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.
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