Wednesday, October 9, 2019

The Great Income Disparity – The US Case

According to Forbes, “In 1965, America's top 1% controlled about 10% of the nation's after-tax income. That number has now grown to over 15%. The average CEO-to-worker pay ratio has increased from 20-1 in 1965 to a whopping 312-1 in 2017. And middle-class real wage growth has been stagnant for decades.”

Presidential candidates are also weighing in on the fast-growing income inequality in the US. On September 24, 2019 Senator Bernie Sanders announced his “Tax on Extreme Wealth” with a proposal for ultra-wealth tax ranging between 2% and 8% depending on the net worth. Presidential hopeful Andrew Yang’s campaign website states, “Andrew would implement the Freedom Dividend, a universal basic income of $1,000/month, $12,000 a year, for every American adult over the age of 18. This is independent of one’s work status or any other factor.”

Given this widening income gap between rich and poor and stagnant wages for the middle class, we need some serious socio-economic re-engineering. Here are some:

1. Implement Laureate Yunus’ Microcredit Model to Create Economic Opportunities in Inner Cities Most inner cities in the US lack proper economic opportunities resulting in poverty, often rampant poverty. Thousands of bright people are stuck in poverty in inner cities due to state and local governments’ inability to create any meaningful economic opportunities. One size fits all economic model does not work there; instead, the local governments should try Laureate Yunus’ Microcredit Economic Model, thus financially empowering the local entrepreneurs (who “are too poor to qualify for traditional bank loans”) to turn their neighborhoods around. Though this bottom-up economic model was developed for poor villages in third world countries, it has tremendous potential for our inner cities. In order to maintain the uniformity of the program, it needs to be federally (HUD) funded or insured, with a dedicated chain of private financial institutions operating and managing it, in line with the existing SBA program. Again, for the program to successfully work, governments must not be involved in running it.
     2. Proclaim all small and mid-size Downtowns as Enterprise Zones –
     Downtowns of many small and mid-size towns around the US suffered heavily with the out-migration of population to the suburbs. While the theme of revival and revitalization of downtowns has been gaining momentum, it needs to accelerate and become more widespread. In fact, all such downtowns must be proclaimed as Enterprise Zones, enticing businesses and builders to return to take advantage of the long-term income and property tax abatements. Sales tax subsidies could be offered to entice consumers to return to shop in revitalized downtowns as well. Public parks could be privatized in an effort to convert them to esthetically-decent yet income-producing family-oriented amusement and entertainment centers. A well-planned nationwide downtown revival initiative will create enormous economic opportunities and jobs; in fact, it could complement the much-talked about trillion dollar Federal Infrastructure Plan, creating much better synergy than approaching them mutually exclusively.

     3. Build Water and Sewage Treatment Plants – Clean water along with effective sewage system is life’s basic necessity. In fact, providing clean water to citizens is as important as the basic education and preventive healthcare. Therefore, investing in water and sewage treatment plants must also be viewed as preventive healthcare, helping people avoid unnecessary trips to health centers and emergency rooms due to easily avoidable water-borne diseases and lack of sanitation. Private companies must be enticed to build and run these plants in exchange for long-term tax-free revenue. Upon expiration of the initial contracts, governments must auction off the maintenance and revenue rights for lump-sum and upfront revenue. This could be one of the best investments in keeping people healthy while reducing overcrowding at the ER, thus freeing up doctors and nurses to provide more critical medical services. This rising tide will incentivize private companies to make bigger and better (AI and robotics) investments in water treatment and recycling technology, striving to lower the overall development and maintenance costs.

    4. Let the Private Sector Develop a Fair and Equitable Property Tax Assessment System – Property tax is often the major source of revenue for Cities and Towns. The poorly built or haphazard assessment systems tend to be highly regressive, thus heavily favoring the rich. Under such a biased system, the poor and middle-class homeowners subsidize the upscale and high-end properties. The young and prospering cities and towns around the country must therefore consider outsourcing this important public task to the private sector or at least develop it in collaboration with the private sector so it becomes truly fair and equitable. Ideally, the development and managing of this task must be entrusted to the private sector. Obviously, an unfair system discourages home ownership at the rank and file level, uproots seniors and minorities and often pushes the middle class off the cliff. On the other hand, a fair and equitable system spontaneously entices property developers, both residential and commercial, to explore those markets. Likewise, the major developers tend to avoid cities and town with unfair and/or unpredictable assessment systems.

     5. Develop a Competitive yet Investment-friendly Business Climate –
     States down to cities and towns must develop an investment-friendly business climate and learn to compete with one another in order to entice significant domestic and foreign investments, leading to persistent and long-term economic prosperity and an ever-expanding job base. Political leaders must also realize that a marketable local economy requires a marketable labor force along with an attractive business climate comprising lower corporate taxes, growth-friendly corporate and environmental regulations, separation of church and state, developed financial institutions, low crime, cooperative and functional government, etc. Furthermore, in order to attract major corporations to help take the city/town to the next level and reshape the economic landscape, local governments must be as forthcoming and accommodative as is economically possible, considering such an event could bring about epoch-making economic impact locally; Case in point: In 2018, we noticed the absolutely astounding reactions from many cities and towns across the country to the proposed development of Amazon’s HQ2 and the regional centers.

    6. Build more Long-term Care Facilities, not Jails and Prisons – People committing the so-called “serious crimes” must be sent to high-security long-term care centers under the care of qualified psychologists and psychiatrists. If we decide to move to a “merit-based immigration,” the top-notch psychologists and psychiatrists from around the world must top the merit list alongside the STEM professors and highly qualified researchers. This humane approach will help save a ton of taxpayer dollars, finding ways back into those poorer communities. The young and reinvented cities around the country should rethink and redefine crime and punishment from a moral high ground. The lack (perhaps absence of) of economic opportunities often forces poor people to commit petty offences, resulting in unnecessary jail terms. Instead of sending them to jails, they should be assigned to the local clergies, rabbis and imams to perform community service. Similarly, in a civilized world, the building of juvenile detention centers does not pass the muster of moral hazards. Those kids should also be supervised by the local spiritual leaders. This holistic approach will be a much better deterrent than the traditional jail terms. They will thus remain as normal and productive citizens without the useless stigma of jails and detentions. In return, the participating religious institutions must receive government aids and grants for maintenance and conservation of their facilities.

    7. Make College Education Free for STEM Students – This country needs to emphasize science and technology education to maintain global championship. Government colleges must provide free STEM education to all qualified poor students. In order to get into the free STEM programs students must compete and qualify for the available seats, ensuring the acceptance of the best and brightest. Students pursuing other essential disciplines like nursing, teaching, etc. must receive tuition subsidies as well. All other majors (e.g., business, humanities, etc.) irrespective of the students’ financial needs must pay full tuition, thereby forcing the otherwise needy to pursue vocational education in line with the market demand. Again, vocational education must carry full financial aid for the needy. While the local governments must always ensure that the financially disadvantaged students are never left behind, they must simultaneously understand the marketability of the labor force. Taxpayer dollars must never be squandered on education that is contrary to the market demand.
     8. Richest 1% Needs to Accept the Generational Reset – The richest 1% now owns 50.1% of the world’s wealth. Given this absurd concentration of wealth, we need this 1% to be self-convinced (like Mr. Warren Buffett) that they are just temporary custodians of their wealth. They must therefore come to terms with the generational reset meaning, at the end of their lives, they must return a sizable portion, if not all, of their wealth back to the society, pulling tens of thousands out of abject poverty each year. In other words, the success or failure of this country is now largely dependent on them. If they are honest and honorable enough to accept this harsh reality, the advancement of the citizenry will gleefully continue; absent which, millions more will continue to drift away in utter poverty. Hopefully, this voluntary return of wealth – and not forced redistribution of wealth – will become a self-fulfilling prophecy in arresting the ever-widening income disparity and mitigating poverty. We just want them to be more humane in feeling the pain and anguish of millions of mothers watching their children go to sleep hungry.

    9. Apply the Same High Moral Standard to the other 99% – We must learn to put the interest of the country ahead of our own. So, the rich and poor alike must also come to terms with the generational reset, voluntarily returning a big part, if not all, of our wealth back to the society. Perhaps, we need a universal ring-tone ‘Mom, I am hungry, I can’t sleep’ which will constantly remind us that millions of children are hungry and that their mothers are starving. That nightly cry is the Via Dolorosa for those mothers – that just never ends. We must never forget that these are our children and their mothers are our daughters and sisters. They are inseparably part of us!

   Sid Som, MBA, MIM
   President, Homequant, Inc.

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