Ignorance of Income Inequality is Damaging to our Society

Three years ago the Occupy Wall Street movement got America’s attention with the cry of “We are the 99%.” Income inequality was put under a spotlight for a time. But how far did the understanding penetrate? Unfortunately, not very far.  

First, in a recent poll the average American thought CEOs made 30 times the wage of their employees, which hasn’t been true for 50 years. Today the figure is ten times as much—over 300 times.

Second, most people are completely unaware of the extent of wealth inequality, which is much worse than income inequality.  The wealthiest 20% in the U.S. own about 84% of the wealth. Think about that for a moment: only 16% of wealth is left for over three-quarters of the population. When you get to the bottom half of the population, those 155 million people own only about 2% of the total wealth.

To see an illustration of the income and wealth inequality in the United States, watch this episode of a TV show I did with Arthur Hancock in 2010.

The chart above, created by Pavlina Tcherneva, an economics professor at Bard College, vividly shows one of the contributors to the rise of income inequality in the last few decades. The graph portrays the distribution of national income growth during economic expansions since WWII. The blue represents the bottom 90%, the red the top 10%. In the last thirty years all the gains have gone to the wealthy, in fact, in the latest expansion most Americans have been losers—the truth is most of us don’t even realize we’re in an expansion, the Great Recession hasn’t ended for us yet.

In a recent column, “Invisible Rich,” Paul Krugman asks:

So how can people be unaware of this development [massive income inequality], or at least unaware of its scale? The main answer, I’d suggest, is that the truly rich are so removed from ordinary people’s lives that we never see what they have. We may notice, and feel aggrieved about, college kids driving luxury cars; but we don’t see private equity managers commuting by helicopter to their immense mansions in the Hamptons. The commanding heights of our economy are invisible because they’re lost in the clouds…

Does the invisibility of the very rich matter? Politically, it matters a lot. Pundits sometimes wonder why American voters don’t care more about inequality; part of the answer is that they don’t realize how extreme it is. And defenders of the superrich take advantage of that ignorance. When the Heritage Foundation tells us that the top 10 percent of filers are cruelly burdened, because they pay 68 percent of income taxes, it’s hoping that you won’t notice that word “income” — other taxes, such as the payroll tax, are far less progressive. But it’s also hoping you don’t know that the top 10 percent receive almost half of all income and own 75 percent of the nation’s wealth, which makes their burden seem a lot less disproportionate…

Today’s political balance rests on a foundation of ignorance, in which the public has no idea what our society is really like.

And the wealthy, in control of the media and the government, have a vested interest in keeping us ignorant.

Why Do We Treat Capital Better Than Labor?

A question I have been pondering for some time is, “Why does capital get all the rewards? Why do profits flow to the money men and not to the laborers? Why does our system crown money as king?” Is it only because the wealthy make the rules in our plutocracy? Or is there some underlying economic principle at work? I don’t think so. I think this is a reflection of the fact that we are still living in a semi-feudal economy.

Warren Buffett made a splash a month ago by publishing an op-ed in the New York Times, "Stop Coddling the Super-Rich," restating his sense of outrage that his employees pay a higher percentage of their income in tax than he does. The top rate on wages is currently 35%; the investment income rate is capped at 15%. “As a result, anyone making more than $34,500 a year in wages and salary is taxed at a higher rate than a billionaire is taxed on untold millions in capital gains,” says a Washington Post article, "Capital Gains Tax Rates Benefiting Wealthy Feed Growing Gap Between Rich and Poor." The abstract for the article claimed that the “job-creating” benefits attributed to a low rate were disputed, but then never really gave a cogent opposing argument (of course). In fact the drop in the capital gains tax (under Clinton and G.W.Bush) encouraged the speculative investments that brought down the world economy in 2008.

Couldn’t you make a case that there is no difference between capital and labor? That capital is in fact, excess labor, and should be treated identically? When humans first began agriculture there was no such thing as capital. There was only human labor. But as our skills increased, we accumulated excess food—this was the first capital. Slowly this excess built on itself until it became abstracted into currency.

Labor is the source of capital and should be what is rewarded by our tax code. Instead of passive investment we should be rewarding active labor. The Washington Post article quotes Marty Sullivan, an economist and a contributing editor to Tax Analysts: "The way you get rich in this world is not by working hard. It's by owning large amounts of assets and having those things appreciate in value."

Unfortunately there’s bipartisan support for low capital gains taxes, because a huge number of members of Congress are rich. Here’s some numbers from an article in The Week magazine "The Congressional Millionaires' Club: By the Numbers":

261: Number of millionaires in the last Congress, out of a total of 535 members

$911,510: Median wealth of all members in the last Congress

$25,149: Median estimated wealth of an American over the age of 18 (2005)

What we have in this country is a plutocracy. The wealthy are rule this country. The trappings of democracy, elections for example, are maintained as a superficial veneer to hide the truth.

And of course since the wealthy are in control, capital will be rewarded and labor penalized. In 2009 I wrote an article for my column in Highlands Newspaper called "Feudal Economics." An excerpt:

What do I mean by “feudalism”? Feudalism is a socio-political system where a very few “lords” own almost everything and everyone else is a “vassal,” or servant of the lord. The vassals work for the lord and are completely dependent upon him. We usually think of the Middle Ages in Europe or the Shogun era in Japan when we think of feudalism, not modern-day America. 

In the United States, wealth is highly concentrated in a relatively few hands. According to G. William Domhoff, a sociology professor at the University of California Santa Cruz (using 2004 numbers), the top 1% of United States households owned 34% of all privately held wealth, and the next 19% owned 50%. In other words, 20% of the people own 85% of everything in this country. That leaves 15% of the wealth for the bottom 80% of the population. 

In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households have an even greater share, 42.2%, and the top 20% owned 95.2%, leaving only 7.5% for the bottom 80%. (To be clear, we’re not talking income here, these figures are for assets.) 

We haven't moved past feudalism; we've just added a new wrinkle or two. Case in point: the rise of the corporation.According to the World Institute for Development Economics Research, the 500 largest corporations in the U.S. “control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits.” 

Further, the CEOs of these corporations serve on each other’s boards, creating an even more incestuous relationship, something like the royal families of feudal Europe intermarrying to keep the power in the family. The CEOs grant each other huge pay packages, and you can only imagine the secret favors they do for each other. 

The current concentration of wealth in the hands of a few is very dangerous to our democracy, because wealth is power. Our government is owned by the wealthy and the corporations. The elite run this country and the rest of us—the majority of people in the country—are no better than wage-slaves. 

Karl Marx’s theory of economic development predicted countries would progress from feudalism through capitalism to socialism. No reason to worry about this country going socialist—we haven’t even made it to capitalism yet. Let’s concentrate on throwing off the chains of our feudal lords.

Plutocracy Now!

Mother Jones has an easy to understand set of charts illustrating the widening gap between the rich and the rest of us, "It's the Inequality, Stupid."

The average income for the bottom 90% of Americans is a staggeringly low $31,244. People in the top 1% average $1,137,000. The truly rich are a fraction of that one-percent. The top one-hundredth of a percent average $27 million a year.

Wealth is where the real concentration of money happens: the richest 10% own two-thirds of all wealth in this country. The poorest half of the population own only 2% of all wealth.

Plutocracy means rule by the wealthy, and that is a much better descriptor of our country than "democracy," or rule by the people.

The prank phone call recently made to Governor Walker of Wisconsin by Ian Murphy of the Buffalo Beast clearly illustrates the subservience a politician shows to a rich donor. Walker believed that the caller was David Koch, the billionaire Kansan businessman and major contributor to conservative causes, including the Tea Party and Walker's own gubernatorial campaign. Walker may not have said anything in the phone call that was different from what he says in public, as he defensively claims, but the truly telling aspect of the phone call was not what he said but how he said it. The man posting as Koch barely says anything, and Walker acts like a schoolboy reciting his lessons before the school master. It was clear from who was the boss in that call--it was the money man.

No mere citizen has that kind of power. Only a wealthy man or representative of a powerful organization has that kind of access and power. For the vast majority of us, our pitiful electoral vote once every two years pales in comparison to the power of the dollar-votes the Koch brothers, and those other one-percenters, wield every day of every year.

The Morning After

Republicans hate government, they say. Conservative Grover Norquist famously said he wanted to shrink government so small it could be drowned in a bathtub.

The Tea Party wants to slash federal taxes and government programs--Department of Education, the FDA, and other "useless" agencies. They profess to believe that the only function of government is national defense.
Imagine the Tea Party taking power. Does anybody wonder what would happen the morning after? The recent Republican "Pledge to America" gave some hint of what they'd like to see: other than the military budget, Social Security, and Medicare, they advocate sharp cuts in every other area of government spending. But as Paul Krugman points out in "Downhill with the GOP," there is actually very little money in those discretionary areas:

So what’s left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won’t cut, is to completely abolish the rest of the federal government: “No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid (one-third of its budget pays for long-term care for our parents and others with disabilities). No more child health or child nutrition programs. No more highway construction. No more homeland security. Oh, and no more Congress.”

When liberals get angry at the GOP for being so obstructionist in Congress, I think, "but that's because they don't think Congress should do anything. They think government is the problem, not the solution so they don't want to pass legislation to deal with the nation's problems."

The only problem with this is that when they are in power, they really don't act on their supposed convictions. In the first half of this decade when the GOP had the presidency and both houses of Congress did they really try and pull back the scope of the federal government? No of course they didn't. They deregulated some things, but federal spending increased, and the GOP sponsored a huge expansion of Medicare without ensuring that it be funded.

In other words, they mean their fiscal promises just as much as they mean their morality promises (e.g. banning abortion)--in other words not at all. It's just empty rhetoric.

What they want is power. They don't care about governing, they just want to hold power by being in government.

The Democrats aren't much better. They also want power, but they do seem to have some interest in creating policies to improve life for the average American. There's an interesting graph accompanying the excellent article about income inequality in the U.S. in Slate, by Timothy Noah, "The Great Divergence." The graph is entitled "Income Growth Rates 1948-2005" and it compares the increase in income for the five income quintiles (top 20%, next 20%, etc.) for presidents of the two political parties. Under Democratic administrations, the income gains are almost equal across all quintiles, with a slightly higher rate for the poorest, but under Republican presidents the increase in badly skewed towards, you guessed it, the rich, while the porr gain almost nothing. The accompanying text reads:

Did the United States grow more unequal while Republicans were in power? It sounds crude, but Princeton political scientist Larry Bartels has gone a long way toward proving it. Bartels looked up income growth rates for families at various income percentiles for the years 1948 to 2005, then cross-checked these with whether the president was a Republican or a Democrat. He found two distinct and opposite trends. Under Democrats, the biggest income gains were for people in the bottom 20th income percentile (2.6 percent). The income gains grew progressively smaller further up the income scale (2.5 percent for the 40th and 60th percentiles, 2.4 percent for the 80th percentile, and so on). But under Republicans, the biggest income gains were for people in the 95th percentile (1.9 percent). The income gains grew progressively smaller further down the income scale (1.4 percent for the 80th percentile, 1.1 for the 60th percentile, etc.).

Two other observations are worth making:

1) In all income categories except the 95th percentile, income growth rates under Democratic presidents exceeded income growth rates under Republican ones. That suggests greater income equality can coexist with (or even help create) greater prosperity.

2) The 95th percentile fared about the same under Democrats and Republicans. (This chart shows it doing slightly better under Democrats, but the margin of error erases the Democrats' advantage.) Bartels' party-based interpretation of income inequality can't address the Great Divergence, Part 2—the stratospheric rise in incomes at the very top—because for this group, it doesn't matter much whether a Democrat or a Republican inhabits the White House. Political scientists Jacob Hacker and Paul Pierson, of Yale and Berkeley, respectively, argue that the apparently nonpartisan solicitude Democrats and Republicans express toward the rich is the result of a massive increase in Washington's corporate lobbying sector since the 1970s—and that the growing power of big business in Washington has been a major contributor to the Great Divergence.