I read in the papers a few days ago that the OECD, (the Organization for Economic Cooperation and Development) has listed economic inequality as one of the factors undermining the economic recovery in the United States. So how would inequality sabotage the recovery? Well, when you have a recession, the reason that businesses are shutting down and laying off workers is that too few people are buying their products. And the reason that sales are sluggish is that the people who would have a need for the goods lack the spendable income with which to buy it. Either they have no money, or if they do have any, their jobs are so insecure that they are afraid to spend much.
The usual remedy for such a situation is for government to step in and dump money into the economy. They can do this by acting as the “buyer of last resort,” and spur demand by hiring people or by buying goods, so as to cause people to be hired. Or they can also just give tax breaks, assuming that the tax rebates people receive will be immediately spent. But there is a problem. What if most of the tax breaks go to those who are so wealthy that they do not need to buy anything?
Right now, there is actually a lot of cash in the country. If this cash were spent, we would be out of the recession and we would have full employment. But this cash is not uniformly distributed. It’s nearly all concentrated in the hands of corporations and very wealthy individuals-- who don’t need anything. Corporations won’t spend money on new production facilities when they are unable to sell the product of the factories they already have. And very wealthy individuals can spend only the tiny fraction of their wealth that is actually used to maintain their lifestyle. Most people, even with a very opulent lifestyle, would eventually run out of ways to spend money if their income was in the tens of millions. So a lot of money simply isn't being spent.
This unequal distribution of spending power has not always been a problem. It comes from two sources: one source is the changes in the progressivity of the federal tax curve. The other is the decline in bargaining power for workers. In the Eisenhower administration, the top marginal rate for federal income tax was 92.5%. Only a handful of billionaires, (like Howard Hughes) were subject to this rate, and they generally avoided this tax by giving most of their income to charity. Today the top rate is 35%, the same marginal rate paid by most of the working class. But today, most billionaires don’t even pay at that rate, because they arrange their affairs so that most of their income exists as a capital gain, currently taxed at 15%. That’s why Warren Buffett can say that he pays tax at a lower rate than his secretary. And so far, we have considered only the federal income tax. Working people also pay a large part of their income as payroll tax, which has almost no bite on the very rich because it is paid only on the first $110,100 of income. Workers also pay a lot of sales tax, which applies only to money that is spent, not money that is invested. Since most workers have to spend almost all of their income—often before they get it, they often pay sales tax on almost everything they earn.
The other source of inequality is that workers no longer have the bargaining power to demand a fair share of that which they produce. In the 50s and 60s, productivity rapidly rose, and wages rose along with it. But since about ‘73, wages have remained stagnant, even though productivity has continued to increase. Put simply, all of the benefit of this increase in productivity has been confiscated by capital, and none has been shared with labor. And that is why the wealth has now become so concentrated that the top 1% is hoarding five times as much wealth as the bottom 80%. Besides being a moral outrage, this situation is bad for the economy. The OECD says inequality is a drag on the U.S. economy, and Warren Buffett says that the trouble with this country that rich people don’t pay enough taxes.
So, if everyone understands that this situation is bad for business, why is it that the Wall Street Journal and other business journals have an editorial policy of frenzied denunciation of any attempt to even slightly retard the continued concentration of income and wealth? The reason is that these journals do not really represent the interests of American business—they represent only the interests of the financial sector, which is not the same thing. The financial sector is best understood as though they were absentee landlords from another planet, or perhaps vampires from another planet. They are interested in the welfare of the population only insofar as it affects what they can extract from us.
One might assume that the policy makers of this enclave of spectacular depravity are unusually amoral individuals. That is indeed a possibility. My own bias would be to make this assumption. But even if they aren’t the fiends they appear to be, they would behave precisely the same, because they have no choice. They are a part of a system that requires the ongoing concentration of wealth in order to sell the products which they produce.
Imagine a hypothetical situation where you are a yacht salesman. You are not terribly rich. You are just another working class drudge. But to earn your daily bread, you have to suck up to extremely rich individuals, to induce them to buy multi-million dollar pleasure boats which they do not need. Business has been slow, and you are afraid that you might soon be laid off. Now suppose that the government is considering an increase in deficit spending in order to stimulate the economy. One way would be to extend unemployment benefits to those whose benefits have run out. The other option is to pass a massive tax cut, with the majority of the benefit going to multi-millionaires. Which option would save your job? Allowing 5 million unemployed workers to continue to feed their families would be the more moral option, but would it sell any yachts? In general, pouring money on the bottom rungs of society is the best way to stimulate the economy as a whole. If you give money to those who don’t have money, they will spend it on something. But would it sell yachts? Probably not!
By choosing yachts, I deliberately chose an example of such an extreme luxury item that its market only affects the very, very rich. A huge pleasure boat is not particularly useful, and no one would ever buy one until their needs for useful things were totally sated. But there is one type of purchase that is even more of a luxury item than a big yacht—the purchase of financial instruments. While it’s true that even working class people may have a small retirement nest egg, the overwhelming majority of stocks and bonds are held by the 1%. And few additional sales of these securities are possible without more of the wealth being transferred to this group.
An employee of Wall Street, or any person who derives his living from the financial sector, is like one of the craftsmen hired to build the palace for Louis XIV at Versailles. If the Ancient Regime had been fair to workers, such a place could not have been built. As a worker, this craftsman might resent the unfairness. But if the unfairness ever stopped, he would lose his job building the palace.