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What inequality?!

from David Ruccio

Economic inequality in the United States and around the world is now so obscene, and has convinced more and more people to do something about it, that the business press has initiated a campaign to deny its very existence.

They and the folks they represent are losing the battle of public opinion. And they’ve decided to do something about it.

First up was the Economist, the “newspaper” of record for liberal capitalism [ht: sk], claiming that new research undermines the pillars of the seemingly universal belief that “inequality has risen in the rich world.” Yes, as I have documented from the very beginning on this blog (e.g., herehere, and here), there are plenty of mainstream economists who have attempted to prove that inequality isn’t really a problem—either because it doesn’t really exist or, if it does, it’s not something we can or should do much about. And so the Economist managed to find pieces of research that call into question some of the key pillars of the inequality argument—that the gap between the top 1 percent and everyone else is growing, the middle-class is shrinking, capital is gaining at the expense of labor, and wealth inequality is soaring.

I won’t waste readers’ time repeating the arguments I’ve made on all four of those points over the past decade. You can use the search function at the top of the page to see what I and others have written on these issues—or look at the latest report from the Congressional Budget Office, which I discuss below.

What’s more interesting is where the Economist wants to take the discussion—away from wealth taxes (of the sort being proposed by Bernie Sanders and Elizabeth Warren) and toward the sorts of policies that, while they won’t lessen the degree of inequality, conform to the Economist‘s fantasy of liberal capitalism. Thus, they propose more building (so that young workers can afford housing), antitrust regulation (as if capitalism didn’t have an inherent tendency toward monopoly), less regulation of high-income professions (to create more competition for those high-paying jobs), and fewer restrictions on immigration (but only for “high-skilled” workers).

That’s the Economist’s derisory attempt to minimize the existence of inequality (against most of the available evidence and widespread belief) and to devise some tiny tweaks in existing economic arrangements (and avoid more serious efforts to lessen the degree of inequality).

The Wall Street Journal has also decided to confront the growing campaign against economic inequality—by attempting to show that Donald Trump’s administration has done more to decrease inequality than Barack Obama’s, by promoting economic growth through deregulation and increased business investment. Now, it’s true, Obama oversaw a bailout of Wall Street and a return (after a brief hiatus in 2009) to the same unequalizing trends that predated the Second Great Depression. So, that’s a very low bar to surpass.

fredgraph

And even though the wages of low-income workers have been rising at a faster rate in recent quarters (the supposedly “happy wages of a growing economy”), it is still the case that the wage share of national income (as seen in the chart above) is still less than what it was in 2008 (when it was 44.9, compared to 43.2 in 2018) and far below its postwar peak in 1970 (at 51.6).

To rely on continued growth to solve the problem of inequality is simply a pipe dream, which is even less convincing than the castle in the air invented by the business press on the other side of the pond.

CBO

The fact is, the Congressional Budget Office [pdf] projects that income in the United States—both before and after transfers and taxes—will be more unevenly distributed in 2021 than it was in 2016. That’s because, even though average incomes for the bottom four quintiles are expected to grow, incomes for the top quintile (and especially for the top 1 percent) are expected to grow even faster.

Thus, for example, since 1979, while the average incomes of the middle three quintiles are expected to grow (after transfers and taxes) by a total of 57 percent, the incomes of those in the top 1 percent are projected to increase by a whopping 281 percent by 2021.

There’s no other way around it: inequality in the United States is obscene, and something—much more than minor regulations and continued growth—needs to be done to overcome it.

As it turns out, Americans are fully aware of the problem. For example, according to Gallup, the overall opinion of capitalism held by young adults (both Millennials and Gen Zers) has deteriorated to the point that capitalism and socialism are tied in popularity.

And a new Reuters/Ipsos poll finds that nearly two-thirds of respondents agree that the very rich should pay more.*

Among the 4,441 respondents to the poll, 64% strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs” – the essence of a wealth tax. Results were similar across gender, race and household income. While support among Democrats was stronger, at 77%, a majority of Republicans, 53%, also agreed with the idea.

Moreover, when asked in the poll if “the very rich should be allowed to keep the money they have, even if that means increasing inequality,” 54 percent of respondents disagreed.

That’s the reason the Economist and the Wall Street Journal have decided to launch their campaign about inequality—to attempt to undermine the widespread belief that inequality is growing and, even more, to challenge any and all efforts to actually do something to create a more equal economy and society.

Such a campaign may satisfy their readers, at least in the short run, but the problem itself will remain. This election year, I expect the growing gap between the tiny group at the top and everyone else to overshadow their shabby efforts and culminate in a movement they simply won’t be able to contain.

 

*Ironically, another recent attempt to undermine the Sanders-Warren proposals of new, higher wealth taxes actually serves to reinforce how extreme wealth inequality is in the United States. While admitting that “only a small segment of the population would be subject to the top rate,” the American Action Forum’s Douglas Holtz-Eakin and Gordon Gray [pdf] can only conclude that the taxes would have “broad impacts” only because the wealth holdings of that group “constitute a significant share of the investable wealth in the economy.”

0income

  1. Ahmed Fares
    January 15, 2020 at 6:20 am

    Harvard Business Review has an article titled: “How the Financial Crisis Drastically Increased Wealth Inequality in the U.S.”. Here is a quote from that article:

    [quote]
    Our research demonstrates that wealthier and less-wealthy people own different types of assets: the middle class has a higher share of its wealth in housing, whereas the rich own more stock. An important consequence of this finding is that housing booms lead to wealth gains for leveraged middle-class households and tend to decrease wealth inequality. Stock market booms primarily boost the wealth at the top of the wealth distribution where portfolios are dominated by listed and unlisted business equity, thereby, increasing wealth inequality. The existence of these different portfolios means that wealth inequality is essentially a race between the housing market and the stock market. Over extended periods in postwar American history, that race has been the predominant driver of shifts in the U.S. distribution of wealth.
    [end quote]

    Link to article: https://hbr.org/2018/09/research-how-the-financial-crisis-drastically-increased-wealth-inequality-in-the-u-s

    • Patrick Newman
      January 15, 2020 at 10:11 am

      What about those who have no housing assets – paying rent for an asset the value of which they can never realise?

  2. Marcelo Ladvocat
    January 15, 2020 at 1:29 pm

    After all, with all this inequality and criticism of what is being tried, what is your suggestion to solve this problem?

  3. benign
    January 15, 2020 at 4:22 pm

    @Marcelo: Progressive taxation that brings the after-tax level of inequality down to multiples similar to those in 1970, when CEOs earned ~30X the average worker, not today’s ~350X. See Wilkinson et al. “The Spirit Level.” Such a move would ostensibly dramatically lessen many different damaging social pathologies, and increase that elusive variable “solidarity.”

  4. Kirk Franklin
    January 15, 2020 at 8:30 pm

    The solution is what J.M. Keynes briefly mentioned in his ‘General Theory’ – ‘the euthanasia of the rentier’.

  5. Helen Sakho
    January 15, 2020 at 9:01 pm

    The Liberal Capitalism piece in the recent Economist is a double-sided analysis. Liberalism and Capitalism simply cannot go hand in hand. Inequality has increased and it is a worldwide phenomenon. The coming generations will have inherited so much debt for their education, housing, basic health care and other essentials, that they will forever be at the mercy of unbridled capitalists for a job. That is assuming that real positions have not been replaced by robots.

    What is to be done? I believe the only way forward is to politicise the issue. But most Economists have no intention of doing this inside or outside their classrooms. The reasons are obvious: self interest and fear of losing their tenured positions.

  6. Ahmed Fares
    January 16, 2020 at 1:12 am

    @benign and regarding CEO salaries, here’s a couple of quotes:

    [quote]
    Labor advocates are also fond of appealing to their readers’ sense of fairness by arguing that CEO pay at the company proves it can afford a $15 minimum wage. But the math here also doesn’t add up. Wal-Mart CEO Doug McMillon earned a combined $19.4 million compensation package in 2015, including salary, stock options, and other perks. That makes for a dramatic sound bite. But if this money was somehow divided between all 2.3 million Wal-Mart associates, each associate would get a one-time $8.43 bonus—that’s it.
    [end quote]

    Here’s the math on CEO salaries across all of the US from an article by Tim Worstall titled:
    “Three Cents An Hour: The Cost To American Workers Of CEO’s Excessive Salaries”

    [quote]
    But, before we swallow this wholesale we might want to take a little look at this. Try and figure out whether it is actually a problem or not. To do so let’s try to think of a way of doing that. How about, what if we took the money off the CEOs and we gave it to the workers instead? If we measure the effect of this then we might be able to work out whether it is in fact an interesting problem or not. If it makes a useful difference to wages then maybe it is something we want to do. If it makes near to no difference at all then maybe it’s just one of those things that we don’t bother about and we can turn our attentions to solving real problems the country faces. Proper problems we can all agree upon, like the existence of Simon Cowell perhaps.

    Fortunately Mark Perry over at AEI has done that math that Barbie says is so hard for us:

    Oh. Three cents per hour. That’s trivial, isn’t it? Good, excellent, so that’s a problem we don’t have to worry about at all then. We can simply ignore any policy proposals concerning it.

    That’s the (mean) average earnings of all Americans. And if we take all that excessive compensation of those hirelings of the plutocrats and give it to the workers it makes a difference of that three cents an hour, or 0.1% of earnings. Again, it’s trivial, nothing to spend time thinking about really is it?
    [end quote]

    • benign
      January 16, 2020 at 1:28 am

      @Ahmed you completely miss the point, bro. it’s not about the redistribution, it’s ultimately about relative living standards and the elusive variable “solidarity,” which has been severely lacking among the managerial class since the late Seventies in USA. Watch Wilkinson’s TED talk, bro. you got no concept, just numbers.

  7. Ken Zimmerman
    January 17, 2020 at 10:36 am

    This issue has at least three parts. The wealth extreme of the ‘plutocrats’ increases their political power. Which they have and can continue to use, as the margin of their wealth and income advantage increase, to redirect government taxes and spending. The funds needed to provide effective health care, environmental protection and remediation, food protection, housing help, etc. for all Americans are pulled away from government. Republicans since Reagan have introduced over 1,000 pieces of legislation (national and state) to carry out this diversion. Most of the funds are diverted to tax reductions favoring the ‘plutocrats’’ Which further increases plutocrats’ political power. Then the plutocrats themselves offer to provide these lost services and resources through for-profit enterprises. At a price many Americans will likely never be able to afford (e.g., toll roads, private airports, private social security). Not a problem, right? Private, for-profit lenders will give you the cash needed for the lost services and resources. If Americans can afford the monthly payments – principal and interest. Again, no need to fear. Unable to make these monthly payments! The nice lender will spread debt over 50-60 years and even reduce the APR (not the actual interest rate or carrying charges). Result each American begins their life in debt and ends their life in debt. One of the purposes sought by the creators of the USA was ending imprisonment for debt, debtors’ prisons. If the above scenario plays out, that purposed would have failed mournfully.

    Second, if the above describe scenario plays out, the USA becomes a corporatist oligarchy ruled (literally) by 13,000 to 14,000 of the richest Americans. There might still be elections, but they won’t carry any significance in terms of the major decisions about American domestic government, foreign policy, or military policy. The long-ago statement of Upton Sinclair makes my point, “It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It.” And with the scenario above, each American would be dependent on the oligarchy for not just their salary, but for everything needed for safety, shelter, food, and any sort of meaningful work.

    Finally, Americans demonstrate strong support for equality of opportunity and before the law. The scenario above makes both results highly unlikely. What kind of nation would result from such changes? Difficult to say. But we can examine oligarchical nations in different parts of the world and in different historical periods to work out an answer. Such as Russia and Italy in Europe today. Both are violently partisan nations with hatred, fear, and discontent always present. Sometimes in open conflicts. Sometimes below the surface and expressed through periodic violent outbreaks of murder, rape, and bullying. Outside the oligarchs and their supporters and servants, there is little pleasure or good feeling in these nations. Historically, Britain of the 18th and 19th centuries is an informative example. Ostensibly, a democratic nation (a functioning Parliament existed), Britain during these centuries was a tight and very much undemocratic class/caste arrangement in which upstairs/downstairs was not just the name of a popular PBS program. Charles Dickens and other writers showed us this in their novels and stories. In ‘Oliver Twist,’ Mr. Bumble says this in explaining Oliver’s madness. “What have paupers to do with soul or spirit? It’s quite enough that we let ’em have live bodies. If you had kept the boy on gruel, ma’am, this would never have happened.”

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