A version of this piece was recently published in Artvoice.
======================================================================
Inequality: of the 308 million people in the United
States, one-tenth of 1 percent—just 300,000 people--control more income, and
more wealth, than at any time in the history of the United States – and their
tax rate is less than yours.
But these folks don't "earn" their income in
the same way that doctors, plumbers, office workers, and others who work for
wages and salaries earn their pay; "unearned" capital income is the
source of the great difference in what the top households take in, and extreme
concentration of financial wealth is the cause.
The question for us is very basic: does the amount of
income and wealth held by the top, the very top, matter?
The short answer is that it very much does matter --
because about 30 years ago the United States went from having what economists
generally characterize as a "share" economy to an
"extractive" economy, and the results have not been pretty.
First, let’s put the US numbers in global perspective: the
top 10% own 73% of all financial wealth (things like stocks, bonds and real
estate)--only Russia, the Ukraine, and Lebanon rank worse in wealth inequality;
for income, the top 10% receive 50%, which ranks us 41st worst (out
of 141 countries, and only slightly better than Uruguay). These are the kinds of numbers that start revolutions. It’s no wonder that President Barack Obama
says “inequality is the defining challenge of our time.” But it wasn’t always this way…
One has to go back to 1929 to find these levels of income
and wealth concentration in the US, and many economists argue it was that inequality
which was a primary cause of the Great
Depression. The depression, with its
25% unemployment rate, sparked FDR’s New
Deal policies which included jobs programs, social security, higher taxes
on the wealthy, and restrictive financial regulation, among others. The result was a dramatic drop in measured
inequality, as the share of income held by the top 10% fell from 50% to less
than 35% by the end of WWII.
It was the progressive policies of the New Deal kept
inequality in check for the next thirty years.
More importantly, from 1947 to 1980 America experienced an economic Golden Age, as growth averaged 3.7% per
year. And economic growth was not driven by the
savings of the wealthy, rather it was the result of a vibrant middleclass which
was created by a strong, unionized manufacturing sector. Despite today’s rhetoric about the need for
low taxes on the “job creators,” the top income tax rate was never less than 70%
during this entire period.
So what happened? There
is one simple explanation: the US has moved from a “shared” to an “extraction” economy. For those thirty years after WWII,
productivity gains from technological progress were shared with workers in the
form of higher wages (see for EPI example). Since
the mid-1970s, labor has been under siege and wages have stagnated; productivity
gains now go to the owners of capital in the form of interest and profit. Most of what explains this change is the
result of four factors: deindustrialization; Supply-side economic theory,
globalization, and financialization.
By the 1970s, American companies had become complacent while
foreign companies (in Japan and Germany for example) were becoming more
competitive; in addition, two OPEC oil embargoes helped push costs up and
stoked inflation. These pressures caused
business profits and the real value of stock prices to decline throughout the decade. In response, US manufacturing companies started
to shift production to low-wage countries, which is the easiest way to restore
profitability. Thus began the era of deindustrialization
and the steady decline in high-wage, unionized jobs over the next three
decades.
On the political side, Ronald Reagan was elected in 1980 with
the promise of restoring American prosperity; however, that promise was built
on a philosophy that would seek to destroy the New Deal foundations.
Supply-side economics (aka Reaganomics) promised that lower taxes on capital
income (dividends and capital gains) and deregulation would re-invigorate
America’s competitiveness, and the “rising tide of wealth would lift all
boats.” But by the end of the 1980s, financial
deregulation made bond traders the “masters of the universe” and unleashed the
era of “greed is good,” and greed was good for the top, as their share of
income increased from 33% to just over 40% by the end of the decade.
By the 1990s, the US economy had become financialized, meaning the sectors of Finance, Insurance and Real
Estate (FIRE) now dominated economic output and their industry leaders heavily
influenced economic policy. Supported and
pushed by FIRE sector political donations and lobbyists, politicians passed trade
agreements (for example, Clinton passed NAFTA and gave China Most Favored
Nation status), more deregulation, and more tax cuts unleashing the forces of
globalization and financialization onto the US economy. Combined with corporate CEOs compensated with
stock options and Wall Street investment banks financing Leveraged Buyouts for
quick gains, it created a short-term focus on profitability, accelerating the
shift of manufacturing to low-wage countries, further decimating US
manufacturing, unionized labor, and the middle class.
While apologists will argue that inequality is the result of
educational and skill differences among people, extreme inequality is the
result of a power relationship: capital dominates labor. Globalization and financialization have
allowed the “owners” of capital to extract higher profits by reducing labor’s
bargaining power which has suppressed wages--since the 1970s wages have stagnated even while productivity continues to rise. The social compact between labor and capital has
been destroyed, with all gains flowing to the top.
Other than increased inequality, what has the extraction
economy given us? Since 1980 the average
growth rate in the US has declined from 3.7% to 2.75%; the combination of lower
growth, tax shelters and lower tax rates on the wealthy has produced chronic government
deficits; more income at the top has created an economy prone to speculative bubbles;
and we now have a political system that is more like a Russian oligarchy than
not.
Sure, if you win the genetic lottery—if you can toss a ball
100 mph or sing like a songbird, then you too can join the club. The truth is, as the income data show, there
is a very small group (the 10% of the 1%) that has garnered most of the gains
from the extraction economy, and those gains have come at the expense of the
laboring class.
Despite the Supreme Court’s recent decision to allow the
wealthy nearly unlimited influence over the political debate, all is not
lost. We can change the discourse, and
there are policies that we can support that will help reduce inequality and the
power of America’s oligarchs.
Join us next week Thursday at 5:30 pm for the final film of
the Crisis! Film series, “Inequality for All.” The film will be preceded by a
presentation (“Solving Inequality”) from Dr. Robert Pollin, Distinguished
Professor at the University of Massachusetts Amherst, and followed by a panel
discussion with audience Q&A.
