inequality in the US is now a heated debate. In fact, it is argued that the last time the disparities in income were as high as they are now was just before the Great Depression. The high level of disparities in income is both incompatible with the pillars of equality for the opportunity and social justice and a serious threat to the economy and democracy of America. The documentary, Inequality for All, highlights the sources and impacts of such inequality in the American society, specifically, the middle class. As this paper reports, Reich’s ideas concerning the causes of the income inequalities related to the fact that while there has been a significant growth in both the global and domestic economies, the US has not had proper mechanisms to ensure equitable distribution of such resources. He demonstrates that a typical worker made about $48,000 following an adjustment for inflation while a person in the top one percent earned about $390,000. However, by 2010, the trend had worsened because a typical worker would make about $33,000 while that in the top one percent would make $1.1 million. According to Reich, the disparities have worsened because of poor policy development as indicated in this paper. 

In the documentary, Reich argues that an amalgamation of technological innovation, globalization, market deregulation, and anti-union legislations have resulted in the creation of situations that made the economy to boom, but less of the wealth so generated has trickled downwards. He posits that no one realized such abnormalities early enough, which literary meant that more wealth would end up in the hands of the richest Americans (Reich, 2014). This argument is widely supported in the literature. For example, Wolff (2012) reports that the top 20 percent of the US households control more than 84 percent of the total wealth of the nation while the bottom 40 percent only control 0.3 percent. The report also uses an example of the Walton family and indicates that t controls more resources than 42 percent of all the American families combined. Instead, there was a generation of mechanisms of coping with the situation such as allowing more women to enter the workforce, which created dual-income families (Reich, 2014). In addition, the working hours rose significantly while the rise in the costs of buying a home allowed more Americans to borrow. The coping mechanisms came to a halt in 2007, and according to Reich, the economy has exhausted options, and if the trend persists, there is the probability of crises ahead for Americans. 

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Of what significance is middle-class to the American economy? The documentary highlights that any prosperous society must increase its investment in the poor and the middle-class. He notes the importance of the middle-class in the US noting that it accounts for 70 percent of spending in the country. However, Reich sadly notes that policies of economic development have segregated the American middle-class and limited its ability to create jobs. He notes that this category of Americans can generate jobs for the rest of the economy. However, Reich notes that the middle-income families can achieve such when policies are such that they allow the middle-class to earn enough salaries to let them spend in the economy, stimulate demand for products, and improve their tax revenue potential. Tyson (2014) who reports that disposable incomes of the poor and middle-class in the US have lagged behind those of other developed nations for many years makes a similar claim. In addition, Tyson observes that the US middle-class has started to fall behind. She notes that over the last few decades, middle-class families in most developed nations have delighted in bigger increments in disposable income than those of the US. In addition, in 2014, the U.S. lost the identification of having the "wealthiest" middle-class to Canada, with a few European nations, not a long way behind (Tyson, 2014). Once the liberal open advantages in training, medicinal services, and retirement are added to assessments of dispensable family revenues in these nations, the relative position of the US’s middle-class slips much further.

Reich singles out wage stagnation as another cause of the rising income disparities in the country. He reports that while the average wage for the persons in the top bracket of the population has risen by more than 182 percent since 1978, that of the typical worker has dropped by more than 30 percent (Reich, 2014). The idea of wage stagnation and its effects in widening the income gap is also reported in other literature such as Tyson (2014). Tyson reports that the real median incomes of full-time laborers between the age of 25 and 64 years started to stagnate after peaking in the early 70s because of a reduction in the growth in productivity and a yawning gap between wage growth and productivity. Reich further explains the real impact of the stagnation in the wage rate for the middle class through his argument that the rise in inflation aggravated the situation. He singles out the costs of buying a house, the attainment of higher education, childcare, and healthcare as the biggest influencers. He reports that tuition was free at Berkeley, where he works as a professor during the 60s and has since grown to $700 in the 70s and finally $15000 for all in-state students presently. He recounts in the documentary that middle-class families are almost finding it too difficult to cope and there is a steady emergence of a new aristocracy in the US. 

According to the documentary, there is a link between inequality and education. Reich considers that education was one of the most guaranteed gateways for people into the middle-class over the years. However, he recounts that the rates of college graduation started to flatten out by the end of the 1970s (Reich, 2014). It means that the US has not been keen to invest in its workforce, which implies that Americans are likely going to be less competitive in the global economy. The effect of a less-skilled workforce is visible using a variety of real-life example, as Reich highlights using Apple Inc. He demonstrates where the money spent on the purchase of an iPhone goes. He notes that while China is the country of assembly for the iPhone, only 3.6% of the revenue from the sale of one phone goes back to China (Reich, 2014). Instead, the US gets 6 per cent; South Korea gets 13 percent, Germany gets 17 per cent while Japan gets 34 percent. This example demonstrates that it is not only the cost of labor or wages that matter, but also the value of the workers of a given country adds to the production process. Therefore, the real value of investing in the workforce is to ensure that it attains a competitive edge in the global labor market. Reich’s argument coincides with previous studies that have indicated that college degrees are not a direct passage into the middle-class. Instead, the real value of collegiate degrees now lies on the types of college majors that students took (Selingo, 2013). Therefore, the existence of such a trend should be a warning sign to policymakers to redesign the education system to suit the job expertise levels required, which is yet to be accomplished. 

The documentary also argues that system of taxation of the US is one of the major cause of the economic disparities in the country. For instance, Reich considers that the taxation system in use in the US favors the rich and exploits the middle class. During an interview with Warren Buffet, Reich manages to create an understanding that the rich do not pay enough tax. For example, Buffet feels that he pays little tax, at least in comparison to his revenues, since he considers that average tax rate for his office workers is 32.9 percent while he only has a tax rate of 17.7 percent. Reich’s documentary touches on another of the most debated topics in the US, taxation. For example, it is widely debated that the tax system used in the country taxes the poor more than it does to the rich since most of the revenues for the rich people do not fall under the taxable categories (Forbes, 2015). Reich posits that if the middle class are essentially stuck because they do not earn enough to pay much tax and the rich are not remitting their fair share of the tax; there is little for the government to spend in higher education and infrastructure projects (Reich, 2014). 

Reich also relates the problem of Americans to the negative effects associated with trickle-down economics. He notes that the rich do not spend enough money in the economy to stimulate enough economic growth to support the poor and middle-class (Reich, 2014). He notes that the rich do not create sufficient economic activity through indicating that an individual who earns as much as $10 million only spends a section of the money. To justify this, Reich interviews a venture capitalist who has an eight-figure salary. The interviewee hints that even while he is such rich, he does not need more than three pairs of jeans because he desires to save as much money as possible. Reich indicates that most of the money of the rich is invested abroad because of the desire to generate more returns on investment. For this reason, Reich posits that the US should replace the current trickle-down economics with middle-out economics. He argues that such a system of economy has the potential of enabling the middle-class become more prosperous. 

In conclusion, Robert Reich’s documentary, Inequality for All, highlights the perils of the American middle-class. As this work has highlighted, the problems of a widening gap between the rich and the poor in the US is because of poor policies to improve the middle-income families. For example, there has not been many efforts to raise the disposable incomes of the middle-class. Despite the increases in the costs of living and a biased system of taxation, the wage rate of the American middle-class has remained behind those of most other developed nations of the world for a long time. Reich also identifies the negative impacts of a trickle-down economy as being the cause of the wide gap between the rich and the poor. For example, he notes that while the top 1 percent of the population controls more than 80 percent of the wealth of the nation, they are less willing to spend on the domestic economy. Instead, most of them would prefer to save their money or to invest it abroad with the view of generating more returns n investment. As a result, Reich proposes the replacement of the trickle-down economics with the middle-out economy because of the capacity of the later to develop the middle-class. 


Forbes, S. (2015). Why congress is Biased on Real Tax Cuts. Forbes Welcome . Retrieved 15 April 2017, from https://www.forbes.com/sites/steveforbes/2015/01/21/congress-is-biased-against-real-tax-cuts/#7e97ed9b3914

Reich, R. (2014) : Inequality for All (11/20/13) . Retrieved 15 April 2017, from https://www.youtube.com/watch?v=O_LkMWP2Q2A

Selingo, J. (2013).  Does the College Major Matter? Not Really The Choice Blog . Retrieved 15 April 2017, from https://thechoice.blogs.nytimes.com/2013/04/29/does-the-college-major-matter-not-really/comment-page-2/?_r=0

Tyson, L . (2014). The Rising Costs of U.S. Income Inequality . Retrieved 15 April 2017, from http://www.huffingtonpost.com/laura-tyson/us-income-inequality-costs_b_6249904.html

Wolff, E. N. (2012).  The asset price meltdown and the wealth of the middle class  (No. w18559). National Bureau of Economic Research. Retrieved April 15, 2017 from http://www.nber.org/papers/w18559

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