How Bad Policy Created Income Inequality, Pushed Ordinary Americans to the Precipice, and Threatened Our Democracy

I haven’t posted about so much that I wanted to write about – Wisconsin, unions, Obama’s continued fecklessness (and perhaps betrayal of ordinary Americans), and all manner of idiocy coming from the Rs, state and federal. It was frustrating, but I was (a) working very long hours at a new gig, which I actually like, and (b) thinking a great deal about what I feel is one of the really core issues–income inequality. Last October, I posted an NYT piece by Dr. Robert Frank about how serious this concern is, or at least should be (it’s below). Since then, I’ve given that matter more thought. So below is my first take on this, which I’ve cross-posted at a friend of mine’s blog, VT Digger (see the link to the right, down near the end of the list).

At the conclusion of the third “Pirates of the Caribbean” movie, Captain Jack Sparrow and his First Mate, Joshamee Gibbs, are parting company. They grin at each other, bump fists, and recite part of the pirates’ code, “Take what you can. Give nothing back.”

In 2011, the pirates’ code could be well on its way to replacing E Pluribus Unum. Why? Because as an increasing share of the wealth created by the work of millions of people is being claimed by a relatively small portion of them, inequality of incomes is growing, and that poses a threat to our economic and political stability.

Last fall, Tim Noah, a writer at Slate, produced a comprehensive series, “The Great Divergence,” tracing the history of income inequality in the US and the implications for us The Great Divergence. I heartily recommend it, and I will present a shorter version here.

The chasm between the incomes of the wealthiest and the rest of us has been grower steadily wider for about 30 years. Some will argue this is due to the forces of the Market, but it’s more the result of three decades of public policy that have tilted our government and the economy away from average Americans.

Granted, some people will always earn more money than others. Society rewards certain skills over others, often without regard to the value of work performed to keeping society running.

For example, I’m a huge baseball fan, and my favorite team is the St. Louis Cardinals. Right now, the team may lose perhaps the best player in the game, Albert Pujols, because they refuse to meet his salary demand of $30 million a year for 10 years. Now, in terms of his skill in his profession, not to mention his commercial value, Mr. Pujols is not asking for an exorbitant level of compensation. However, in terms of value to society, a professional athlete is pretty far down on the ladder, compared, say, to a nurse, a teacher, or a police officer, none of whom could ever dream of that kind of income.

It’s a given that CEOs will make more than factory workers, although when a CEO performs badly, it’s not uncommon for him to walk away with a golden parachute. The man or woman on the shop floor simply loses the job.

The question is not whether some people will get richer than others, but whether the distance between them can grow so large as to threaten the health of an economy and a democracy and whether we will use the institutions of that democracy to prevent that from happening.

The Economic Policy Institute, using data reported by economist Emmanuel Saek, determined that, between the 1940s and 1980, an era known as The Great Compression, income inequality shrank as the richest 10 percent of Americans got about a third of income growth, while the lower 90 percent got the other two thirds. Everything began changing after 1980, and in the first seven years of this century, income growth was slower, and all of it went to the top. For the great majority of Americans, income declined in that period.

So-called “free market” advocates will argue, hey, that’s the way the world works. If you’re not smart enough or fast enough or hard-working enough to get to the top of the heap, that’s not our problem. This argument assumes the rich got that way, by gum, through their own efforts, and they’ve earned their rewards. Any attempt to intervene is distorting the markets, punishing success, and so forth.

Well, maybe that assumption deserves some examination, which I’ll take a stab at below. But more important is the issue of whether it is good for society, as a whole, for the gap between the rich and the rest to yawn so widely.

Even Alan Greenspan—the free-market avatar and Ayn Rand acolyte who was one of the key architects of the current recession—stated, back in 2007, “[Income inequality] is where the capitalist system is most vulnerable. You can’t have the capitalist system if an increasing number of people think it is unjust.”

Now, Greenspan apparently cares more about whether people on the wrong side of the income gap perceive unfairness in “the capitalist system”—and therefore might rise up to do something about it—than whether it actually is fair. Remember, this is not only one of the men who created the framework for the current disaster, but earlier, he was instrumental in getting taxes on Social Security payments raised, adding nearly $2 trillion to the tax bills of lower- and middle-income Americans. But whatever his motivation, he thinks inequality is a bad thing.

Much like the Great Recession, income inequality in America is not just a byproduct of market forces or a natural economic cycle. It is, in significant part, a direct result of public policy, and it is, in significant part, through public policy that we can make gains against this dangerous tide.

Income inequality is measured by the Gini coefficient, which measures inequality of distribution in several different disciplines, including economics. A value of zero indicates complete equality of dispersion, while a value of 1 indicates maximum inequality. In terms of measured income inequality, Scandinavian countries tend to do very well (Sweden has the lowest Gini number, .23, of the nations measured). Not surprisingly, developing countries tend to live on the opposite end of the scale. The worst was Namibia, with .70. Japan is about .38. The European Union, taken as a whole, is at .31 Canada is just above .32.

The US? Just above .46, a level near that estimated for 1929 and the highest, by far, of any industrialized nation.

In 2009, my home state of Vermont had a Gini coefficient of just under 43. Maine and New Hampshire were just over that. This is not a new development. In 2007, the Carsey Institute at the University of New Hampshire published a paper stating that, between 1989 and 2004, New England experienced the fastest growth in income inequality of any region in America. That report was discussed and elaborated upon by the authors in a piece for the Boston Federal Reserve Bank’s “Communities and Banking” magazine a few months later, and there it was stated Vermont was second in the nation, in terms of the rate of inequality growth, behind Connecticut – Income Inequality in New England

This is a trend that is likely to continue, especially considering the fact that a large number of Vermont workers are employed in low-wage positions like food services, administrative aides, and social assistance. VT Department of Labor

How is this happening?

Most economic models have productivity driving wages higher, but that model isn’t working. Americans are hardly slackers. Bureau of Labor Statistics data show growth in productivity and compensation tracked pretty uniformly between the postwar years and 1980. Then, productivity still grew, but wages lagged. Some semblance of normalcy returned in the 1990s, but the gap between productivity and wage growth yawned open further in the “oughts.”

A recent EPI issue brief The Sad But True Story of Wages in America notes that, between 1989 and 2010, productivity grew by more than 62 percent, but real hourly compensation grew by about a third of that.

The drop in union membership has, no doubt, contributed to this trend. American corporations moved jobs out of the Northeast and Midwest to the South and overseas while the federal government re-aligned the economic playing field in favor of business. Without union representation, individual workers have very little power to negotiate wages, benefits, or working conditions. As this past week marked the 100th anniversary of the deadly Triangle Shirtwaist Fire Kos on Triangle Fire it’s useful to remember how important unions are to promoting the general welfare.

Some have posited that advances in education and technology drove rising inequality, because people who did not have certain advanced skills found themselves falling farther and farther behind. There’s an element of truth in that; however, a college degree doesn’t seem to have the same economic power it once had – Sheepskin Deficit While a college degree is still a good idea, it’s not a guarantee of decent employment if the jobs aren’t there – American Prospect – Overselling Education

I am convinced that, by and large, we have the system that powerful architects of economic and social policy intended we should have.

Despite their proclaimed disdain for Big Government, the rich exert a great deal of control over its workings and enthusiastically game the system they had so much influence on creating.

I recommend a recent piece in Foreign Affairs, “Why the Rich are Getting Richer,” by Robert C. Lieberman Why the Rich are Getting Richer.

Dr. Lieberman looked at the fact that, in 2009, the average income for Americans living in the top 5 percent of earners rose, while everyone else’s fell. Dr. Lieberman describes how national policy shifted dramatically after the 1960s. Changes in tax policy have significantly reduced the contributions made by the wealthiest Americans, not to mention corporations. (Bank of America and General Electric, for example, were two of many large corporations that paid zero federal income taxes in 2009. Moreover, GE got a $3.2 billion tax benefit last year. GE – Thanks, America! ) Meanwhile, labor policies have crippled the ability of unions to organize. Deregulation, particularly of the financial industry, showered a few with billion-dollar windfalls even as they drove the economy over a cliff.

Having spent five years in the 1990s working on Capitol Hill, I can attest to a fact just about everyone knows intuitively—that wealthy interests in this country have the most influence over policy, particularly taxes, who pays them, and how much they pay. This ability to write the rules of the game invariably results in those rules favoring the interests of the writers. Even the mortgage interest deduction, hallowed by many as a benefit to the middle class, largely bestows its favors on the wealthy – Tax Policy Center on MI deduction

Dr. Lieberman refers in his essay to the book “Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class,” 9781416588696, which documents how the political system has tilted the playing field. This ground has been plowed before, most notably by Pulitzer-Prize-winning journalists Don Barlett and James Steele, who documented what was happening 20 years ago with a series of investigative stories that became three books. In great length and detail, they explained how the tax system and related economic policies had been built to favor a wealthy few over the great majority of Americans. www.barlettandsteele.com

When the wealthy are not gaming the system in the halls of Congress, they’re doing it in the halls of Commerce. I often allude to the shenanigans played by financiers in the decade behind us that crashed the economy. Simon Johnson, MIT economics professor and former chief economist at the International Monetary Fund, has written a great deal about how, after deregulation, the game was rigged. For example – ship-of-knaves.

Seems ironic to me that, despite the alarms raised by libertarian/free-market folk, the government has already “distorted” the market significantly against ordinary Americans, so perhaps what we need is a little bit of leveling of the playing field. We need it to save our country from becoming a huge banana republic.

Dr. Frank’s commentary is certainly not a voice in the wilderness. Pulitzer-Prize-winning business columnist Steven Pearlstein noted in a piece last fall that there are real costs, to our economy and our democracy, as inequality grows – AR2010100505535.html. He is one of many commentators who have described various harms done to our health, security, and stability by the gap between incomes, but let me just summarize by saying that, if a society organizes itself in such a way that a few people at the top can have public policy crafted in a way that sends increasingly large shares of the combined wealth created to their own bank accounts, it makes it harder for people of more modest means to save, invest, and certainly pay for life’s necessities, much less any luxuries. It also creates frustration, uncertainly, and eventually anger that undermines democracy. The Right was clever enough to organize this anger last year and channel it into election-year victories, but you can only scapegoat immigrants, the poor, and Big Government so long (especially when you control so much of Big Government) before people realize they’ve been hustled.

If we’re to end this erosion of our economy and democracy, we need to create policies that re-balance the system so that the millions of people who are instrumental in creating the enormous wealth that exists in our society have a larger share of the rewards for their work. A simple start would be taking our tax system back to, at least, the system in place in the 1990s, when job growth boomed and the inequality gap narrowed slightly. We should be strengthening, not attacking unions, which are a counterbalance to the overwhelming power business holds over workers. We should, instead of destroying the social safety net, mend it so that, if Americans cannot earn enough to assure themselves of a measure of security, then we step in to fill in the gaps.

Our federal government was established “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty” for “We the People,” not just the few. Let’s use that tool for the purpose it was created.

UPDATE Just came across this paper – Norton and Ariely on attitudes towards inequality – that I hadn’t seen when I posted this piece.

Later,

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