“We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” Justice Louis Brandeis
Justice Brandeis was concerned about the income inequality he saw growing in the years leading up to the great depression. At that point, the top 1% average income was approximately 16x the median household income. In 1980 this “Brandeis Ratio” was 12.5. By 2006 (the most recent numbers) it had jumped to 36.
So let’s take this whole issue on.
First let’s document that income inequality is really growing.
Then let’s take up the conservative arguments for why we shouldn’t be concerned.
Let’s see if we can determine what the root causes are.
Finally, let’s dig into Justice Brandeis’ concern about the threats income inequality pose to our society.
The following graph should do the trick. The key inflection point to remember is 1980. Up until that point the incomes of everyone in the economy from rich to poor grew at a rate that pretty much equaled the growth of productivity. After 1980, incomes of the top 5% grew continued to track the productivity curve while the 50% percentile and the 30% percentile flattened out. So there should be no question that income inequality has increased since Ronald Reagan took office.
It’s the Economy, Stupid
Conservative Republicans claim that the current income inequality is the result of the natural progression of economic forces. The information revolution, globalization, and the growth of the service economy transformed the workplace. Workers continued to be more productive, but the nature of work changed. Manual labor was replaced by intellectual labor. Manual labor and the manufacturing associated with it moved to those markets with the lowest cost workers. The service economy created well paying jobs for highly skilled individuals, and low paying jobs in retail and entertainment markets for everyone else where unions were weak and workers expendable.
They also claim that the rich have earned their money through talent and hard work. They are the ones who are creating the jobs that this economy needs. Taxing them effectively punishes the sort of hard work and innovation we should be encouraging. It also discourages the private sector job creation that we need.
Here are the problems with these narratives.
I’ve already posted that the majority of the top earners became rich either through inherited wealth, good fortune, or theft using unethical or pathological behavior. I’ve also posted data which shows that the .1% and big businesses are not job creators. Jobs these days are being created by medium size fast growing technology businesses.
As far as income inequality being the result of some natural economic evolution, the transformation we’ve seen in the US did not occur globally. Germany for example kept its robust manufacturing-based economy complete with highly paid workers, strong unions, and a broad social safety net. They did not experience the income inequality that we see in this country. They also did not suffer the financial meltdown and deep recession that we experienced.
It’s the Government, Stupid
Political scientists Jacob Hacker and Paul Pierson in their book Winner Take All Politics studied why this transformation only occurred here. They concluded that this skyrocketing inequality wasn’t the natural consequence of market forces but rather the direct result of public policy which concentrated and amplified the effects of economic transformation and directed those gains exclusively toward the wealthy.
Congress has cut tax rates on high incomes repeatedly during this period of time. It relaxed the tax treatment of capital gains and the sorts of investment incomes that are disproportionately paid to wealthy investors. This resulted in windfall profits that the middle class and poor didn’t see.
Workers’ rights to organize and bargain for a bigger piece of the pie were weakened while corporate power grew. Corporations and wealthy individuals gained the sort of access to politicians that the middle class and poor do not have. Based on recent Supreme Court decisions, corporations have inherited some of the same rights as individuals when it comes to funding political campaigns. There are few practical limits to the amounts of money business and the wealthy can contribute and many of those contributions can be anonymous.
Corporate governance policies changed to enable extraordinary pay and benefits for top executives regardless of company performance. Deregulation allowed financial institutions to merge and create organizations that were “too big to fail”. These institutions created financial instruments that were so complicated that the market lost the ability to accurately value them. Those managing these institutions walked away with hundreds of millions of dollars while taxpayers and homeowners paid the bill when the bubble burst.
Both parties were complicit. Reagan and Bush cut taxes. Clinton repealed the Glass-Steagal Act which allowed banks and investment companies to merge.
Hacker and Pierson also pointed out that the American system of separated powers makes it difficult to take the sort of dramatic and decisive action possible under parliamentary-style governments. Once policies are enacted typically during times after the White House changes parties and voters give the new party a majority in both the House and the Senate, they become very difficult to change when government again becomes divided.
Allowing corporate execs to be compensated with stock options, for example, encouraged spikes in short-term stock price rather than long term growth. This produced jaw dropping compensation for execs, but when these policies damage the company, it’s the employees who got laid off. When these companies went bankrupt, it was the employee pension plans that get wiped out. In the 1990s, the Financial Accounting Standards Board recommended changes to curtail this practice. Corporate lobbying in general, and Joe Lieberman in particular stopped the FASB plans and ten years later we ended up with ENRON.
The following graph demonstrates that our representatives have much more in common with the .1% than they do the 99.9%
The bottom line from Hacker and Pierson’s point of view is that business interests have dominated both politics and policy for the past 40 years. It’s that dominance, and not the natural progression of economic forces, which has produced the wealth-driven winner-take-all economy that we have today.
Inequality Damages Quality of Life
So now we come to the meat of this discussion. We’ve established that income inequality is the result of policies that our government implemented in the transition from the FDR New Deal to Reagan-led conservatism. It still leaves the question of so what? What harm does income inequality cause?
The following data is taken from a wonderful talk on the subject by Richard Wilkerson.
He discovered that there is a direct correlation between income inequality in a country and life expectancy, math & literacy, infant mortality rates, homicides, imprisonment, teenage birth rates, trust, obesity, mental illness (including addictions), and social mobility. In the industrialized world, low income inequality correlated strongly with better performance in all of these quality of life statistics. The United States is by far the worst performing country and has one of the highest ratios of income inequality. That same correlation exists if you use the UNICEF index of child wellbeing. There is no correlation, by the way, between these quality of life measures and GDP.
What Wilkerson has discovered is that our quality of life depends on our relationships with others rather than our income. The strength of this social fabric has a direct relationship to overall health of a society as well as the ability of that society to fully leverage the full potential of its members. The converse is that social dysfunction driven by income inequality rips at the fabric of a society. Status competition, envy, and anxiety increases stress at all income levels. Stress damages health and increases violence. A more equal society improves the quality of life for everyone across the income spectrum.
The expectation isn’t that every American has to become a millionaire to validate the American Dream. The expectation is that every American who is willing to work hard and play by the rules will have access to both the education and those opportunities that will allow them to maximize their value in this society.
The fundamental problem is that the promise that America makes to all its citizens has been broken. We have a pluralist democracy where every citizen has a vote. Our promise to every citizen isn’t that they will become wealthy. It’s that if they educate themselves and vote, this democracy will produce solid incremental changes that will inexorably move EVERY American forward toward security and a higher quality of life. We were that country for the fifty years following FDR’s new deal.
In the last thirty years, the progress of the poor and middle class stalled. The following graph shows how the stalled salaries of the poor and middle class ended up funding the dramatic growth of the wealthy class.
The unfortunate result is that the real American Dream is no longer possible in this economy because of income inequality. Those who want to experience the American Dream today that the Greatest Generation created and lived, have to move to one of those countries on the graph that have figured out that income equality is key to social mobility and quality of life – Denmark.