Archive for December, 2015

Conservative Myth – Income Inequality is Fine

Thursday, December 10th, 2015

We’ve already gone through the question of whether or not an unregulated free market really exists in this country (it doesn’t) and whether that market is a fair distributor of wealth (it isn’t).

Just as a reminder. I’m not attempting to suggest any solution to the problem, but just addressing the conservative myths. I want to separate those two discussions, because so often the defense of a myth is the suggestion that there is nothing reasonable you can do to prevent it. We can get into solutions in future posts. Let’s focus these discussions on existence rather than remediation.

So now let’s dig a little deeper into the related conservative myth regarding their tolerance of income inequality. That myth has three parts.

The first, like many conservative myths, ignores the facts and suggests that income inequality isn’t really that bad for the individual. Everyone has a higher standard of living after all and so those who are concerned about income inequality are really just engaged in class warfare.

The second, is that a concentration of wealth in the hands of a few is good for the economy. It is the ultimate expression of a free market at work and it is the wealthy who create jobs, so any attempt to limit their ability to maximize their income is going to hurt the economy.

The third, is related to the second, but more philosophical. Wealth is the natural outcome of a free market. So progressive taxes and other methods which require the wealthy to pay more than everyone else is unfair. These methods punish success and by implication discourage others from making the same sacrifices that these special individual are willing to make.

Let’s take these in order.

Income Inequality is Harmless

Hopefully we all can agree that income inequality is great if you are part of the small group whose share of the income pie has been growing. We’ll talk about that group in more detail in the next two parts of this myth.

For the purposes of this portion of the discussion let’s focus on the rest of those who are primarily wage earners and whose incomes have been basically flat since roughly 1970.

Here’s how life has changed for this group.
1. Mom’s went to work. They did this to allow their families to remain in the middle class, or as an effort to get into the middle class. One wage earner used to be sufficient for a comfortable middle class life, but it isn’t anymore. The nature of middle class jobs changed for a number of reasons. One of those reasons is that executives began taking a bigger piece of the compensation pie. Up until the 1970’s, workers’ wages kept pace with productivity. After the 1970’s only executives benefited from increased corporate productivity.
2. Families got smaller. Middle class families could no longer afford four kids. The costs to raise kids went up in part because mom’s were no longer at home to help. Smaller families mean smaller schools, slower growth in the consumer economy, and long term fewer workers paying taxes and supporting Social Security and Medicare.
3. Commutes got longer. Middle class work weeks got longer. Middle class workers took less vacation. The United States in some ways turned into Japan in terms of the 24-7 nature of middle class jobs. As a result, the health of middle class workers declined as their stress levels went up.
4. The bargaining power of middle class workers decreased. Several factors at work here. One was an aggressive union-busting strategy championed by Ronald Reagan. Another was an aggressive outsourcing of manufacturing to right-to-work southern states and offshore low cost of labor centers. The third was decimation of the white collar workforce as a result of automation. Many middle management jobs simply disappeared as factory work contracted, clerical work disappeared, and software replaced paper and the workforce that managed that paper.
5. The cost of college skyrocketed as Republicans purposefully cut funding to higher education as part of the larger supply side economic fantasy. The middle class did get a tax break, but that modest increase in income fell far short of the cost to send their kids to college. So those families pulled money out of the only other asset they had, their homes. That asset was dramatically devalued in the financial crisis of 2008. The result is that those families are no longer able to pay for a college education. That burden has now shifted to students who leave college with huge debt burdens that previous generations did not have to deal with. The result of those burdens are being felt across the economy as college graduates spent a decade or more paying off debts rather than buying houses, starting families, or starting new businesses.
6. College education used to be the huge social melting pot where smart kids from modest means could make the jump to high paying jobs based on their willingness to work hard. Now college, particularly the elite colleges that are the gateway to the executive level jobs in this country, are only available to the children of those executives. The meritocracy of the 1950’s has been replaced by an oligarchy.

The Concentration of Wealth is Good for the Economy

I’ve dealt with this in previous posts. But here is a quick summary.
1. There is no trickle down economy. Wealthy people only buy from other wealthy people.
2. The wealthy get a substantial amount of their income from the stock market. As a result, their spending habits fluctuate based on the market. This makes for a far more volatile economy than one based on a large set of middle class consumers.
3. The wealthy are NOT job creators. Most jobs in this country are generated by medium size high growth companies. Most of these companies are privately owned. Those owners are not taking big salaries. They may have high net worth because of the value of their business, but all of their assets are tied up in their business. So they aren’t generally reporting high incomes. Too many small businesses fail or get acquired, so the gains of small business are pretty much offset by the loses. Big companies that can afford high priced CEO’s are the ones doing the acquiring. As a result, they lay off more people than they hire. So they also are not a long term significant contributor to job growth.

Wealth is the Natural Outcome of a Free Market

While it is true that in a free market income distribution is going to produce some wealthy people, we have already proven that in this country, markets aren’t free. Worse yet, markets have become warped by the political influence of wealth. Because we’ve allowed markets to become biased to benefit the wealthy at the expense of everyone else, we shouldn’t be concerned that an effort to remove some of this bias is “unnatural”.

While it is true that wealth is an incentive, there is no evidence that progressive taxes are a disincentive, or that a multi-millionaire is any less driven than a billionaire. If higher marginal tax rates were a disincentive to wealth, we would see it reflected in slower economic growth during times of high marginal tax rates and higher growth during times of low marginal tax rates.

During the period 1951-63, when marginal rates were at their peak—91 percent or 92 percent—the American economy boomed, growing at an average annual rate of 3.71 percent. The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm—just the opposite. And during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.

Finally there is the myth that a progressive tax system removes the incentive for those who aspire to wealth to make the same sacrifices that those who achieved it where willing to make. The reality as we covered in the previous post is that great wealth in this country is much more an accident of birth than the product of hard work. Less than 20% of the billionaires in this country earned all of that income themselves. The other 80% inherited a substantial amount of money, in some cases more than a billion dollars.

That is not to say that those who achieve great wealth weren’t willing to work hard and make sacrifices. They were. But it wasn’t their hard work and willingness to sacrifice that distinguished them from those who didn’t achieve great wealth. The difference is that they were lucky. They stood at the table of life and rolled a 7. They were born into the right family at the right time with the right skill set to take advantage of a disruptive moment in our economy. There is nothing wrong with being lucky, but there is something wrong when we suggest that taxing the lucky will somehow diminish their ability or desire to take advantage of their good fortune.

But that still leaves one question unanswered. What sort of incentive does wealth provide for those who are already wealthy? Turns out that the major incentive is preservation of their family’s wealth through investments to minimize their taxes and secure the future for their children. Over the past 50 years or so, those investments have include political contributions to influence favorable rule making.

Again I’m not trying to make value judgments here, though obviously I do have an opinion. I’m just stating facts. For example, it is entirely natural for parents to try to make a better life for their children. By not paying closer attention to the influence that wealth has in this country, however, we are witness to the meritocracy of the 60’s becoming an aristocracy. That’s because those who benefited from the ability to make the jump from the middle class to wealth have had the means to change the system so that it benefits the children of the wealthy rather than all talented, gifted, and hard working children. There are still the same number of opportunities for Ivy League grads now that existed in the 60’s, but a much higher percentage of those grads are coming from wealthy families.

So it raises the inevitable question of which is more beneficial to our society, one billionaire or 20,000 middle class wage earners. In other words, what kind of a society to we want ?

Here are our choices. The society we have today concentrates wealth in the hands of a few who control the rules of the game for their own benefit. Those rule changes have greatly impacted the middle class which is in steep decline. The society we had during the most prosperous years in our history concentrated economic and political power is in the hands of a middle class. They received a fair share of the productivity gains that they delivered because of strong unions. That fair share was sufficient to allow them to provide their children all of the advantages and support required to also be part of the middle class. The result was a growing middle class that sustained economic growth through the 1970’s when the rules began to change.

Economic prosperity doesn’t trickle down, and neither does civic prosperity. Both are middle-out phenomena. When workers earn enough from one job to live on, they are far more likely to be contributors to civic prosperity — in your community. Parents who need only one job, not two or three to get by, can be available to help their kids with homework and keep them out of trouble — in your school. They can look out for you and your neighbors, volunteer, and contribute — in your school and church. Our prosperity does not all come home in our paycheck. Living in a community of people who are paid enough to contribute to your community, rather than require its help, may be more important than your salary. Prosperity and poverty are like viruses. They infect us all — for good or ill.

Inclusive economies always outperform and outlast plutocracies. That’s why investments in the middle class work, and tax breaks for the rich don’t.