Sorry RIch Dudes, Time to Pony Up

To extend the Bush tax cuts for the richest Americans will require the US to borrow $700 billion from the Chinese.  Not only will the tax cuts add to America’s financial wows, but the growing income inequality it will create will tear at the very fabric of our society.  It’s not even compelling to argue for tax cuts on fairness grounds, given how the rich have become so rich over the last 30 years.

Yale’s Jacob Hacker and Berkeley’s Paul Pierson, in their ground-breaking book, “Winner Take All Politics.” argue persuasively that the economic struggles of the middle and working classes in the U.S. since the late-1970s were not primarily the result of globalization and technological changes but rather a long series of policy changes in government that overwhelmingly favored the very rich.

Those changes were the result of increasingly sophisticated, well-financed and well-organized efforts by the corporate and financial sectors to tilt government policies in their favor. From tax laws to deregulation to corporate governance to safety net issues, government action was deliberately shaped to allow those who were already very wealthy to amass an ever increasing share of the nation’s economic benefits.

The book describes an “organizational revolution” that took place over the past three decades in which big business mobilized on an enormous scale to become much more active in Washington, cultivating politicians in both parties and fighting fiercely to achieve shared political goals.

The outcome of this concerted effort is that the richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976.   From 1980 to 2005, more than 80% of the total increase in American incomes went to the richest 1 percent.  

 C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Last year was a terrific year for those at the very top.  Executives at the nation’s 38 largest companies earned a stunning total of $140 billion — a record. The investment firm Goldman Sachs paid bonuses to its employees that averaged nearly $600,000 per person, its best year since it was founded in 1869. 

Have corporate executives earned their hefty pay-checks?   Just look at the stock-market over the last 10, 20 or even 30 years to see that corporate executive pay has far outstripped the value they’ve added to their companies share prices.  The Wall Street gang, who get enormous rewards when their bets payoff, and receive no penalty when they don’t, have a built in incentive to take crazy risks with your money, and they do.  Main-stream economists have shown clearly that Wall Street actions have eroded the financial system’s stability while creating unprecedented risk, all the while lining the pockets of a few very clever financiers.

To raise the taxes on this group, is only to recover some of the wealth that can easily be thought of as ill-gotten gains.  In economics parlance, the government would simply be re-claiming the transaction costs, the externalities, as it were, embedded in the flawed system that tilts toward the stinking rich.

Another compelling reason to focus on taxation is that income-tax policy has changed very dramatically during the last 30 years. Before Ronald Reagan's election in 1980, the top income tax bracket stood at or above 70 percent, where it had been since the Great Depression.   As the economy boomed and income inequality dwindled, the top bracket resided at a level that even most Democrats would today call confiscatory. Reagan dropped the top bracket from 70 percent to 50 percent, and eventually pushed it all the way down to 28 percent. Since then, it has hovered between 30 percent and 40 percent. If President Obama lets George W. Bush's 2001 tax cut expire for families earning more than $250,000, Tea Partiers will call him a Bolshevik. But at a whisker under 40 percent (up from 35), the top bracket would remain 30 to 50 percentage points below what it was under Presidents Eisenhower, Nixon, and Ford. That's how much Reagan changed the debate.

And if Republicans are worried about long-term budget deficits, a reasonable concern, why are they insistent on two steps that nonpartisan economists say would worsen the deficits by more than $800 billion over a decade — cutting taxes for the most opulent, and repealing health care reform? What other programs would they cut to make up the lost $800 billion in revenue?

If you aren’t convinced that we need to let the Bush tax cuts expire on purely economic grounds, maybe a look at the societal consequences of income inequality will move you.  Robert H. Frank of Cornell University, Adam Seth Levine of Vanderbilt University, recently wrote a fascinating paper suggesting that places where inequality increased the most also endured the greatest surges in bankruptcies.  Another consequence the scholars found: Rising inequality also led to more divorces, presumably a byproduct of the strains of financial distress.

Richard Wilkinson and Kate Pickett, two medical researchers based in Yorkshire, relate income inequality trends to mental and physical health, violence, and teenage pregnancy. But their larger point—that income inequality is bad not only for people on the losing end but also for society at large—seems hard to dispute.

The United States' economy is currently struggling to emerge from a severe recession brought on by the financial crisis of 2008. Was that crisis brought about by income inequality? Some economists are starting to think it may have been. David Moss of Harvard Business School has shown that bank failures tend to coincide with periods of growing income inequality. "I could hardly believe how tight the fit was," he told the New York Times. Princeton's Paul Krugman has similarly been considering whether the Great Divergence helped cause the recession by pushing middle-income Americans into debt. The growth of household debt has followed a pattern strikingly similar to the growth in income inequality.

Some scientists believe that growing inequality leads to more health problems in the overall population — a situation that can reduce workers' efficiency and increase national spending on health, diverting resources away from productive endeavors like saving and investment.

Other researchers have focused on how income inequality can breed corruption. That may be especially true in democracies, where wealth and political power can be more easily exchanged, according to a study of 129 countries by Jong-Sung You, a graduate student at the Kennedy School of Government at Harvard, and Sanjeev Khagram, a professor of public affairs at the University of Washington in Seattle.

Corruption, of course, can hurt growth by reducing the efficient allocation of public and private resources and by distorting investment. That may end up creating asset price bubbles.

Unchecked inequality may also tend to create still more inequality. Edward L. Glaeser, a professor of economics at Harvard, argues that as the rich become richer and acquire greater political influence, they may support policies that make themselves even wealthier at the expense of others.

In the United States, there is plenty of evidence that this has been occurring. Bush administration policies that have already reduced the estate tax and cut the top income and capital gains tax rates benefit the well-to-do. It seems hardly an accident that the gap between rich and poor has widened.

As Warren Buffet recently said, “we are in a class war, and my class is winning.”  If we are serious about financial stability, fairness, and a well-functioning society, we can start by increasing the taxes on the wealthiest Americans, who have for too long enjoyed a field heavily tilted in their favor.  Long-term, we will need to address the dynamics that have enabled the wealthy to take so much ground.  As Warren Buffet recently said, “we are in a class war, and my class is winning.”

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