Photo: David Ruccio
The biggest story in the United States economy, beyond its general crappiness, is the extreme inequality that has developed over the past three decades.The top 1% of the country is now taking home a greater per cent of the national income than at any time since the 1920s (see top chart).
Average real hourly earnings, meanwhile, have not increased in 50 years (see next chart).
This inequality is bad for the country and bad for the economy. It instills a general sense that something has gone wrong. It leads to social unrest (witness Occupy Wall Street). It is also unsustainable.
If history is a guide, the inequality will likely resolve itself eventually, one way or another.
The question is whether this “adjustment” will occur peacefully and gradually, through minor shifts in policies and social mores, or suddenly, through market crashes or revolution.
Obviously, the former is preferable.
So the question is how to help this peaceful, gradual adjustment process along.
Specifically, what policies can the government pursue that help ameliorate the inequality problem without killing the golden goose — free-market capitalism — in the process?
Switching to socialism is not the answer. (It doesn’t work.)
Embracing “capitalism with socialist characteristics” is not the answer (unless we want to eliminate Democracy and go to one-party rule, like China and Russia, which I certainly don’t).
Photo: Havoc on the Hill
And ever more violent demonization of “the 1%” is not the answer: With some exceptions, we should be celebrating successful Americans, not vilifying them as greedy bastards who are screwing everyone else. (For the most part, the 1% are playing by the rules our government has established, so if anything should be blamed, it’s the rules.)Although most people agree that inequality is a problem, the solutions are not obvious. This is in part because one cause of inequality is the huge influx of talented low-cost labour in emerging economies — “three billion new capitalists who are putting pressure on wages the world around.”
It’s tempting to blame “Benedict Arnold” companies for taking advantage of this new labour pool to reduce production costs, but protectionism also isn’t the answer. Americans benefit from low-cost manufacturing as much as they are hurt by it: Prices at Apple and Walmart would soar to unaffordable levels if we suddenly forced all “American” companies to make and source everything here. Also, like it or not, we’re all now in this together. Even if you are convinced that Americans’ moral duty is to “Americans,” not “people,” our challenges are now global. The only way to solve the world’s long-term environmental, resource, education, and population problems is to quickly improve the standard of living for “the 99%” everywhere in the world, not just in the United States.
(Richer people have fewer babies and more options. They also turn to violence less frequently.)
So how do we solve the inequality problem?
Well, it’s worth noting that we “solved it” once before: The extreme inequality of the 1920s disappeared by the 1940s and 1950s, when American society became far more equal.
Part of that adjustment was undeniably negative: Wealth and businesses were destroyed by the stock-market crash, Depression, and wars. It would obviously be nice to find a way out of our current problem other than stock-market crashes, Depressions, and wars. (Although we’re certainly experiencing a form of all three.)
The other thing that changed from the 1920s to the 1940s was tax policy.
Photo: National Taxpayers Union
Now, tax policy is a hot-button issue. The moment a discussion of taxes starts, normally level-headed people suddenly transform into angry zealots and start screaming at each other across the room.So let’s start this discussion by acknowledging a universal truth about taxes: No one likes them except people who don’t pay them. And no one, but no one, should be expected to happily agree when someone else starts arguing that their taxes should go up.
But as the chart above shows, three facts are undeniable:
- The extreme inequality that developed in the 1920s came in a period in which marginal tax rates on high-income Americans were extremely low.
- The more balanced equality that reigned in the 1940s-1970s came in an era when progressive tax rates on higher-income Americans and corporations were high.
- The extreme inequality that has developed in the last three decades has come in an era in which tax rates on higher-income Americans and corporations were low.
It therefore seems, at least at first glance, that tax policy may well have something to do with the inequality problem.
And it follows, therefore, that if we raised taxes modestly on higher-income Americans and corporations, we might begin to lessen the inequality problem.
(Importantly, this “adjustment” need not come as a result of forced wealth redistribution — the seizure of money earned by rich Americans and the handing-it-out to poorer Americans — but through incentives. Senior managers and CEOs who know they will have to pay higher income taxes will likely choose to keep more of their wealth in the company in the form of stock ownership. Similarly, corporations that know that they have to pay out more pre-tax profits in taxes will be encouraged to reinvest those profits instead. The latter will create more jobs and research and development spending, which will be good for American companies and the economy in general.)
So adjusting tax policy seems like one obvious solution to the inequality problem.
What are some other solutions? This is a complex problem, and the solutions are not as obvious as many people believe them to be. I’m also trying to learn here, not preach. So please weigh in in the comments below.
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