At various pivotal points in history, the United States has had the good fortune to cobble together a reasonable action, despite many powerful, unreasonable factions opposing it; but the idea that one shouldn’t worry about inequality because everyone will benefit, as in Ronald Reagan’s now infamous “trickle down” theory, has fortunately been thoroughly discredited.
In some ways, I wish it were true, for if it were, it would mean that the average American would be doing very well today, because we have thrown so damn much money at the top that even poor Americans would be among the most well-to-do poor people in the world. But the statistics show that it is simply not the case with supply-side, trickle down economic predictions: while the top has been doing very well, the rest has been stagnating, if not collapsing entirely.
This last, deep, recession—while in no small measure caused by the financial sector which itself is responsible for so much of our inequality today—has in turn made inequality so much worse that it staggers the imagination and the economy in measurable indicators not seen since the Great Depression. 95% of the gains since the so-called recovery have gone to the top 1% of the American population. And it all began with Ronald Reagan’s misguided, anti-American, anti-Capitalism, anti-good sense pyramid scheme of Supply-side economics.
And the fact that not only the charismatic, albeit naive and easily-convinced, Reagan could sell the idea to a good segment of the population, but that remnants of that voodoo and worse voodoo economics is still being peddled successfully is a testament to the abject ignorance surrounding macroeconomics today.
Despite the right wing’s insistence, it is not the case that our economy needs this inequality to continue to grow. One of the most popular , and inaccurate misconceptions in today’s right wing politics is that those at the top are the job creators; and giving more money to them will thus create more jobs.
But what was once obvious, has been lost in the circus and showmanship of that which constitutes politics in the 21st century–that it is demand that creates jobs, not wealthy individuals and corporations receiving more and more tax relief. When there is sufficient demand, America’s firms (especially if we can get our financial system to work in the way it should, providing credit to small and medium-sized enterprises) will create the jobs to satisfy that demand stimulate growth and fuel debt pay down; not heaping more and more of the country’s wealth on a smaller and smaller segment of the population.
And unfortunately, given our intentionally distorted tax system, for too many at the top, there are incentives to destroy jobs by moving them abroad. This growing inequality is in fact weakening demand—and one of the primary reasons that inequality is bad for overall economic performance.
And make no mistake, we pay a high price for this inequality, in terms of our democracy and nature of our society. A divided society is different—it doesn’t function as well. Our democracy is undermined, as economic inequality inevitably translates into political inequality.
The outcomes of America’s politics are increasingly better described as the result of a system not consisting of one person one vote but of more dollars more votes. One of the prices we pay for the extremes to which inequality has grown and the nature of inequality in America—both inequality in outcomes and inequalities of opportunities—is that we have a weaker economy than ever before.
Greater inequality leads to lower growth and more instability. These ideas now have become mainstream: even the IMF has embraced them. We used to think of there being a trade-off: we could achieve more equality, but only at the expense of giving up on overall economic performance. Now we realize that, especially given the extremes of inequality achieved in the US and the manner in which it is generated, greater equality and improved economic performance are complements.
This is especially true if we focus on appropriate measures of growth, focusing not on what is happening on average, or to those at the top, but how the economy is performing for the typical American, reflected for instance in median income. For too many— even a majority—the American economy has not been delivering. And if our economy is not delivering, it not only hurts our people, it undermines our position of leadership in the world: will other countries want to emulate an economic system in which most individuals’ incomes are simply stagnating or even receding?
We pay a price not only in terms of a weak economy today, but lower growth in the future. With nearly one in four American children growing up in poverty, many of whom face a lack of access to adequate nutrition and education, the country’s long-term prospects are being put into grave jeopardy; and the danger to America’s future stems exponentially more from these conditions than from a perceived burden of national debt that will somehow “saddle generations to come”.
The weaknesses in our economy have profound budgetary implications. The budget deficits of recent years are a result of our weak economy, not the other way around. If we had more robust growth, our budgetary situation would be far more improved. That’s why investments in decreasing inequality and increasing equality of opportunity make sense not only for our economy, but for our budget. When we invest in our children, the asset side of our country’s balance sheet goes up, even more than the liability: any business would see that its net worth is increased. In the long run, even looking narrowly on the liability side of the balance sheet, it will be improved, as these young people earn higher incomes, contribute more to the tax base, and have more discretionary income, which is the lifeblood of capitalism; not a ever-narrowing segment of the population with abject control of the assets of the country.
The role of policy in creating inequality means there is a glimmer of hope.
Policy created the problem, and it can help get us out of it. There are policies that could reduce the extremes of inequality and increase opportunity—enabling our country to live up to the values to which it aspires. There is no magic bullet, but there are a host of policies that would make a difference.
- We need to move more people out of poverty
- strengthen the middle class
- curb the excesses at the top
- more support for education, including pre-school
- increasing the minimum wage;
- giving more voice to workers in the workplace, including through unions;
- more effective enforcement of anti-discrimination laws
- better corporate governance, to curb the abuses of CEO pay
- better financial sector regulations, to curb not just market manipulation and excessive speculative activity, but also predatory lending and abusive credit card practices
- better anti-trust laws, and better enforcement of the laws we have
- and most of all, a fairer tax system—one that does not reward speculators or those that take advantage of off-shore tax havens with tax rates lower than honest Americans who work for a living.
- If we are to avoid the creation of a new plutocracy in the country, we have to retain a good system of inheritance and estate taxation, and ensure that it is effectively enforced.
- We need to make sure that everyone who has the potential to go to college can do so, no matter what the income of his parents—and to do so without undertaking crushing loans.
We stand out among advanced countries not only in our level of inequality, but also on how we treat student loans in our bankruptcy loans. A rich person borrowing to buy a yacht can get a fresh start, and have his loans forgiven; not so for a poor student striving to get ahead. The special provisions for capital gains and dividends not only distort the economy, but, with the vast majority of the benefits going to the very top, increase inequality and simultaneously impose enormous budgetary costs
While the elimination of the special provisions for capital gains and dividends is the most obvious reform in the tax code that would improve inequality and raise substantial amounts of revenues, there are many others that I hope to point out at a later time.
But we must be careful of how we measure our progress. If we use the wrong metrics, we will strive for the wrong things. Economic growth as measured by GDP is not enough—there is a growing global consensus that GDP does not provide a good measure of overall economic performance.
What matters is whether growth is sustainable, and whether most citizens see their living standards rising year after year. This is the central message of the International Commission on the Measurement of Economic Performance and Social Progress. Since the beginning of the new millennium, our economy has clearly not been performing in either of these dimensions. But the problems in our economy have been manifest for longer. As I have emphasized, a key factor underlying America’s economic problems today is its growing inequality and the low level of opportunity.
In the past, when our country reached these extremes of inequality, at the end of the 19th century, in the gilded age, or in the Roaring 20s, it pulled back from the brink during the Great Depression. It enacted policies and programs that provided hope that the American dream could return to being a reality.
We are now at another one of these pivotal brinks.
I hope we once again will make the right decisions.
Harvey A. Gold