Inequality For All
by Ted P. Schmidt
Think there’s room for you at the top of the income ladder?
Inequality: Of the 308 million people in the United States, one-tenth of one 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 percent own 73 percent 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 percent receive 50 percent, 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 percent 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 percent fell from 50 percent to less than 35 percent by the end of World War II.
The progressive policies of the New Deal kept inequality in check for the next 30 years. More importantly, from 1947 to 1980, America experienced an economic Golden Age, as growth averaged 3.7 percent per year. And economic growth was not driven by the savings of the wealthy; rather it was the result of a vibrant middle class 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 percent during this entire period.
So what happened? There is one simple explanation: The US has moved from a “shared” to an “extractive” economy. For those 30 years after World War II, productivity gains from technological progress were shared with workers in the form of higher wages.
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 (a.k.a. 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 percent to just over 40 percent by the end of the decade.
By the 1990s, the US economy had become financialized, meaning the sectors of finance, insurance, and real estate (or FIRE) industries 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. 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 percent to 2.75 percent; 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 miles per hour 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 percent of the one percent) that has garnered most of the gains from the extractive 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.
Ted P. Schmidt is a professor of economics at SUNY Buffalo State.blog comments powered by Disqus
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