Friday, February 24, 2012

Why Growing Income Inequality Is Bad for America

The Rich Keep Getting Richer

Controversy over the huge bonuses at financial firms like AIG and J.P. Morgan Chase have served to highlight both the disproportionate growth of the financial sector, and the perverse incentives that led traders and executives to take reckless risks with their companies and our economy.

But they have also shined the spotlight once again on the grave threat posed to our society by the growing income inequality that was the trademark of the last thirty years of our economic history.

Some facts:
* The CEO of the average company in the Standard and Poor's Index makes $10.5 million. That means that before lunch, on the first workday of the year, he (sometimes she) has made more than the minimum wage workers in his company will make all year. That translates to $5,048 per hour -- or about 344 times that pay of the typical American worker.
* Most people would consider a salary of $100,000 per year reasonably good pay. But the average CEO makes that much in the first half-week of the year.
* And that's nothing compared to some of the kings of Wall Street. In 2007, the top 50 hedge and private equity fund managers averaged $588 million in compensation each -- more than 19,000 times as much as the average U.S. worker. And by the way, the hedge fund managers paid a tax rate on their income of only 15% -- far lower than the rate paid by their secretaries.
There is simply no moral or economic justification for this kind of greed. Just as important, growing income inequality is a cancer that is attacking both the economy, and the social and political fabric of our society. A look at economic history makes several things clear.

1) Growth of income inequality does not result from "natural economic laws," as conservatives would like us to believe. It is the result of systems set up by human beings that differentially benefit different groups in the society.

At the beginning of the Great Depression, income inequality, and inequality in the control of wealth, was very high. Then came the "the great compression" between 1929 and 1947. Real wages for workers in manufacturing rose 67% while real income for the richest 1% of Americans fell 17%. This period marked the birth of the American middle class. Two major forces drove these trends -- unionization of major manufacturing sectors, and the public policies of the New Deal that were sparked by the Great Depression.

The growing spending power of everyday Americans spurred the postwar boom of 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, but income inequality continued to drop.

From 1973 to 1980, everyone lost ground. Real wages fell 3% and income for the richest 1% fell 4%. The oil shocks, and the dramatic slowdown in economic growth in developing nations, took their toll on America and the world economy.

Then came what Paul Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan administration magnified income redistribution. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%.

Much as they like to tout the magic "natural" effects of the market on levels of wages, conservatives have not been shy about using the power of government to affect the distribution of the fruits of the US economy. They have slashed taxes for the rich and for corporations, and increased the relative tax burden on working people. And by cutting taxes for the rich, they have transferred wealth to the most affluent people in America from all of our children by increasing the federal debt.

2). Increased income inequality is completely unrelated to the relative contribution of various groups in the population to the nation's economic prosperity.

Who could argue that the executives and traders of the Wall Street financial firms, whose reckless speculating ultimately sent our economy into a tailspin, made any meaningful contribution to our economic welfare? Yet they often made hundreds of millions of dollars.

Remember, much of the financial sector does not produce anything. The principal missions of the financial sector are to take on risk and allocate capital effectively. Some in the industry -- especially many community and regional banks -- do just that. But in the last year, the financial sector as a whole didn't "take on risk," it shifted risk to ordinary Americans through gigantic taxpayer bailouts. Many Wall Streeters themselves escaped the recent economic debacle, having salted away hundreds of billions of dollars.

Fundamentally the financial sector is made up of middlemen, who spend their time creating schemes that allow them to funnel society's money through their bank accounts so they can take a sliver of every dollar off of the top.

Right now, the private health insurance industry is busy trying to defend its turf against a public health insurance option. It wants to maintain its "right" to take that tribute off the top of as many health care dollars as possible. Remember, the private health insurance industry doesn't deliver any actual health care.

Does the CEO of CIGNA who is going to retire this year with a $73 million golden parachute contribute more to our well-being than a nurse who actually delivers health care?

The same is true of most of the financial sector, many of whom are essentially professional gamblers. It is the farmers, manufacturing firms, the health care providers, the transportation companies, the guys who sweep up buildings, the cops and firefighters, the people who teach our kids -- those are the people who produce the goods and services that we consume in our economy. The real incomes of these Americans have dropped by $2,197 per year since 2000, while the "bonus party" on Wall Street continues even though these Americas were asked to reach into their jeans and pony up hundreds of billions to bail out Wall Street's catastrophic mistakes.

3). As political scientists Nolan McCarty, Kevin T. Poole and Howard Rosenthal show in their book Polarized America: The Dance of Ideology and Unequal Riches, inequality in income distribution causes political polarization. It divides our society. Their study found that there is a direct relationship between economic inequality and polarization in American politics.

McCarty, Poole and Rosenthal measured political polarization in congressional votes over the last century, and found a direct correlation with the percentage of income received by the top 1% of the electorate.

They also compared the Gini Index of Income Inequality with congressional vote polarization of the last half-century and found a comparable relationship.

Want less political polarization? What a more bi-partisan spirit? Want America to be unified? Want less hatred and violence in our society? History shows that you start by once again compressing the difference in incomes between the very richest and the rest of America.

4). Finally, increased income inequality is completely undemocratic. It is a betrayal of our most fundamental democratic values. And it is dangerous to our prospects for long-term survival.

The increasing inequality of income leads inexorably to increasing inequality in the distribution of wealth. Power in the society is more and more concentrated in the hands of a few. It becomes more and more likely that some of our most powerful citizens came to that station not because of their merit, but because they got it the "old fashion way" -- they inherited it. That is directly contrary to our shared belief in a more democratic society -- where power and opportunity are broadly shared -- where no one's power or station in life are determined by accident of birth. The earliest Americans came to this continent to escape tyranny, aristocracy and plutocracy.

Progressives who stand up against the increasing concentration of economic power in the hands of a few are standing for one of the proudest traditions of our democracy. And our commitment to the democratic distribution of power is not simply an expression of utopian idealism.

In his brilliant study of why societies in the past have failed, called Collapse: How Societies Choose to Fail or Succeed , Pulitzer Prize-winning physiologist and ethno-geographer Jared Diamond concluded that one of the most common factors was "rational behavior" by actors -- and decision-making elites -- that benefited some individual or private self-interest but was harmful to the prospects of the entire society.

He found that this was often complicated because the benefits to a small group that profited from the action were great in the short run, and the resulting damage to everyone else was not very palpable or immediate, except over time.

This problem became especially acute when elites thought they could insulate themselves from the consequences of communal disaster. Then, they were even less prone to make decisions in the public interest. The increased inequality in the distribution of wealth and income makes this kind of decision-making more and more likely. We see when the interests of the wealthy stand in the way of solutions to the problems of climate change and environmental destruction -- or when we fail to raise enough money for the public education that benefits all children because the few who can afford private schools refuse to pay "higher taxes."

The creation of a democratic society, built on egalitarian principles, is the only real systematic means of assuring that the interests of the entire society