With income inequality at record levels, Bush's legacy lives on

income-inequality-at-record-levels-bush-legacy-lives-onIncome inequality pierced its previous record high in 2008 -- a fitting legacy for President George W. Bush. Fresh census figures reveal that the ratio of the incomes of the top 10 percent of Americans -- over $138,000 a year -- to those at the poverty level -- $12,000 -- was 11.4 times. (The previous record was 11.22 in 2003.) Bush's $1.3 trillion worth of tax cuts -- 32.6 percent of which went to the top 1 percent of earners -- have hit their mark.

The political miracle is that Bush was able to get nearly half the vote with policies that helped his base -- the top 1 percent. By 2007, the U.S. savings rate, at -0.7 percent, had reached its lowest level since 1928, right before the Great Depression. And with the price of oil rising to its July 2008 peak of $147 a barrel, Bush won the battle to help his buddies in Houston and Saudi Arabia. One measure of that help: Between January 2001 and August 2006, the W-Industrial Complex Index (WIC) -- a group of energy and defense stocks -- rose 184 percent, while the S&P 500 fell 4 percent.

Too bad things were so much worse for the other 99 percent of Americans. With median incomes unchanged since 1997 and prices rising, consumers made up the difference by borrowing on their homes and credit cards. Then, at the end of the year, the current recession kicked off, throwing millions out of work. This drove median income down from $52,163 in 2007 to $50,303 in 2008, wiping out a decade's worth of gains and bringing median income down to its lowest level since 1997.

And so the deflationary spiral began. Those out of work could no longer borrow to spend, and with 70 percent of GDP growth coming from consumer spending, that meant fewer purchases and more unsold inventory. That, in turn, led companies to reduce excess capacity by firing workers. And with fewer people employed, the cycle continued, and the economy sank further.

The big question is what to do about this situation. I'm not a fan of the reverse Robin Hood approach used under Bush, which tilted the economic playing field to favor the richest 1 percent. I think it would be better to use the power of the government to help boost the odds of success for technology-based start-ups.

After all, new technology -- such as clean tech -- is what creates new wealth. It is the people who take a chance on starting new companies and creating new products who give society better ways of living and conducting business. The American system of taking new ideas from the lab to the market is our greatest economic strength.

Rather than focusing on redistributing a shrinking pie, we ought to devote ourselves to creating new pies that enlarge opportunity for a broader cross-section of our country. We're still cleaning up after the previous administration, but we must create something better to replace its failed policies.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.
Read Full Story

From Our Partners