The media is filled with stories related to income inequality lately. Consider the following:
- Riots in Chile: Riots that started as a protest over an increase in transit fares has transitioned into a mass movement to address income inequality left over from the Pinochet dictatorship that ended in 1990. Folks in Chile were promised that democracy and capitalism would bring widespread prosperity. Instead, the income inequality that helped topple the brutal dictator has continued. The irony here? According to the Organisation for Economic Co-operation and Development (OECD), inequality in the United States is comparable to that in Chile. And in Chile, income inequality is falling, unlike what is happening here.
- The Trump tax cuts didn’t work: This is perhaps the least surprising story on the list, but here it is anyway. The Trump tax cuts passed by a unified Republican party in Congress in 2017 were supposed to deliver high growth and trickle down economic benefits to workers. What has actually happened? Anemic growth, stagnant wages, a recession in manufacturing, lower investment . . . in other words, exactly the opposite of what was supposed to happen. Oh, but it did dramatically increase income inequality.
- Wall Street targets Elizabeth Warren: The Massachusetts Senator and Democratic Presidential candidate has made a name for herself by targeting the excesses of Wall Street and promoting policies aimed at reducing inequality. Her populist message has catapulted her to the top of many polls, making Team Warren the odds-on favorite to win the nomination. In response, Wall Street financiers are “fearful,” according to CNBC’s Jim Cramer.
In response, some argue that becoming billionaires is the American dream, and that inequality is the result of a working capitalist system. As Stephen Moore, Trump’s one-time pick for the Federal Reserve Board opined, “capitalism is a lot more important than democracy.”
Leon Cooperman, a billionaire former Goldman Sachs executive argued, “What is wrong with billionaires? You can become a billionaire by developing products and services that people will pay for.” Then, regarding Senator Elizabeth Warren’s candidacy, “This is the fucking American dream she is shitting on.”
Others have claimed that inequality results from a skills gap. The problem is that the people earning lower wages don’t have the skills that will help them earn more money, so the argument goes.
In fact, both these arguments are easily dismissed.
Research has found that while higher state taxes can have a negative impact on innovation, the same is not true for federal taxes. Apparently, people want to locate in the United States for reasons other than our tax rate. Furthermore, this research has found that other factors are more influential than taxes on the location of innovation, factors such as the conglomeration of innovative people in a specific area. Such conglomerations tend to occur because of the infrastructure available. For example, Silicon Valley and Boston became technology hubs because of their superior technology universities. But these universities are supported by taxes, so there is a trade-off.
What’s more is that the tax cuts did not result in an increase in business investment. In fact, as a result of our policy environment, business investment has been low by historical standards since 2001, and Trump’s tax cuts have done nothing to reverse that trend. This trend, by the way, has been a reality despite record corporate profits.
Regarding the skills gap, the question is what would address this problem. The answer is better worker training. And yet, the apologists for extreme wealth inequality are the same people who want to reduce funding for higher education.
In fact, the myth of the “American dream” has become just that . . . a myth. According to the graph below, the only developed country with lower intergenerational mobility, in other words, the ability of poor people to become wealthy, is Great Britain. High tax Scandinavian countries and Canada now have much higher social mobility than we do.
So what happened? In a word, the Reagan revolution.
The statistics are shocking. The United States enjoyed relatively low inequality until 1980, when former President Ronald Reagan spearheaded a conservative revolution aiming to undo the welfare state that had built up since the Great Depression. His policies, which have been shockingly successful in returning United States society to the era of the Roaring Twenties, include the following:
- Tax cuts for the rich: Prior to Reagan, the top marginal tax rate was 70 percent. This is the tax rate paid by households only on their earnings in excess of $161,300 in 1980 dollars, or $502,611.97 today. Reagan cut that rate to 50 percent, further reducing it to 28 percent by the end of his Presidency.
- Attacks on labor: Reagan is famous for his attack on the Professional Air Traffic Controllers’ union shortly after he took office. But in fact, this attack was part of a larger right-wing strategy to delegitimize labor unions, a policy that has been extremely successful. Where union membership hit a high of about a third of all workers in the 1960s, it started to decline in the 1970s, accelerating after Reagan’s election. Now, union membership is about where it was in the 1920s, and as you can see below, the rate of union membership is highly correlated with income inequality. That is why they have been the target of sustained attacks by the right wing.
- Shift from social spending to military spending: From the chart below, you can clearly see how the federal budget shifted from being focused on domestic spending to military spending in 1980. I remember working in Washington in the late 1980s, and to look at the history of spending for any number of domestic programs was to see massive drops at the beginning of the Reagan presidency. At the same time, military spending has gone up. Now, the United States spends more on defense than the next seven countries combined. In general defense spending, especially in today’s era of contracted out military work, tends to increase income inequality, while programs that educate people, provide child care, and fund basic research tend to decrease inequality. These are the very programs that have never recovered from Reagan’s revolution.
- Dramatic reductions in funding for higher education: Education is the surest path for someone to move from one class to another. But since the 1980’s, government has been steadily decreasing its investment in higher education. The result is higher tuition and fees, as well as the burgeoning student loan crisis. The College Board provides us with the chart below. Look at the massive drop in funding and the corresponding big increase in tuition and fees that characterized the 1980s.
- Regulatory changes that benefit shareholders to the detriment of workers: We discussed the attack on labor unions above, but the flipside is how shareholders experienced a boon. For example, legislation passed in the Great Depression made it hard for companies to engage in stock buybacks. Buybacks are a way for them to increase the value of shareholders’ investments rather than investing in workers or innovation. Under Reagan, however, the Securities and Exchange Commission changed a rule making it easier for companies to buy back their own stock. The result has been a decline in investment in assets that build value. Now, just as companies did in the wake of the Trump tax cuts, they essentially gave money back to their shareholders instead.
There is good news. Because inequality is policy driven, it can be undone. It is not by accident that Wall Street, which has gorged itself on inequality, watches Elizabeth Warren’s candidacy with trepidation. The truth is, however, that just about any candidate other than Trump will engage in efforts to reduce income inequality. Indeed, Trump sold himself in 2016 as a candidate who would do something about it, only reversing positions when he was elected. The public, however, wants to see this changed, and they likely won’t stand for many more years of empty promises.