Home > inequality, Plutonomy, Political Economy > Inequality: government is a perp, not a bystander

Inequality: government is a perp, not a bystander

from Dean Baker

In his speech on inequality earlier this month President Obama proclaimed that the government could not be a bystander in the effort to reduce inequality, which he described as the defining moral issue of our time. This left millions convinced that Obama would do nothing to lessen inequality. The problem is that President Obama wants the public to believe that inequality is something that just happened. It turns out that the forces of technology, globalization, and whatever else simply made some people very rich and left others working for low wages or out of work altogether. The president and other like-minded people feel a moral compulsion to reverse the resulting inequality. This story is 180 degrees at odds with the reality. Inequality did not just happen, it was deliberately engineered through a whole range of policies intended to redistribute income upward. 

Trade is probably the best place to start just because it is so obvious. Trade deals like NAFTA were quite explicitly designed to place our manufacturing workers in direct competition with the lowest paid workers in the world. The text was written after consulting with top executives at major companies like General Electric. Our negotiators asked these executives what changes in Mexico’s law would make it easier for them to set up factories in Mexico. The text was written accordingly.

When we saw factory workers losing their jobs to imports from Mexico and other developing countries, this was not an accident. In economic theory, the gains from these trade deals are the result of getting lower priced products due to lower cost labor. The loss of jobs in the United States and the downward pressure on the jobs that remain is a predicted outcome of the deal.

There is nothing about the globalization process that necessitated this result. Doctors work for much less money in Mexico and elsewhere in the developing world than in the United States. In fact, they work for much less money in Europe and Canada than in the United States. If we had structured the trade deals to facilitate the entry of qualified foreign doctors into the country it would have placed downward pressure on the wages of doctors (many of whom are in the top one percent of the income distribution), while saving consumers tens of billions a year in health care costs.

In other words, the government quite deliberately structured our trade to put downward pressure on the wages of much of the labor force, while protecting doctors and other highly paid professionals from similar competition. Trade is just one of the many ways in which the government has redistributed income upward over the last three decades.

The subsidy for too big to fail banks, which makes the Wall Street crew incredibly rich, is another way that the government redistributes money to the top. Bloomberg estimated the size of this annual subsidy for the Wall Street gang at $80 billion a year, more than the government spends on food stamps.

The longer and stronger patent protection the government has given pharmaceutical companies is another way that money goes from the rest of us to the rich. The annual size of patent rents in the drug industry is currently in the neighborhood of $270 billion, more than three times as much as the government spends on food stamps.

And the macroeconomic policy run by the government has also worsened inequality. Budgets are crafted by politicians, not the gods or nature. The decision not to run a more stimulatory policy to reduce unemployment is every bit as much a conscious act as would be the decision to try to bring the economy to full employment with further stimulus.

In other words, Congress and the president have decided to craft budgets that lead to tens of millions of people being unemployed or underemployed. As Jared Bernstein and I point out in our new book, high levels of unemployment put downward pressure on workers’ wages, especially those in the bottom third of the labor force. This means we have a federal budget that limits growth and employment in a way that redistributes income upwards.

There is a much longer list of ways in which the government has acted to redistribute income upwards over the last three decades. I have a fuller discussion in my book, The End of Loser Liberalism: Making Markets Progressive (free download available).

But the key point is that inequality didn’t just happen, it was the result of government policy. That is why people who actually want to see inequality reduced, and for poor and middle class to share in the benefits from growth, are not likely to be very happy about President Obama’s speech on the topic. His comment about the government being a bystander ignores the real source of the problem. Therefore it is not likely that he will come up with much by way of real solutions.

See article on original website

  1. December 28, 2013 at 5:24 pm

    “Trade is probably the best place to start just because it is so obvious.”
    I think a lot of the problem is that it isn’t quite so obvious to policymakers. Why? Perhaps it has something to do with this: “The text was written after consulting with top executives at major companies like General Electric”. You get corporations writing government policy, and then those same corporations go on a massive misinformation campaign to convince enough voters that the problem lies elsewhere.

  2. Podargus
    December 28, 2013 at 7:18 pm

    Your President is a mere front man for the oligarchical rip off merchants. That was obvious from 2008.When he retires at the end of 2016 I am sure he will be well satisfied with his performance as will his masters.
    Then he can go on the lecture circuit and other nefarious pursuits and make more squillions just like Clinton. Obama and Clinton make Bush Junior look like an honourable man.

    Three juvenile delinquents in a row as Presidents. Surely you can do better in 2016?

    • Dave Raithel
      December 29, 2013 at 3:16 pm

      I doubt it.

  3. December 28, 2013 at 10:27 pm

    TAXATION is the best place to start.
    As President Obama *even* knows but somehow does not understand that he has the answer, yet.
    Stated on ” 60 minutes” (12/11/11)” President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
    YES,YES…reduce FICA to zero. Reduce federal personal income taxes to “first $100,000
    at zero percent tax , any amount above at 10%.
    That simple!
    Dare you ask , “Where is the somewhere else?”
    *****There shall be but one and only one issuer of the sovereign currency.
    Any issuance will be by way of a loan.The INTEREST paid to the central bank
    shall be the taxation.
    Are you aware that the private for profit banks have raise over $100 trillion as interest profit for themselves since inception of being legally allowed to do just that: issue new currency and tax it via interest!

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