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Federal workers should not have to pay for the Social Security tax cuts

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Congress is set to extend the 2011 Social Security tax reduction to the end of 2012.  Three cheers for that.  Social Security taxes are some of the most unfair in America.

But Congress is once again going to sell federal workers down the river.

If the proposed deal goes through Congress and is signed by the President, the employee-contribution portion of the Social Security tax will remain at the current 4.2% reduced rate through the end of 2012.

It will return to the normal 6.2% rate in 2013, unless the reduced rate is extended again or made permanent after the November elections.

To pay for this reduced rate, Congress plans to cut government contributions to federal worker retirement plans.

In other words, all workers will pay less for their Social Security retirement pensions, but federal workers will pay more for their government employer retirement pensions.

The amount of money at stake in the federal pension contributions is only a small sliver of the money involved in the Social Security tax cut.  Federal workers aren’t being targeted because it will make a real difference to the deficit.

Federal workers are being targeted out of pure mean-spiritedness.

Federal worker pay has already been frozen for 2011 and 2012.  Meanwhile consumer prices rose on average 3.0% in 2011 and is likely to rise further in 2012.  That means that federal worker pay is falling farther and farther behind inflation.

In real terms, federal workers have already taken a serious pay cut, and now their pensions are on the line as well.

It’s not like we can’t afford to pay our civil servants.  In actual dollars (not adjusted for inflation) US gross domestic product (GDP) rose 4.2% in 2010 and 3.9% in 2011.  Federal worker pay could have risen at the same rate with no damage to the economy.

Instead, federal workers are being told to take what is in real terms a pay cut at the same time that the country is getting a tax cut.  That’s just not right.

There’s a better, fairer way to pay for the Social Security tax cut: extend Social Security taxes to cover all income.

Currently, people pay no Social Security tax on wages over $110,100 and no Social Security tax at all on non-wage income.  Extending Social Security taxes to cover all income would more than make up for the reduction in rate to 4.2%.

The fair way to reduce the tax rate is to expand the tax base.  Make everyone pay a little instead of making a few people pay a lot.

And don’t drag federal worker pay into the debate.  If you think federal workers are overpaid, go apply for a federal job.  There are no waiting lists.  Federal workers have it hard enough without Congress playing politics with their paychecks and pensions.

U.S. income distribution: Just how unequal?

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Levels of income inequality in America today are running at record levels. Activists from the Occupy movement have placed rising inequality firmly on the national agenda, and inequality looks to figure prominently in the 2012 election campaigns.

All this makes inequality statistics suddenly newsworthy, but how do statisticians measure something as slippery as inequality? Some people obviously have more than others, but how does that difference translate into numbers that represent the level of inequality for an entire society?

Anyone following the inequality debate so far has probably heard of the Gini coefficient. America’s Gini coefficient is 46.9. Or 37.0. Or maybe as high as 57.4. Really, it depends who you ask.

The Gini coefficient was first defined in a 1912 paper by the Italian economist Corrado Gini (1884-1965). The coefficient measures the degree the degree of concentration in a country’s income distribution. Social statisticians today use many different inequality measures, but none more than the Gini coefficient.

The Gini coefficient amounts to a kind of percentage and can run from 0 to 100. A Gini of 0 represents 0 percent concentration in a country’s income distribution. In a country with a Gini coefficient of 0, everyone receives exactly the same income.

A Gini coefficient of 100 represents 100 percent concentration in a country’s income distribution. In a country with a Gini of 100, one person receives all of the country’s income. Everyone else gets nothing.

In between 0 and 100, Gini coefficients are harder to interpret. A Gini coefficient of 50 represents 50 percent concentration in a country’s income distribution. What does it mean to have 50 percent concentration in a country’s income?

A Gini of 50 could mean that half the people share all of the income while the other half get nothing. In other words, a country that literally consisted of haves and have-nots in a 50-50 split would have a Gini coefficient of 50.

This scenario, of course, isn’t very realistic. Everyone, no matter how poor, has to have some income to live. There are no literal have-nots.

We could also have a Gini coefficient of 50 with the top 10 percent of a country’s population very well-off, the next 50 percent more or less equal, and the bottom 40 percent very poor.

With some fiddling around the edges, that’s more or less the situation in America today.

According to the Census Bureau, the official Gini coefficient for the United States was 46.9 in 2010, the most recent year with data available. This is way up from the all-time low of 38.6 set in 1968.

Gini coefficients can be used to measure the concentration of any distribution, not just the distributions of income. Higher concentrations translate into higher inequality. Lower concentrations mean lower inequality.

For example, wealth inequality in America runs much higher than income inequality. New York University economist Edward Wolff estimates the Gini coefficient for household wealth — net worth — in the United States to be 86.5, based on 2009 data. That’s much higher than any income inequality estimate.

Leaving aside wealth and other forms of inequality, even income inequality statistics can differ depending on how income is defined.

The most common definition of income used by the Census Bureau and other statistical agencies is total money income of a household, excluding capital gains. All of the members of a household are assumed to share in the household’s combined income.

Household income includes wages, salaries, interest, dividends, alimony payments, child support, Social Security payments, and any other cash transfers. It doesn’t include food stamps, Medicare, or other non-cash benefits.

A major gap in the measurement of income inequality is the exclusion of capital gains, profits made on increases in the value of investments. Capital gains are excluded for purely practical reasons. The Census doesn’t ask about them, so they can’t be included in inequality statistics.

Obviously, the rich earn much more from investments than the poor. As a result, real levels of income inequality in America are much higher than the official Census Bureau figures would suggest.

Edward Wolff, working with Federal Reserve Board data that included capital gains, but not government transfer payments, put the figure at 57.4 for 2006.

How does America’s Gini coefficient compare to those of other countries? Comparative data on income inequality are reported by the Organisation for Economic Cooperation and Development.

The OECD reports three different Gini coefficients for the United States and other countries (see accompanying table). The first covers the Gini coefficient for wages earned from work. The second traces overall income inequality. The third measures inequality in total living standards, including government-provided health and education benefits.

 

 

According to the OECD, the Gini coefficient for income inequality in the United States is just 37.0. The OECD is highly secretive about its methodologies, so it’s impossible to know why this is so different from the official figure of 46.9 reported by the U.S. Census Bureau.

Whatever exact procedures the OECD uses, it claims to use the same procedures for all countries. According to the OECD, the Gini coefficient for wages is highest in Italy (46.5) and the United Kingdom (45.6). The United States comes in third-highest out of the 18 developed countries for which data are available.

After other sources of income are included, however, the United States is by far the most unequal of all 18 countries. The United States (37.0) is well ahead of number two Portugal (34.7) and number three United Kingdom (34.5).

The United States scores worse mainly because Social Security, unemployment insurance, and other cash benefits in the United States contribute much less to income than comparable programs in other countries.

Including the value of government-provided health and education benefits makes the United States look even more unequal compared to other developed countries. In this final comparison the U.S. Gini coefficient (30.3) is still worse than number two Portugal (29.1) and far worse than number three Italy (26.2) and all other developed countries.

By this last measure, the most equal countries in the world are the usual suspects: Denmark (19.4), Norway (19.3), and Sweden (18.1).

So is America’s Gini coefficient 46.9 (Census Bureau), 37.0 (OECD), or 57.4 (Edward Wolff based on Federal Reserve data)? It depends what you mean by income. If by income you mean all the money that households get from all sources, including both government transfers and capital gains, then it’s probably around 50, give or take a point.

So we’re right back to the haves and have-nots. That we’re a society of haves and have-nots may not be literally true, but it’s more than just a metaphor. America is suspended roughly half-way between full equality and a situation in which all of the country’s income is concentrated in one person’s hands.

In other words, we’re half-way between a socialist utopia and an absolute monarchy. America in 1968 was hardly a socialist country, but it was much closer to the utopia. Maybe it’s time to turn back the clock on income inequality. Utopia doesn’t sound so bad.

The real Social Security crisis

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President Barack Obama is ready to support “reforms” to “strengthen” Social Security, he declared in his State of the Union address. Indiana Gov. Mitch Daniels thinks we need “repairs” to make Social Security more “affordable,” he said in the Republican Party’s official response.

Neither Obama nor Daniels got down to details. But it’s a good bet that their reforms and repairs to strengthen Social Security and make it more affordable won’t lead to higher retirement benefits for America’s senior citizens.

The average retired American receives just over $1,200 a month in Social Security benefits. And that’s after Social Security beneficiaries finally got a raise in January, for the first time in three years. A 3.6-percent boost is putting an extra $42.59 a month in the average retiree’s pocket.

The annual adjustment helps, but who wants to retire on $1,200 a month? It’s not much for a lifetime of work.

Benefits are too low to begin with, so incremental adjustments just aren’t enough. That’s because Social Security benefit payments are based on your top 35 years of wage income.

This system worked fine from the 1950s through the 1970s, when wages went up every year and well-paying, full-time jobs were easy to find. As a result, Social Security benefits more than kept pace with rising standards of living.

In the 30 years from 1950 to 1980, the average Social Security retirement benefit (adjusted for inflation) rose 4 percent per year.

Growth in the economy as a whole averaged 2.2 percent per year over the same period.

Since 1980, Social Security benefit growth has slowed. Between 1980 and 2010 the average retirement benefit grew just 1.1 percent per year (adjusted for inflation).

Social Security benefits didn’t keep up with growth in the economy as a whole, even though annual economic growth averaged only 1.7 percent.

Looking forward, things don’t look good for tomorrow’s retirees.

The threat isn’t that the so-called “Social Security Trust Fund” might go bankrupt. The Trust Fund is nothing more than an accounting gimmick.

Social Security taxes go straight into the U.S. Treasury and are used to pay the government’s daily expenses. The government makes an electronic accounting entry crediting the Trust Fund account for the money so taken.

When the government writes Social Security checks, it makes a reverse accounting entry that charges the Trust Fund account for the money paid out. There are no gold bars sitting in a vault set aside for Social Security.

Social Security won’t cost the government a cent for the next 27 years, after which it will have to be modestly subsidized. That’s hardly a crisis.

No, the problem is that tomorrow’s retirees will face lower and lower benefit levels because of the way benefits are calculated. An individual’s benefits are based on his or her employment history and the economy’s overall wage growth. Tomorrow’s retirees are in trouble on both counts.

First, jobs have been much less stable in recent decades. Spend a few years unemployed and you average in a few zeros. Spend a few years working part-time and you average in a few low-paid years.

Second, workers’ wages have been stagnant since the mid-1970s. People retiring in the next few years will have their benefits calculated using average wage growth over the period 1975-2010. Low wage growth means low benefits.

It may be difficult to face facts in an election year, but the fact is that Social Security retirement benefits are just too low. At a time when retirement savings are down and private pensions have all but disappeared, Social Security must be beefed up to compensate. That’s the reform we need to strengthen Social Security.

To increase benefits, the Social Security system needs more revenue, and the fairest way to raise money is to equalize the Social Security tax for all workers.

Individual wages over $110,100 a year are currently exempt from Social Security taxes. This cap should be removed. If it were, we could afford to increase benefits substantially.

If everyone pays in, everyone can retire with dignity.

To grow the realonomy, tax and spend

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Low taxes mean high growth, and a rising tide lifts all boats.  Don’t tax the job-creators.  Money trickles down from the rich to the poor.

We’ve been hearing arguments like these since the 1980 election, when Ronald Reagan beat Jimmy Carter on a platform of reducing taxes on the wealthy. They were wrong then, and they’re wrong now.

The truth is that taxes on investors and the wealthy are lower now than at any time since the 1920s.  They hit rock bottom in the 2000s.

Our slowest-growth decade since the 1920s?  The 2000s.

Growth was even slower in the 2000s than in the 1930s.  That’s right, slower than during the great depression.

America’s taxes on the wealthy have been at historically low levels for thirty years now, but job creation is lower than ever.  For the past five years there’s been no job creation at all.

The economy has been creating jobs at slower and slower rates since the end of the 1970s.  It may seem hard to believe, but the 1970s were actually a jobs paradise compared to today.

Jobs growth was faster in the 1970s — when taxes on the wealthy were 70% — than they have been at any time since.  The 1970s were even better than the 1990s.  It’s only by today’s low standards that the 1990s seem like they were such a good time.

The solution?  Raise income taxes.  Raise them on everyone, but most of all raise them on the wealthy.

Why do high taxes on the wealthy bring more jobs for the rest of us?  It’s all a matter of what people do with their money.

The wealthy don’t live in our economy.  They live in a Plutonomy all their own.  Most of their income gets spent on two things: investment and luxury goods.

Today, in the fifth year of a recession that’s turning into a new Great Depression, luxury goods sales are at an all-time high.  That’s the Plutonomy.  The Plutonomy is not in recession.

But the wealthy also invest.  Does this investment create jobs?

It does, but it doesn’t create American jobs.

In today’s global investment markets money follows the highest returns.  With China growing at 10% to our 2%, the higher returns are in China.  That’s where the investment flows.

When you tax high incomes, you take money that would have been invested globally and give it to the government to spend, and almost all government spending is in the United States.

Taxing high incomes also puts a damper on luxury consumption.  That’s a side effect we can live with.

Should the poor and working class also pay higher income taxes?  You betcha.  Everyone shared in the Bush tax cuts, rich and poor alike.  Everyone can afford to go back to 1999 levels of taxation.

But down in the working class Realonomy of the American economy there’s not much income tax to be paid because there’s not much income.  That has to change.

Give the poor more income and in return let them pay a little more tax.  That’s a fair deal.

How do we get them that income?  Tax and spend.

Take the money people would invest in China, take the money that people would spend on that extra TV for the kids’ bedroom, and spend it on things we really need.

Tax and spend, so we can have high-quality schools with low student-teacher ratios.  Tax and spend, so we can have pleasant, attractive national parks.  Tax and spend, so we can send put people to work helping our elderly and disabled live more fulfilling lives.

That’s right.  “Tax and spend.”  Those three dirty words are now the key to economic recovery in America’s Realonomy.

Get out the bleach.  It’s time to tax and spend our way to recovery.  Sometimes the simplest solutions are the right ones.  This is one of those times.

As the plutonomy powers ahead, the “realonomy” remains in recession

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America’s longest recession since World War II officially ended in June 2009. Since then, the economy has expanded by almost 6 percent (adjusted for inflation). All of the losses of 2007-2009 have been erased.

American economic output is now at an all-time high. So why doesn’t it feel that way?

Back in October 2005, three Citigroup stock analysts heralded the arrival of a new kind of economic system in the United States. They called it the “Plutonomy,” the economy of the rich.

They explained that in a Plutonomy “the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers.” In other words, official economic statistics no longer represent the experience of the economy as a whole. More and more, they represent only the experiences of the very rich.

Official economic statistics show that US national income per capita grew a cumulative 10 percent between 1999 and 2011 (adjusted for inflation). In aggregate, we generate 10 percent more per person than we did 12 years ago. Where did that 10 percent growth go?

Up in the stratosphere of the American Plutonomy, the IRS reports that incomes among the top 400 American taxpayers increased 107 percent between 1999 and 2007 (adjusted for inflation). Top 400 incomes declined in 2008, but by most accounts they have now bounced back to pre-recession levels.

For people who just make it into the top 1 percent, the gains have been much more modest. Their real incomes have risen about 12 percent since 1999, depending how you count. By some estimates, the increase has been closer to 6 percent. In other words, people at the 99th percentile of the US income distribution – people making upwards of $360,000 per year – have just about kept pace with economic growth in the economy as a whole.

Since 1999, no group below the top 1 percent has even kept pace. They are the “other 99 percent.” They live in the “Realonomy.”

In the Realonomy, people make most of their money from wages, not investments. In the Realonomy, people have to worry about retirement planning and health insurance. In the Realonomy, people can’t afford to lose their jobs.

While the Plutonomy continues to grow by leaps and bounds, the Realonomy has been in recession since 1999. Even at the very top of the Realonomy, people have experienced flat or declining incomes over the past 12 years. For example, families at the 95th percentile of America’s income distribution have experienced, on average, a 1.2 percent decline in real income (income adjusted for inflation) since 1999.

Further down the ladder, the situation gets worse and worse. For families at the 80th percentile, incomes are down 1.3 percent; at the 60th percentile, down 4.4 percent; at the 40th percentile, down 7.1 percent; at the 20th percentile, down 10.5 percent.

Nor does education provide an insurance policy. Among college graduates with full-time, year-round jobs, real incomes are down 3.6 percent over the past 12 years.

On the other hand, those without college degrees or full-time jobs have fared even worse.

The simple fact is that the Realonomy has been stagnant or in recession since 1999. The Realonomy hit bottom in 2009-2010, but it still hasn’t bounced back. Only the Plutonomy is growing, not the Realonomy.

The Realonomy won’t start growing again until America addresses its runaway inequality. We need fairer taxes, higher minimum wages, and more – not less – government spending.

That may all sound counterintuitive in a recession, but that’s only because we’ve gotten so used to the politics of Plutonomy. Growth isn’t enough.

We have growth. The top of the top 1 percent is growing like crazy. It’s government’s job to redirect some of that growth to the other 99 percent.

Outrageous bonuses for federal workers

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Members of the US House of Representatives — Republicans and Democrats alike — seems to think that federal workers are overpaid.  They voted 309-117 to freeze the salaries of federal workers through December 2013.  Those voting in favor of the freeze included 237 Republicans and 72 Democrats.

Federal worker pay has already been frozen for 2011 and 2012.  Meanwhile consumer prices rose on average 3.0% in 2011.  The Federal Reserve Board’s target inflation rate for 2012 and 2013 is 2.0%.  That means that real federal worker wages have fallen 3.0% already and will fall a further 2.0% this year.

If the House of Representatives gets its way, real federal worker pay will fall a cumulative 7.0% in real terms by the end of 2013.

President Obama, on the other hand, is asking for a 0.5% raise for federal workers in 2013.  Even under the “socialist” Obama plan, federal workers will take a 6.5% cumulative cut in real pay by the end of 2013.

To put this in perspective, top corporate executive pay rose, on average, 36.5% in 2010 alone.  Figures for 2011 are not yet available.

Leaving aside corporate executives, there’s one big reason why federal worker pay shouldn’t go down in a recession: it doesn’t go up in a boom.

Many private sector professionals got great raises and big bonuses in 2006 and 2007.  No one except executives and bankers is getting a bonus this year, but base salaries still reflect those historical increases.  Pay goes up in good times and stagnates in bad times.

Bonuses for federal workers in 2006?  0.0%.  Bonuses for federal workers in 2007?  0.0%.  Raises for federal workers in those two years?  Less than inflation.  Federal workers live in the Realonomy with the rest of us, not in the Plutonomy of the bankers and executives.

In fact, federal worker pay for any given position has never risen more than 4.8% in a single year since 1980.  Back in 1980 it rose 9.1%.  Consumer prices that year rose 13.4%.

When federal workers start getting outrageous bonuses in good times, it’ll be fair to freeze their pay in bad times.  Until then, it simply isn’t.  Share the wealth, share the pain.  Don’t, don’t.

Bonuses for federal workers might be a good idea, but I don’t expect to see them in my lifetime.

The people who want to cut federal worker pay — and this includes the President, who has effectively supported a 6.5% cut in real pay over three years — justify the cuts by pointing to the budget deficit.  They say there’s no money.

As executive and banker bonuses show, the money is there.

In actual dollars (not adjusted for inflation) US gross domestic product (GDP) rose 4.2% in 2010 and 3.9% in 2011.  If these gains had been distributed absolutely equally throughout the economy, federal workers should have received raises of 4.2% in 2010 and 3.9% in 2011.  They got 0.0% and 0.0%.

Someone is getting the raises.  Those GDP increases went somewhere.  They didn’t disappear into thin air or get exported to China.  They represent the increase in US national income after all those payments to China.

The truth is that it’s not about the availability of money.  It’s about the distribution of money.  For bankers and executives in the Plutonomy to get 20% and 30% raises, someone in the Realonomy has to get no raise at all.  Lately, that someone has been the federal worker.

People, it’s not that hard.  You don’t need calculus, a Ph.D., or a background in macroeconomics.  The economy grew 4.2% in 2010 and 3.9% in 2011.  Where are the federal worker raises?  Where are your raises?

Ask the bankers and executives.  Ask your boss.  Don’t balance the budget on the backs of federal workers.  Maybe you’ve had things even worse than them, but that’s not their fault.  Blame the people who got the outrageous bonuses, not the people who didn’t.

UK panel: Executive compensation is a “market failure”

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Rising inequality is in the news. Occupiers from Wall Street to Winnipeg have made rising inequality a cornerstone of their campaign. Labels like “the 1 percent” and “the other 99 percent” are in the news and on politicians’ agendas.

This new attention to inequality goes all the way to the top. In his State of the Union address, President Obama warned that America was becoming “a country where a shrinking number of people do really well, while a growing number of Americans barely get by.”

We expect Democrats to get worked up over inequality, but what about Republicans? In the official GOP reply to the State of the Union address, Indiana Gov. Mitch Daniels called for us to “restore an America of hope and upward mobility and greater equality.”

The day after Obama’s and Daniels’ remarks, the World Economic Forum opened its 2012 conference in Davos, Switzerland. At the opening debate, Professor Raghuram Rajan of the University of Chicago Booth School of Business told the assembled worthies that rising income inequality was unavoidable.

According to Rajan, rising inequality is not due to outrageous corporate pay practices but to “far deeper forces”: changing technology, globalization and innovation.

“These are not going to be affected by corporate governance,” Rajan said.

The World Economic Forum, held each January at the ski resort of Davos, Switzerland, is an annual invitation-only gathering of top CEOs, politicians and pundits from around the world.

Business executives and business school economists are fond of tracing rising inequality to deep historical trends. If you believe that markets are always rational, then high pay merely reflects a person’s true economic value.

Historical trends, so the story goes, are making highly intelligent, highly skilled people more valuable – and thus more highly paid – than ever before. Resistance is futile. Inequality is rising due to deep forces beyond human control.

Economists call this line of reasoning the “skills premium” argument. Economists and executives, of course, tend to be highly intelligent and highly skilled. It’s just a coincidence that they believe that their own high salaries are the inevitable result.

The main problem with the skills premium argument is that it is wrong.

The skills premium argument implies that inequality should be rising everywhere in the world. In fact, major increases in income inequality have only occurred in the United States, Canada and the United Kingdom.

It’s a strange global historical trend that only shows up in three English-speaking countries and nowhere else.

While business school economists trace rising CEO pay to a skills premium, a blue-ribbon panel in the United Kingdom has reached a very different conclusion.

The UK High Pay Commission concluded that “top pay is a symptom of market failure based on a misunderstanding of how markets work at their best.”

The commission traced rapidly escalating income inequality back to a way of thinking that views “human nature, aspiration and endeavour … through a prism of self interest.”

“It is through looking at executive remuneration that we see the classic problems of corporate governance laid bare,” the commission said. In other words, the commission found that people – not deep historical forces – are responsible for rising income inequality.

British politicians from all shades of the political spectrum have rushed to endorse the report’s conclusions. In fact, the Conservative-led British government announced on Monday, January 23, that it would propose legislation to rein in executive pay.

The main focus of this legislation? Corporate governance reform.

The proposed British legislation is similar to the 2010 Dodd-Frank law in the United States, in that it will require British companies to publish details of executive pay and the ratio of executive to median worker pay. The British law will go much further, though. It will give company shareholders a binding annual “say-on-pay” for executive compensation and severance pay. Under the US Dodd-Frank law, shareholder say-on-pay resolutions are nonbinding and only have to be held once every three years.

Remarkably, major industry groups in the United Kingdom have come out in support of these reforms. The Institute of Directors said in a press release that it “welcomes … a binding shareholder vote on executive remuneration,” while the Confederation of British Industry more guardedly affirms that “the proposal that binding votes for shareholders will not be retrospective is welcome” without explicitly endorsing or objecting to the votes themselves.

A shareholder vote on executive pay is unlikely in itself to reverse rising income inequality – certainly not in the United States, where these votes are nonbinding. Broader corporate governance reforms would go further to reduce inequality.For example, the UK High Pay Commission recommended that workers’ representatives be given seats on corporate boards. This is already done in countries like Germany, where income inequality is much lower than in the United States, the United Kingdom and Canada.

The British government, however, categorically rejected the possibility of putting workers’ representatives on the boards of UK companies as part of its new reform package. The commission also recommended that more company directors be chosen from the public and that the role of compensation consultants in setting executive pay be reduced.

Britain’s opposition Labour party, despite having resisted the creation of the High Pay Commission in 2010, has endorsed the commission’s report in full.

Meanwhile, American politicians of both parties have vowed to address rising inequalities. The modest Dodd-Frank provisions on executive pay came into force on January 1, but it is unlikely that further action on corporate governance in the United States will be taken before the November elections.

Immobility nation

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For most people facing poverty today in the United States, the concept of America as the land of opportunity is just a fable.

America is becoming “a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” President Barack Obama declared during his State of the Union address.

The numbers back him up. Executive compensation and the poverty rate are both at or near all-time highs.

Surprisingly, it was Republican presidential candidate Rick Santorum who first made economic mobility an issue in the 2012 elections. Three months ago, he pointed out that children born to poor families rarely grow up to become rich, or even middle class.

“Believe it or not, studies have been done that show that in Western Europe, people at the lower parts of the income scale actually have a better mobility going up the ladder now than in America,” he said during the October 19 Republican presidential debate in Las Vegas.

In early January, when The New York Times picked up on Santorum’s comments and explored the fact that American incomes are increasingly immobile across generations, it made a big splash in the media. Now, Obama’s aspiration to “restore an economy where everyone gets a fair shot” is going viral.

Santorum is right about mobility. Academic studies typically show that around 40-45 percent of income differences are transmitted from one U.S. generation to the next. This is about twice as high as the equivalent figures in Western Europe and Australia.

Unfortunately, American immobility is an even bigger problem than that.

In a highly technical report from the Federal Reserve Bank of Chicago, economist Bhashkar Mazumder shows that prior researchers have seriously underestimated the degree to which children inherit their parents’ positions in society.

The new best estimate is that the intergenerational stickiness in income is around 60 percent. In other words, over half of a person’s economic status in life is predetermined at birth.

Mazumder, the director of the Chicago Census Research Data Center, concludes that it would take an average of five generations for a family’s offspring to rise from low income to middle income.

This doesn’t mean that all of a poor family’s descendants will be poor for six generations, but it does illustrate just how slowly family incomes change in America.

It wasn’t always this way. Time was when opportunities for advancement in America were expanding, not contracting.

Another study from the Federal Reserve Bank of Chicago shows that intergenerational mobility increased continuously from 1940 to 1980. Only then did it start to fall.

By 2000 (the final year of the study covered), mobility in America was lower than where it had started in 1940.

Obama and Santorum are right to argue that the government has a responsibility to foster an economic environment that encourages intergenerational mobility. And the American people agree with them.

A 2011 poll from the Pew Charitable Trusts’ Economic Mobility Project found that 83 percent of Americans “support a government role in promoting upward economic mobility.”

The top three things Americans told Pew that the government should do? Provide all children with a quality education, promote job creation, and ensure equal opportunity — all of which Obama called for in his address.

In the end, the best way to promote upward mobility is to give people a helping hand. It’s not enough to get government out of the way. Government can and should be part of the solution.