Trickle-Down Caused the River of Wealth to Flow Upstream

income-inequality-400x280We are currently witnessing the most profound ‘Great Transfer’ of wealth from the middle and lower-class income earners to the top 1% in the history of the world. I wish that were a hyperbolic overstatement, but sadly it is not.

The second half of Thomas Piketty’s provocative book, Capital in the 21st Century, addresses the structure and causes of economic inequality as he lays out recommendations for how to deal with what he sees as this pervasive and long-ignored problem.

In this context, Piketty’s focus shifts to a detailed examination of income inequality in the United States, the combination of capital and earnings. He notes that at the end of the Nineteenth Century, American income distribution was more equitable than in Europe, in part, because the U.S. had fewer landowners and they were not as wealthy as those in Europe.

This all changed when Ronald Regan came into office and began dismantling the middle-class, which his successors in the Republican Party ran with in ways the inept President Reagan never intended, nor even imagined. But as any prosecutor worth his weight in jelly beans will tell you, ignorance is no defense to unintended consequences.

America likes to think of itself as a land of the Great Middle Class with a government “of, by and for the people.” But that reality has changed drastically over the past several decades, as money and power have created a dominant American Oligarchy; a term previously used only in connection with those big sleazy Mafioso-type businessmen in Russia. Russia had Oligarchs; we didn’t. That became a big difference between the official narrative of what separated our “land of the free and the home of the brave” from “them” in the post-Soviet period.

Actually, I first heard the term “oligarchy” when I was studying labor history half a lifetime ago. We were taught about something called the “Iron Law of Oligarchy.” It was a concept coined in 1911. Here’s how it was defined in that relic of another age: The Encyclopedia Brittannica:

  “iron law of oligarchy, sociological thesis according to which all organizations, including those committed to democratic ideals and practices, will inevitably succumb to rule by an elite few (an oligarchy). The iron law of oligarchy contends that organizational democracy is an oxymoron. Although elite control makes internal democracy unsustainable, it is also said to shape the long-term development of all organizations—including the rhetorically most radical—in a conservative direction”

 

The conclusion, therefore, is that the formal organization of bureaucracies inevitably leads to oligarchy, under which organizations originally idealistic and democratic eventually come to be dominated by a small, self-serving group of people who achieved positions of power and responsibility. So, oligarchies have been with us seemingly forever. It’s an “iron law,” that references the small elite – the 1 percent of the 1 percent – that dominates economic and political decision-making.

Yes, the Koch Brothers are a perfect example.

Everybody on the liberal left is now discovering information spelled out in a number of studies that caught the attention of Bill Moyers and his writing colleague Michael Winship. They frequently discuss the way governments become partial to oligarchs and insure that the rich rule:

“Inequality is what has turned Washington into a protection racket for the one percent. It buys all those goodies from government: Tax breaks. Tax havens (which allow corporations and the rich to park their money in a no-tax zone). Loopholes. Favors like carried interest. And so on. As Paul Krugman writes in his New York Review of Books essay on Thomas Piketty’s Capital in the Twenty-First Century, ‘We now know both that the United States has a much more unequal distribution of income than other advanced countries and that much of this difference in outcomes can be attributed directly to government action.’”

CEOs of major companies earn an average of 331 times more than their employees and  The New York Times reports America’s middle class is “no longer the world’s richest.”

Even the barons of business news admit that wealth is concentrated as almost never before, Here’s Bloomberg News: “Just today, the world’s 200 richest people made $13.9 billion.” In one single day, according to Bloomberg’s Billionaires Index.

The wealth effect” is a construct that Alan Greenspan conjured up straight from the depths of his  economically antiquated ass—while Chairman of the Federal Reserve–and presented to the American people as a valid economic theory.

His theory: if we immensely enrich the richest few thousand people in the world during years of bailouts, money-printing and interest-rate repression, everyone would be happy somehow.

Sound familiar? It should. It’s the same crap the GOP is spewing today through the mouthpieces for conservative billionaires like the Koch  Brothers and Sheldon Adelson, three of the richest individuals in the world.

Adding critical firepower to this perspective, Eric Zuesse, cites the study to appear in the Fall 2014 issue of the academic journal Perspectives on Politics, that finds that “the U.S. is no democracy, but instead an oligarchy, meaning profoundly corrupt, so that the answer to the study’s opening question, ‘Who governs? Who really rules?’ in this country, is:

“To put it short: The United States is no democracy, but actually an oligarchy.”

Much of this involves what economist Simon Johnston calls the “capture” of the state by corporate interests. He explains in a recent post:

“Before 1939, wages and profits in the financial sector in the United States amounted to less than 1% of GDP; now they stand at 7-8% of GDP. In recent decades, financial assets have expanded dramatically relative to any measure of economic activity, as life expectancy increased and the post-WWII baby boomers began to think about saving for retirement. Compared to the size of the US economy, individual banks are now much bigger than they were in the early 1990’s.”

Sounds pretty frightening – and depressing, but none of us should be shocked by these findings.

In this restrictive political frame, how can ordinary people effectively address their government for change? Lobby our media to start reporting on the world as it is, not what it was, when today’s senior editors grew up, believing in the myths of American pluralism?

Bullshit. The media itself has become as corrupted as the democracy itself, with just six media giants controlling 90% of the “news” Americans are allowed to hear.

American economist Paul Krugman refers to this “Ozzie and Harriet” era as “The America We Love,” a nostalgic time that has lodged in the American collective unconscious as the era of the Great American Middle Class when the combined impact of government policies from Franklin Roosevelt’s New Deal through Lyndon Johnson’s Great Society had combined to spread the national wealth more evenly.

But by the end of the century, the wealth of the top ten percent had zoomed upward to near 50 percent, surpassing Europe as the more economically unequal society.

Since 1980, inequality of income skyrocketed in America as in no other country, a change attributable mostly to capital gains among the investment class along with “supply-side”, voodoo economics and other tax cuts that followed Ronald Reagan’s rise to the presidency in 1981.

This run-up in wealth was aided by extensive stock speculation, including the Internet bubble, the real-estate bubble and the general rise in the stock market, a trend that reversed early in the Twenty-first Century when the bubbles popped and the financial markets in 2007-08 faced the worst crisis since the Great Depression.

But the crash only temporarily halted this march toward inequality. As Piketty’s chart reveals, after a dip in 2007-2008, there was a sharp rebound upward in divergence of income as government money and policies stabilized the financial markets but did little to help average Americans who faced high unemployment and a flood of home foreclosures destroying the net worth of many middle-class families. (See chart on page 292)

If this pattern of wealth disparity continues, Piketty predicts that the upper 10 percent will have about 60 percent of all income by 2030.

Piketty makes one of his most chilling observations, pointing out that the peak point for U.S. concentration of wealth in the Twentieth Century was 1929, the year of the Great Crash; brought on, at least in a preponderance of reasons, by Herbert Hoover’s obsession with paying down the national debt.

Again, ringing any bells?

In the ensuing 85-year time span, the other highest point of concentration was in 2008. At both points, the system collapsed, wreaking havoc across the world economy.

Piketty’s point is that it appears that no economic system can sustain this level of imbalance. These imbalances, with wealth overloaded at the very top, cause dangerous instability, just as the ballast from a broad middle class – like the one during the “Ozzie and Harriet” era a half century earlier – seems to keep a system relatively steady.

Prior to the 2007-08 crisis, there was a stagnation of purchasing power for the middle and working classes. This, in turn, caused them to take on debt, supplied by banks that had been freed from much of the regulation that had been imposed after the Great Crash of 1929. (See: Stop the GOP Assault on the U.S. Economic Future http://progresshg.com/2012/05/10/gop-assault-our-economic-future/  and Forget Dodd-Frank: Reinstate Glass Steagall http://progresshg.com/2012/03/01/reinstate-glass-steagall/ ).

Wage inequality and its role in this imbalance, particularly the staggering increase in wages and salaries at the very top in recent years, is a marked contrast from the eras of World War II and the post-war “Ozzie and Harriet” years.

In terms of real purchasing power, the minimum wage peaked in 1969. At that time it was $1.60 per hour. In today’s dollars that’s $10.10.

The minimum wage stagnated, especially under Presidents Ronald Reagan and George H.W. Bush and has been stuck at $7.25 since 2009, meaning that it has lost more than a quarter of its purchasing power since 1969 and is one-third below the minimum rate in France.

So, just as the wealthiest Americans were benefitting from Reagan’s “supply-side” tax cuts, the bottom wage earners were left to fend for themselves.

One reason is that, unlike in Japan, after 1970, boards of directors were all too eager to give their officer candidates just about whatever they wanted in the form of remuneration. And as Piketty points out, seldom was this done on a cost-benefit ratio for the company or the stockholders. In retrospect, it was really more on a “pay for luck” rather than performance standard, he says. (p. 335)

From about 1914-1970, these taxes were generally progressive, that is, the richest paid a higher rate than the lower-, working- and middle-classes. But that progressivity has steadily declined amid successful lobbying by “free-market” forces that have poured huge sums of money into think tanks, media outlets and, in the U.S., political campaigns.

By letting the rich better shield their assets, including their opportunity to pass down the wealth to their heirs, governments have cut themselves off from much of the money needed to pay for domestic and other needs.

Traditionally, much of the wealth of the well-to-do has come from inheritance. In France in the 1800s, the top 10 percent of those with inherited wealth earned as much as 25-30 times as the average worker, while a skilled professional made about 10 times as much as the average worker.

So, because of these recurring imbalances in the system, the idea of a deservedly compensated meritocracy generally no longer applies.

So, what to do? The question is addressed in the last part of the book, entitled “Regulating Capital in the Twenty-First Century.” His chief recommendation is a universal and progressive global tax on capital, which would also require government to find where the capital actually is and who owns it. (p. 471)

Piketty draws a lesson from the Great Depression when President Franklin Roosevelt began to steadily and insistently raise taxes on the richest people in America.

As this system took shape, about half the money went to health and education. The other half went to transfer payments, e.g. welfare support, the GI Bill of Rights and various pension plans. During this time period, social mobility also increased in the United States. People from humble beginnings had a real shot at climbing the economic ladder.

However, since the Reagan era and the growing conservative hostility toward social programs – accompanied by massive tax cuts for the rich – the trends of the New Deal have been reversed. Today, along with the concentration of wealth at the top and stagnation below, U.S. social mobility is on the decline, falling behind European nations such as Sweden.

The point is that if the public is to regain control of capitalism – and the destabilizing extremes that it produces – then the people must bet on democracy.

The upcoming elections this year and in 2016 will be seminal periods in America’s future history. If the U.S. aristocracy is permitted to continue to buy elections via Citizens United, if the middle class doesn’t wake up and start voting is own interests, if the GOP retakes the Senate…Capitalism and the promise of a bright American future that it would bring will not survive.