Reducing Wealth Inequality

“What are two good ways for the federal government to reduce the gap between rich and poor?”
J____

I received this text message from my friend J___. Given J___'s politics, I expected a punchline that never came. You know, something hysterical like "send the poor to Mexico." I want to discuss the inequality problem, economic trends from the last several decades, and a few options for what can be done to reverse those trends. Extreme inequality is a growing problem for all of us, it erodes our democracy and financial stability. I have very little hope that anything can be done about it without a radical change in outlook and political participation within our society for reasons that I will discuss.

The Problem
For the last 3 decades there has been an enormous shift in wealth from the majority to a narrow minority. This trend has been both global and national.

First some quick facts and trends: Working class wages have been falling or stagnating over the last 30 years while the income of the top 10% has been dramatically rising. In the early 1980s the proportion of CEO income to workers wages was approximately 50 to 1. Today it is 450 to 1. The richest 400 people in America make more in a year than the entire population of the 20 poorest countries in Africa. The top 5% of Americans own more than the remaining 95%. The gap between the rich and the poor has been widening, and widening at an accelerating pace in the U.S. Inequality was decreasing in the U.S. from the beginning of the Great Depression through the 1970s, but that trend has since reversed.

This has put a squeeze on the American middle class, which has been steadily eroding. A number of recent academic studies found that people are less likely to move up in economic class in the United States than they once were. Where you are born is becoming a larger determining factor in where you end up. The Horatio Alger story is becoming more myth than reality.

Americans are not aware of that however, the Christian Science Monitor reported in May 2005 that although academic studies indicate that income mobility in the U.S. is no better than in France or Britain, lower than in Canada, and is approaching the rigidity of Brazil but Americans do not believe that. Their perceptions are still in line with the period from 1950-1980 when there was much greater class mobility. The studies found that people are having a harder time moving up because of medical bills and high housing costs, not irresponsible spending. Other studies have found that income volatility is also increasing.[1]

Some have argued quite forcefully that this situation is not by chance, but the result of years of tax restructuring and legislation brought on by corporate lobbying. (See for example David Cay Johnston’s book Perfectly Legal.) During the era of Dwight Eisenhower the percentage of federal revenue from corporate taxes was 35%, today it is less than 10%. The Christian Science Monitor reports that the U.S. tax system is already almost flat. Because of the Bush tax cuts, by 2010 billionaires and millionaires will actually a smaller percentage of their income than the upper middle class. David Cay Johnston reports that according to government data, many of the wealthiest people in America paid no taxes at all in 2002.[2]

Some people mistake the concern about extreme inequality as a call for making everyone equal. In any competitive economic system some people are going to be more successful and hard working than others, and they should rightly enjoy greater rewards. The danger is taking this principle to an extreme, or perverting it and allowing a class system to settle in where economic prosperity is increasingly correlated with the wealth of one's parents, as is currently happening.

Furthermore, I would argue that it is fundamentally immoral to have more than enough food, medical care, and shelter for everyone but to have an economic system that deprives them of access. This basic morality is enshrined in the Universal Declaration of Human Rights, which guarantees medical care, shelter, and the right to work for everyone. The U.S. has been a signatory to this document for over fifty years.

Gross concentrations of wealth and power also threaten political democracy. It is widely recognized that wealth correlates with power. The powerful are more able to influence political policy in favor of their interests, even when at odds with the majority. This eventually leads to a oligarchy rather than a democracy. Alan Greenspan comments,

“The income gap between the rich and the rest of the US population has become so wide, and is growing so fast, that it might eventually threaten the stability of democratic capitalism itself.”[3]

Narrow interests currently dominate the U.S. political system and not surprisingly the majority of Americans favor positions that are not represented by either of the two political parties, which has led to disaffection and apathy.

The Solution
I don’t think the solution to this problem is all that difficult to formulate. The problem is more one of motivation than ideas. We could restructure our tax system and strengthen social programs that benefit the poor and to do this we have to change how people perceive the issues.

For instance, recently Congress voted to cut $50 billion over the next five years from social programs like Medicaid, Food Stamps, and free and reduced school lunch programs. The cuts represented less than 1% of the social spending budget, but were roughly equivalent to the tax cuts going to the wealthy over the same period of time. Of the news articles I read, none explicitly described this as a tax increase on the poor. But that is what they are. If you cut subsidies for public health care, food aid to the poor, etc. those are tax increases on the poor. Hardly anyone even seems aware of that.

Most people refer to all of Bush’s tax cuts similarly, they refer to his “cuts” – primarily for the wealthy without mentioning that he has been effectively increasing taxes for the middle class and poor. A CBO report in 2004 found that the richest 20 percent of Americans have seen their share of the national tax burden fall while the rest saw it increase since 2001. Laura D. Tyson writes in Business Week that Bush’s tax cuts have been a windfall for the rich, and that the current income and wealth inequality in the U.S. is at its worst since the 1920s. [4]

To take another example, look at the recent debate over the “death tax.” It only affects the wealthiest estates in the country. The principle behind that tax is that in America you should not inherit your position in society. The tax does not completely dismantle the estate, but does take a chunk for redistribution. However, conservatives in the media and Congress successfully recast the issue in such a way that many Americans were against this tax and incorrectly believed it affected a far higher percentage of families than it did. For instance, they believed that it would destroy farmers even though not one farming family can be produced that it would have or has put out of business. A CBO study found that the number of farms it affected in the last 4 years was between 0 and 27.[5]

That is not to say that there is not a valid criticism against the tax: mainly that it may not really be a redistributive tax. Much of the government’s budget is spent on funding corporations or research and development for products that once developed and refined, are given to private firms to sell back to the same public that funded their development. It may be that the estate tax is largely a redistribution of wealth to the already rich. This is admittedly simplifying things a bit. We do have programs that benefit the majority and the poor, but our spending is out of proportion.

What we should do is reduce our defense spending, which is grossly disproportionate compared to the rest of the word, and increase social spending. We should offer better social services, including a national health care system. (Incidentally most of us would likely see a net gain if we had a better health care system even if we didn’t use it. The U.S. spends twice as much per capita for health care compared to other countries but get worse care. The higher costs are reflections of adverse selection and market externalities that we all pay for people who have no access to care including loss of worker production, rising insurance costs, inefficiencies that public systems don’t have, etc.)

Economist Edward Wolff suggests we implement a wealth tax similar to what exists in several Western European countries.* The majority of people would be exempt from the tax, and it would amount to a small tax for the richest that would raise over $60 billion in revenues per year.

Why it won’t work
Right now, this solution is infeasible. The moneyed interests of the country – the ruling meritocracy - are too powerful to let it happen, or more accurately they are too powerful to allow the legislation and policies they have paid for be rolled back. Unless the American population was a lot more politically active and aware there just is not enough opposition to what is going on.

If something were to start happening to change these trends, then you would see fierce opposition. A good example of what you would expect to see is what is happening in Venezuela with Hugo Chavez. He came to power legally, has been saved from a (U.S. supported) coup by an enraged public, and has been overwhelmingly affirmed with several public referendums. Independent inquiries have verified that the elections and referendums were legitimate. He is loved by the poor and despised by the rich because he has spent a lot of money improving the conditions of the poor people in Venezuela. Wages have not really gone up, but that is not the whole story. Literacy has gone up, hunger has gone down, and living conditions have improved because of increased spending on education, food aid, etc.

Do I think Chavez is wacky, crazy, a genius, a maniac, etc? I don’t know and it doesn’t matter. What is important is that he has been overwhelmingly approved of in democratic elections and referendum - by Venezuelans. But the American media and political leaders treat him harshly. The press is hostile to him, referring to him as a “strongman”, an implied statement that he is a dictator.** Chavez is laughed at for suggesting that the U.S. has a plan to overthrow him; even though he has already survived one U.S. supported coup and the U.S. has a well-documented history of intervening in the affairs of Latin countries.

If anyone in the U.S. were to gain political influence and popularity by suggesting that we really start spending more on our poor and public and less on corporations, they would likely be met with the same hostility.

Afterward
For more on economic solutions and criticisms, see here.
For more on Chavez and our media/intellectual culture see here.

* Income is distinct from wealth - If you don’t know the difference between wealth and income then imagine you are on a deserted island with one other person. You have a suitcase with $1 million; he has a cave full of canned food. You have more money, but he is wealthier.[6]

** For example, see: Harman, Danna. “Latin strongman rebels against US-centric news.” Christian Science Monitor. 13 May 2005
Webb, Andy. “Bush Orders Policy to ‘contain’ Chavez.” The Financial Times. 13 March 2005
Editorial. “Nonsense from Hugo Chavez.” Los Angelos Times, 28 January 2005
Editorial. “A Threat to Latin Democracy.” Washington Post, 21 March 2005
Diehl, Jackson. “The Façade of Latin Democracy.” Washington Post, 6 June 2005
Editorial. “Venezuela’s ‘Revolution’.” Washington Post, 14 January 2005

Notes:
[1] Francis, David. Christian Science Monitor. 23 May 2005.
Editorial. New York Times. 30 May 2005
[2] Francis, David. Christian Science Monitor. 14 April 2005.
Johnston, David Cay. New York Times. 3 July 2005
[3] Grier, Peter. Christian Science Monitor. 14 June 2005
[4] Weisman, Jonathan. Washington Post. 13 August 2004
Tyson, Laura D. Business Week. 1 November 2004
[5] Johnston, David Cay. New York Times. 5 June 2005 Johnston, David Cay. New York Times. 10 July 2005.
[6] Wolff, Edward. Multinational Monitor. May 2003
Wolff, Edward. Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It Perfectly legal. New Press, 2002