How to Shrink Inequality
by Robert Reich, Monday, May 12, 2014
Some inequality of income and wealth is
inevitable, if not necessary. If an economy is to function well, people
need incentives to work hard and innovate.
The pertinent question is not whether income and wealth inequality is
good or bad. It is at what point do these inequalities become so great
as to pose a serious threat to our economy, our ideal of equal
opportunity and our democracy.
We are near or have already reached that tipping point. As French
economist Thomas Piketty shows beyond doubt in his “Capital in the
Twenty-First Century,” we are heading back to levels of inequality not
seen since the Gilded Age of the late 19th century. The dysfunctions of
our economy and politics are not self-correcting when it comes to
inequality.
But a return to the Gilded Age is not inevitable. It is incumbent on
us to dedicate ourselves to reversing this diabolical trend. But in
order to reform the system, we need a political movement for shared
prosperity.
Herewith a short summary of what has happened, how it threatens the
foundations of our society, why it has happened, and what we must do to
reverse it.
What has Happened
The data on widening inequality are remarkably and disturbingly
clear. The Congressional Budget Office has found that between 1979 and
2007, the onset of the Great Recession, the gap in income—after federal
taxes and transfer payments—more than tripled between the top 1 percent
of the population and everyone else. The after-tax, after-transfer
income of the top 1 percent increased by 275 percent, while it increased
less than 40 percent for the middle three quintiles of the population
and only 18 percent for the bottom quintile.
The gap has continued to widen in the recovery. According to the
Census Bureau, median family and median household incomes have been
falling, adjusted for inflation; while according to the data gathered by
my colleague Emmanuel Saez, the income of the wealthiest 1 percent has
soared by 31 percent. In fact, Saez has calculated that 95 percent of
all economic gains since the recovery began have gone to the top 1
percent.
Wealth has become even more concentrated than income. An April 2013
Pew Research Center report found that from 2009 to 2011, “the mean net
worth of households in the upper 7 percent of wealth distribution rose
by an estimated 28 percent, while the mean net worth of households in
the lower 93 percent dropped by 4 percent.”
Why It Threatens Our Society
This trend is now threatening the three foundation stones of our
society: our economy, our ideal of equal opportunity and our democracy.
The economy. In the United States, consumer
spending accounts for approximately 70 percent of economic activity. If
consumers don’t have adequate purchasing power, businesses have no
incentive to expand or hire additional workers. Because the rich spend a
smaller proportion of their incomes than the middle class and the poor,
it stands to reason that as a larger and larger share of the nation’s
total income goes to the top, consumer demand is dampened. If the middle
class is forced to borrow in order to maintain its standard of living,
that dampening may come suddenly—when debt bubbles burst.
Consider that the two peak years of inequality over the past
century—when the top 1 percent garnered more than 23 percent of total
income—were 1928 and 2007. Each of these periods was preceded by
substantial increases in borrowing, which ended notoriously in the Great
Crash of 1929 and the near-meltdown of 2008.
The anemic recovery we are now experiencing is directly related to
the decline in median household incomes after 2009, coupled with the
inability or unwillingness of consumers to take on additional debt and
of banks to finance that debt—wisely, given the damage wrought by the
bursting debt bubble. We cannot have a growing economy without a growing
and buoyant middle class. We cannot have a growing middle class if
almost all of the economic gains go to the top 1 percent.
Equal opportunity. Widening inequality also
challenges the nation’s core ideal of equal opportunity, because it
hampers upward mobility. High inequality correlates with low upward
mobility. Studies are not conclusive because the speed of upward
mobility is difficult to measure.
But even under the unrealistic assumption that its velocity is no
different today than it was thirty years ago—that someone born into a
poor or lower-middle-class family today can move upward at the same rate
as three decades ago—widening inequality still hampers upward mobility.
That’s simply because the ladder is far longer now. The distance
between its bottom and top rungs, and between every rung along the way,
is far greater. Anyone ascending it at the same speed as before will
necessarily make less progress upward.
In addition, when the middle class is in decline and median household
incomes are dropping, there are fewer possibilities for upward
mobility. A stressed middle class is also less willing to share the
ladder of opportunity with those below it. For this reason, the issue of
widening inequality cannot be separated from the problems of poverty
and diminishing opportunities for those near the bottom. They are one
and the same.
Democracy. The connection between widening
inequality and the undermining of democracy has long been understood. As
former Supreme Court Justice Louis Brandeis is famously alleged to have
said in the early years of the last century, an era when robber barons
dumped sacks of money on legislators’ desks, “We may have a democracy,
or we may have great wealth concentrated in the hands of a few, but we
cannot have both.”
As income and wealth flow upward, political power follows. Money
flowing to political campaigns, lobbyists, think tanks, “expert”
witnesses and media campaigns buys disproportionate influence. With all
that money, no legislative bulwark can be high enough or strong enough
to protect the democratic process.
The threat to our democracy also comes from the polarization that
accompanies high levels of inequality. Partisanship—measured by some
political scientists as the distance between median Republican and
Democratic roll-call votes on key economic issues—almost directly tracks
with the level of inequality. It reached high levels in the first
decades of the twentieth century when inequality soared, and has reached
similar levels in recent years.
When large numbers of Americans are working harder than ever but
getting nowhere, and see most of the economic gains going to a small
group at the top, they suspect the game is rigged. Some of these people
can be persuaded that the culprit is big government; others, that the
blame falls on the wealthy and big corporations. The result is fierce
partisanship, fueled by anti-establishment populism on both the right
and the left of the political spectrum.
Why It Has Happened
Between the end of World War II and the early 1970s, the median wage
grew in tandem with productivity. Both roughly doubled in those years,
adjusted for inflation. But after the 1970s, productivity continued to
rise at roughly the same pace as before, while wages began to flatten.
In part, this was due to the twin forces of globalization and
labor-replacing technologies that began to hit the American workforce
like strong winds—accelerating into massive storms in the 1980s and
’90s, and hurricanes since then.
Containers, satellite communication technologies, and cargo ships and
planes radically reduced the cost of producing goods anywhere around
the globe, thereby eliminating many manufacturing jobs or putting
downward pressure on other wages. Automation, followed by computers,
software, robotics, computer-controlled machine tools and widespread
digitization, further eroded jobs and wages. These forces simultaneously
undermined organized labor. Unionized companies faced increasing
competitive pressures to outsource, automate or move to nonunion states.
These forces didn’t erode all incomes, however. In fact, they added
to the value of complex work done by those who were well educated, well
connected and fortunate enough to have chosen the right professions.
Those lucky few who were perceived to be the most valuable saw their pay
skyrocket.
But that’s only part of the story. Instead of responding to these
gale-force winds with policies designed to upgrade the skills of
Americans, modernize our infrastructure, strengthen our safety net and
adapt the workforce—and pay for much of this with higher taxes on the
wealthy—we did the reverse. We began disinvesting in education, job
training and infrastructure. We began shredding our safety net. We made
it harder for many Americans to join unions. (The decline in
unionization directly correlates with the decline of the portion of
income going to the middle class.) And we reduced taxes on the wealthy.
We also deregulated. Financial deregulation in particular made
finance the most lucrative industry in America, as it had been in the
1920s. Here again, the parallels between the 1920s and recent years are
striking, reflecting the same pattern of inequality.
Other advanced economies have faced the same gale-force winds but
have not suffered the same inequalities as we have because they have
helped their workforces adapt to the new economic realities—leaving the
United States the most unequal of all advanced nations by far.
What We Must Do
There is no single solution
for reversing widening inequality. Thomas Piketty’s monumental book
“Capital in the Twenty-First Century” paints a troubling picture of
societies dominated by a comparative few, whose cumulative wealth and
unearned income overshadow the majority who rely on jobs and earned
income. But our future is not set in stone, and Piketty’s description of
past and current trends need not determine our path in the future. Here
are ten initiatives that could reverse the trends described above:
1)
Make work pay.
The fastest-growing categories of work are retail, restaurant
(including fast food), hospital (especially orderlies and staff), hotel,
childcare and eldercare. But these jobs tend to pay very little. A
first step toward making work pay is to raise the federal minimum wage
to $15 an hour, pegging it to inflation; abolish the tipped minimum
wage; and expand the Earned Income Tax Credit. No American who works
full time should be in poverty.
2)
Unionize low-wage workers.
The rise and fall of the American middle class correlates almost
exactly with the rise and fall of private-sector unions, because unions
gave the middle class the bargaining power it needed to secure a fair
share of the gains from economic growth. We need to reinvigorate unions,
beginning with low-wage service occupations that are sheltered from
global competition and from labor-replacing technologies. Lower-wage
Americans deserve more bargaining power.
3)
Invest in education.
This investment should extend from early childhood through world-class
primary and secondary schools, affordable public higher education, good
technical education and lifelong learning. Education should not be
thought of as a private investment; it is a public good that helps both
individuals and the economy. Yet for too many Americans, high-quality
education is unaffordable and unattainable. Every American should have
an equal opportunity to make the most of herself or himself.
High-quality education should be freely available to all, starting at
the age of 3 and extending through four years of university or technical
education.
4)
Invest in infrastructure. Many
working Americans—especially those on the lower rungs of the income
ladder—are hobbled by an obsolete infrastructure that generates long
commutes to work, excessively high home and rental prices, inadequate
Internet access, insufficient power and water sources, and unnecessary
environmental degradation. Every American should have access to an
infrastructure suitable to the richest nation in the world.
5)
Pay for these investments with higher taxes on the wealthy.
Between the end of World War II and 1981 (when the wealthiest were
getting paid a far lower share of total national income), the highest
marginal federal income tax rate never fell below 70 percent, and the
effective rate (including tax deductions and credits) hovered around 50
percent. But with Ronald Reagan’s tax cut of 1981, followed by George W.
Bush’s tax cuts of 2001 and 2003, the taxes on top incomes were
slashed, and tax loopholes favoring the wealthy were widened. The
implicit promise—sometimes made explicit—was that the benefits from such
cuts would trickle down to the broad middle class and even to the poor.
As I’ve shown, however, nothing trickled down. At a time in American
history when the after-tax incomes of the wealthy continue to soar,
while median household incomes are falling, and when we must invest far
more in education and infrastructure, it seems appropriate to raise the
top marginal tax rate and close tax loopholes that disproportionately
favor the wealthy.
6)
Make the payroll tax progressive. Payroll taxes
account for 40 percent of government revenues, yet they are not nearly
as progressive as income taxes. One way to make the payroll tax more
progressive would be to exempt the first $15,000 of wages and make up
the difference by removing the cap on the portion of income subject to
Social Security payroll taxes.
7)
Raise the estate tax and eliminate the “stepped-up basis” for determining capital gains at death.
As Piketty warns, the United States, like other rich nations, could be
moving toward an oligarchy of inherited wealth and away from a
meritocracy based on labor income. The most direct way to reduce the
dominance of inherited wealth is to raise the estate tax by triggering
it at $1 million of wealth per person rather than its current $5.34
million (and thereafter peg those levels to inflation). We should also
eliminate the “stepped-up basis” rule that lets heirs avoid capital
gains taxes on the appreciation of assets that occurred before the death
of their benefactors.
8)
Constrain Wall Street.
The financial sector has added to the burdens of the middle class and
the poor through excesses that were the proximate cause of an economic
crisis in 2008, similar to the crisis of 1929. Even though capital
requirements have been tightened and oversight strengthened, the biggest
banks are still too big to fail, jail or curtail—and therefore capable
of generating another crisis. The Glass-Steagall Act, which separated
commercial- and investment-banking functions, should be resurrected in
full, and the size of the nation’s biggest banks should be capped.
9)
Give all Americans a share in future economic gains.
The richest 10 percent of Americans own roughly 80 percent of the value
of the nation’s capital stock; the richest 1 percent own about 35
percent. As the returns to capital continue to outpace the returns to
labor, this allocation of ownership further aggravates inequality.
Ownership should be broadened through a plan that would give every
newborn American an “opportunity share” worth, say, $5,000 in a
diversified index of stocks and bonds—which, compounded over time, would
be worth considerably more. The share could be cashed in gradually
starting at the age of 18.
10)
Get big money out of politics.
Last, but certainly not least, we must limit the political influence of
the great accumulations of wealth that are threatening our democracy
and drowning out the voices of average Americans. The Supreme Court’s
2010 Citizens United decision must be reversed—either by the Court
itself, or by constitutional amendment. In the meantime, we must move
toward the public financing of elections—for example, with the federal
government giving presidential candidates, as well as House and Senate
candidates in general elections, $2 for every $1 raised from small
donors.
Building a Movement
It’s doubtful that these
and other measures designed to reverse widening inequality will be
enacted anytime soon. Having served in Washington, I know how difficult
it is to get anything done unless the broad public understands what’s at
stake and actively pushes for reform.
That’s why we need a
movement for shared prosperity—a movement on a scale similar to the
Progressive movement at the turn of the last century, which fueled the
first progressive income tax and antitrust laws; the suffrage movement,
which won women the vote; the labor movement, which helped animate the
New Deal and fueled the great prosperity of the first three decades
after World War II; the civil rights movement, which achieved the
landmark Civil Rights and Voting Rights acts; and the environmental
movement, which spawned the National Environmental Policy Act and other
critical legislation.
Time and again, when the situation demands
it, America has saved capitalism from its own excesses. We put ideology
aside and do what’s necessary. No other nation is as fundamentally
pragmatic. We will reverse the trend toward widening inequality
eventually. We have no choice. But we must organize and mobilize in
order that it be done.
Assignment:
Explain which 3 of Reich's proposed solutions you feel would be most useful to reducing wealth inequality. For each one, explain what you think the major obstacles are. If you do not support any of the proposed solutions pick 3 and explain why they would not work or should not be implemented.
Minimum 1 full paragraph.
EMAIL YOUR RESPONSE TO ME AND POST IT AS A COMMENT BELOW (do not include your name on the comment!)
