Mind the Gap: The Danger of Income Inequality
On August 31, 1910, Teddy Roosevelt delivered his famed New Nationalism speech and issued an unabashed call to cleanse the public sphere of corporate corruption. He deplored the lack of “restraint upon unfair money-getting” that allowed the emergence of “a small class of enormously wealthy and economically powerful men. He emphasized that politicians should “serve the people by whom they are elected, and not the special interests.” Defending extensive government action, he remarked that “the right to regulate the use of wealth in the public interest is universally admitted” and warned his antagonists that “ruin in its worst form is inevitable if our national life brings us nothing better than swollen fortunes for the few and the triumph in both politics and business of a sordid and selfish materialism.”
If Roosevelt’s denunciations sound familiar, they should. A century has passed since the zenith of the Progressive Era, and about 50 years have passed since the heyday of the American middle class, yet we have regressed since those halcyon days. We are fighting the same battles as the Progressives did a hundred years ago over inequality and corporations’ role in society, showing organized money’s success at erasing our forebears’ hard-won gains.
In 2014’s political climate, where even the most modest proposals divide polarized policy-makers, ambitious plans like Teddy Roosevelt’s New Nationalism, FDR’s New Deal, or LBJ’s Great Society would be political suicide. The government can barely stay open, let alone address the festering economic ills threatening our democracy. It dithers as it deals with special interests, and meanwhile, inequality has reached Gilded Age levels.
For the super-rich, things are swell. The 400 wealthiest Americans have as much wealth as the poorest 150 million Americans. The average CEO makes 204 times as much the average worker — an increase of 1,000% since 1950. According to economists Emmanuel Saez and Thomas Piketty, the top 10% raked in over 50% of pretax income in 2012, exceeding pre-Depression levels.
Contemporary robber barons’ profits have come at everyone else’s expense. Productivity has soared by 124% since 1968, according to the Center for American Progress, but the 99% has not enjoyed the benefits. The federal minimum wage stands at a paltry $7.25 an hour, and the median household income is roughly $50,000. The Center for Economic Policy and Research has calculated that, had the minimum wage tracked with productivity gains since about 1970, it would have reached $21.72 in 2012. And according to 2011 statistics compiled by Mother Jones reporter Dave Gilson, if the median household income had grown along with the economy since 1970, it would now be around $92,000.
Some justify these trends by trotting out the old “rags to riches” trope, claiming that America has higher levels of social mobility than other industrialized democracies. But in fact the opposite is true. Harvard researcher Nathaniel Hendren says “mobility is fairly low in the U.S.” relative to other developed nations. Increasing inequality and low mobility go a long way toward explaining America’s economic malaise.
How did we get here? According to University of Texas-Austin professor and economist James K. Galbraith, “credit and stock bubbles” are partly behind the rise in inequality. In addition to factors like “the general preference of public policy and tax policy for the rich and the fall in the real value of the minimum wage, periodic recessions and the decline of unions,” he blames the “rise in capital asset prices in conjunction with the concentration of stock ownership, especially in the financial sector and in the new technologies” for our new Gilded Age. Kenneth Arrow, Nobel Prize-winning economist, agrees. He ascribes the rise of inequality to “globalization, capital-labor substitution, and the growth of the financial sector.” According to Arrow, the increased “competition for American manufacturing” and an “increasingly important” Wall Street “less and less dependent on low- and middle-wage labor” have engendered inequality.
What caused this economic revolution? In a 1971 memo to U.S. Chamber of Commerce, future chief justice Lewis Powell wrote, “Business must learn…that political power is necessary; that such power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination.” During the 1970s, Big Business heeded Powell’s advice and promoted its interests. Movement conservatives — individuals fighting New Deal ideology — won victories at the tail end of the Carter administration and the beginning of the Reagan era. Trumpeting the virtues of deregulation and supply-side economics, conservatives enacted policies that favored capital and eroded the social safety net and system of regulation crafted from 1933 and 1973. Taxes plummeted, unions were attacked on all sides (most famously, Reagan destroyed the air traffic controllers’ union), and industry after industry was deregulated in the name of “free” markets. Wall Street metastasized.
As the financial sector swelled, banks and their allies — Republicans and Democrats alike — chipped away at the safeguards instituted during the New Deal. The 1999 repeal of the Glass-Steagall Act, a law separating commercial and investment banking, certified the revolution that had already occurred. The rich had a growing impact on legislation thanks to increased expenditures on lobbying and campaign contributions, the regulatory capture of the bureaucracy, and the revolving door.
Corporate interests’ political meddling engendered a vicious cycle. Using their newfound influence, multinational corporations, banks, and the wealthy rewrote the laws in order to increase their wealth and weaken the government’s ability to hold them accountable. As the clamor of moneyed interests became more strident, the Republican Party moved further rightward. The Democratic Party also became more conservative, ceding its traditional commitments to the working and middle classes. These changes have led to today’s extreme polarization — with a Republican Party that has moved much farther to the right than the Democratic Party has moved to the left — as well as Washington’s gridlock on inequality-related issues.
Why are the high and rising levels of inequality in our country so worrisome? Firstly, inequality detracts from democracy and freedom. It makes people become more atomized and withdraw from the public sphere. People worrying about their next meal have little time to worry about voting or participating in political groups. As FDR’s vice president Henry Wallace once observed, “Men and women cannot be really free until they have plenty to eat, and time and ability to read and think and talk things over.”
Secondly, inequality constitutes a serious market failure. It is economically inefficient; as people make more money, any additional money has diminishing marginal utility. Someone earning $5,000 annually would benefit much more from receiving an additional $1 million than Bill Gates would. Broad-based prosperity, with a middle class that can spend money, is necessary for a thriving economy given our consumption-based model of capitalism. In fact, the 2008 Wall Street debacle and today’s economic doldrums stem from our nation’s market-destabilizing inequality.
Thirdly, inequality undermines trust and health. As society becomes more unequal, the classes interact less frequently. As Richard Wilkinson and Kate Pickett catalogue in their book The Spirit Level, citizens of more highly stratified societies suffer from increased status anxiety, stress, and mental illness. More unequal societies have higher rates of violence, addiction, teenage pregnancy, obesity, and imprisonment.
In 2011, Occupy Wall Street brought the three dangers of inequality into the national spotlight and agitated for economic reform. Meanwhile, an increasingly populist segment of the Democratic Party — spearheaded most notably by Elizabeth Warren and Bill de Blasio — has placed inequality back on the agenda. In an October 2013 story by the Associated Press, Yale’s own Sterling Professor of Economics Robert Shiller articulated these groups’ concerns when he contended, “The most important problem that we are facing now today, I think, is rising inequality in the United States and elsewhere in the world.” In December 2013, President Obama echoed Shiller, calling income inequality the “defining challenge of our time.” He reiterated the need for action in his subsequent State of the Union address.
So how can we correct extreme inequality? There are a multitude of potential solutions. Galbraith, the University of Texas-Austin professor and economist, recommends increasing the minimum wage to $12 per hour and funding public services like schools and healthcare. He also suggests increasing the rate on the estate and gift tax and eliminating “loopholes and evasions” to prevent the generational transmission of large fortunes.
Arrow concurs with Galbraith about reforms to the tax code, claiming that the “constructive realization of capital gains at death” is needed to lessen inequality. He also advocates “regulations reducing the scope of financial activity” as a way of “prevent[ing] the financial sector from being the source of economic instability.” Additionally, Arrow says, the government should “use its tax and transfer policies,” including “higher taxes on high incomes” and the elimination of such “ridiculous” rules as allowing hedge fund managers to consider their fees to be capital gains for tax purposes, to “offset market-created inequality.”
The tax code is certainly ripe for reform. Eliminating exemptions so corporations must pay the official tax rate would be an excellent way to fund redistributive programs. A financial transactions tax would raise revenue and limit the scope of Wall Street. The government could also significantly raise income taxes on the wealthy; In the 1950s, the U.S. had a 91% top marginal income tax rate. While that rate is obviously too high, in an October 2013 Guardian op-ed, economists Saez and Piketty supported “mak[ing] a top rate tax level of 80% at least ‘thinkable’ again.” A cap on executive pay that sets a maximum for annual compensation would be a more direct approach to restraining runaway inequality. So would increasing the minimum wage and indexing it to average executive pay.
Expanding Social Security benefits would support those who are struggling. Increasing funding for education, providing universal preschool and subsidized child care, and tackling student debt would help equalize opportunity for all. Reforming labor laws and making the right to unionize a civil right would increase the middle class’s bargaining power. Most radically — though not without precedent in Richard Nixon’s Family Assistance Plan and an impending vote in Switzerland — we could resurrect the idea of a universal basic income, thereby providing some level of economic security to all Americans. In 1944, to augment the Constitution, FDR proposed a Second Bill of Rights which included the rights to education, housing, a job with a living wage, health care, and Social Security. Policies aiming to realize these rights would help to build an America where opportunity is truly equal.
Ignoring inequality will not cause it to vanish. The shrinking middle class and swelling ranks of the poor will not stay quiet forever. As the poet Oliver Goldsmith chillingly warns us, “Ill fares the land, to hastening ills a prey, / Where wealth accumulates, and men decay.” One way or another, the inequality problem will be resolved.