No, the title of this post isn’t taken from the
Onion. It’s taken from the title of an article sponsored by an organization that engages in even more outrageous humor… I mean ideas – The American Enterprise Institute (AEI).
“
The Upside of Income Inequality” makes two basic points to support the conclusion noted in the title of the article. First, that the value of a college education has risen as income inequality has risen. And second, that consequently the percentage of Americans who attend college has increased. The graph they provide indicates that college
attendance by 20-25 year-olds rose from about 40% in 1981, when income inequality began to take-off with the “Reagan Revolution” to about 50% in 2005.
However, the article leaves out a few important things. For example, it doesn’t mention that the during approximately the same time period college
graduation rates (percent of college students who graduate) at public colleges (which are primarily attended by the non-wealthy)
decreased by almost the same amount that
attendance rates increased, and the great bulk of that decrease occurred during the Reagan-Bush years, as opposed to the Clinton years, when rise in income inequality was much less conspicuous (the article doesn’t extend to the Bush II years).
Clearly, the declining graduation rates must be related to the skyrocketing costs of a college education, coupled with the declining amount of federal aid available for education. The result is that as of January 2008,
56% of parents believe that college is unaffordable for their children. What all these data suggest is that, as a college education becomes more and more important to our children’s economic futures, the increase in college attendance rate is accounted for mostly by those who have parents at the upper end of the economic spectrum, whereas the decrease in graduation rates is accounted for mostly by those who have parents who can barely afford to send their children to college. Many low income teenagers begin college, only to ultimately find that the economic requirements don’t allow them to finish it. Furthermore, those who manage to squeak by graduate with huge debts, the repayment of which substantially cuts into their income. Thus, the widening income gap is both a cause and a consequence of the inability of many with low income parents to finish college. The end result is a vicious cycle of income inequality and educational inequality.
The real “upside” of income inequalitySo let’s be honest about this. What the AEI
really means when it talks about the “upside” of income inequality is that the upside is … income inequality itself. In other words, whether income inequality is considered bad or good all depends upon where you stand. If you’re a CEO or a hedge fund manager, it’s good. If you’re in the lower 98% of the income spectrum, then it’s probably bad. Gabriel Thompson
puts this into perspective in his comments on the AEI’s “The Upside of Income Inequality”:
The “upside” of income inequality is best considered from above: for example, with a view from the fifth floor of (hedge fund manager and chairman of AEI Bruce) Kovner’s mansion overlooking Central Park, which he purchased in 1999… for $17.5 million… Other vantage points from which to assess the benefits of growing income inequality in a clear-eyed vantage point might include Kovner’s 200-acre estate… or… oceanfront properties… which he purchased last year for $70 million.
Thompson discusses in more detail what the “upside” of income inequality is all about:
The financial elite continue to break income records… The top 25 on the list earned an
average of $892 million (in 2007), up from $532 million in 2006 – in a year when the economy began to stall… The top ten earners alone made a combined $16.1 billion, more than the GDP of Nicaragua….
Kovner… his real desire is to transform the world through sweeping ideas – the sort of ideas that set the stage for the invasion and occupation of Iraq and that now urge confrontation with Iran. Along with its nation-conquering agenda, AEI is also a voice for an unfettered free market that abhors any sacrifice from the wealthiest among us….
It’s about the vast political power conferred by wealth, which can be deployed to support institutions pushing policies that, in turn, magnify the wealth divide. Kovner subsidizes senior fellows who … see something sinister in a living-wage movement that “seeks to force urban firms to pay up to double the minimum wage.”… He calls the movement a “sneaky way of bringing socialist economics to America’s cities”.
Cool. They don’t even have to worry about recessions.
An explanation for huge income inequality – offered by the mega-richTo put the issue of income inequality in perspective, Thompson provides a bar chart showing the average annual compensation for several groups of U.S. leaders. At the bottom end of the scale, represented by a bar that appears to be about half a millimeter high is the annual compensation for our top 5 military leaders: $958 thousand. Another bar, representing the average compensation for the top 5 corporate CEOs, which is $290 million, extends half way up the page. Unfortunately, Thompson couldn’t fit the bar for the top 5 hedge fund managers on the page. To do that, the pages would have had to have been about 20 times higher than a normal magazine in order to represent the average of $12.6 billion in compensation that those hedge fund managers receive; that awesome compensation is accounted for by the awesome responsibility associated with their jobs. As Thompson explains it, hedge funds engage in “extremely complex investments” and are composed of a group of wealthy investors who are “presumed to know how to handle their money intelligently”.
One thing that helps hedge fund managers to maintain their standard of living is “a tax code that allows billionaire fund managers to pay taxes at a lower rate than their secretaries”. That’s largely because their income is considered capital gains, which are taxed at only 15%. As there has been some public resentment over that situation, Congress recently (unsuccessfully) considered a bill that would rectify it. Thompson explains how the existing tax structure was defended before Congress:
At the House hearing on the bill, Bruce Rosenblum, managing director of the Carlyle Group and chair of the Private Equity Council, the industry’s new lobby group, argued that the risks taken by fund managers are “significant”. Primarily, they “forego other opportunities … in exchange for the greater upside potential.”
Thompson comments further:
Perhaps sensing that this argument wasn’t persuasive enough, Rosenblum went on to highlight the other “assets” that managers stand to lose if their funds perform poorly, namely “good will, business relationships and reputation.”
THE DOWNSIDE OF INCOME INEQUALITY AND GOVERNMENT POLICIES THAT FACILITATE ITThus the “upside of income inequality” turns out to be not so much an upside for perhaps 98% or 99% of us. Having given some space to discussing the upside, let’s consider some of the downsides of income inequality and the government policies that facilitate it.
Median incomeOne of the major arguments that the wealthy use to justify tax reductions for the wealthy is that they spur the economy, as measured by various statistics such as annual gross domestic product (GDP). Let’s forget for the moment that actual evidence weighs against that argument (more on that later). More important is the fact that median income should be a more valid economic indicator than GDP or many of the other economic indicators that are commonly used, which are more related to mean income than median income. Say, for example, that we have a community of 10,000 people, whose median per capita income is $20,000 annually, and whose mean per capita income is $50,000 annually. That would be a community where many families would be struggling or in poverty. Then suppose that someone with an annual salary of $10 billion moves into the community. The mean income of that community would increase eleven times, whereas the median income would probably increase only by maybe a few cents or a few dollars. The fact that the median income doesn’t change parallels the fact that the community’s average citizen’s financial status would not be improved (unless the billionaire’s money “trickled down” to the other citizens, but let’s not get into that now). Therefore, median income is a much better indicator of the well being of the entire community than is mean income.
A high top marginal tax rate is one of the mechanisms that Franklin Delano Roosevelt used to reduce income inequality, by making the wealthy pay their fair share of taxes. One good indication of progressive taxation is the “top marginal tax rate”, which is the highest tax rate paid on income above a certain level. You can see from
this graph that, except for a brief high top marginal tax rate during and shortly after World War I, the only long lasting high top marginal tax rate in U.S. history began with FDR’s presidency. It then continued at high levels, 70% or more, for several decades after FDR’s death, until it declined precipitously at the start of the Reagan presidency in 1981. It continued to decline during the Reagan and Bush I years, then
rose moderately during Bill Clinton’s presidency, before substantially declining again under Bush II.
As I noted above, today’s right wing conservatives warn of dire consequences to our economy that would result from any attempt to increase taxes on the wealthy, even to the relatively moderate levels that existed just prior to the Bush II presidency. From these warnings you would think that the very high rates of taxation on the wealthy, starting with FDR’s presidency and lasting for half a century, would have resulted in catastrophic economic consequences, notwithstanding the reductions in income inequality.
This chart shows median family income levels, beginning in 1947, when accurate statistics on this issue first became available. With the top marginal tax rate approaching 90% at this time, median family income rose steadily (in 2005 dollars) from $22,499 in 1947 to more than double that, $47,173, in 1980. Then, for the next 25 years, except for some moderate growth during the Clinton years, there was almost no growth in median income at all, which rose only to $56,194 by 2005 (85% of that growth was accounted for during the Clinton years). However one wants to interpret those numbers, nobody could possibly conclude that they indicate overall bad financial consequences accruing from high tax rates on the wealthy. To the contrary, as economist
Paul Krugman notes, this period coincides with “the greatest sustained economic boom in U.S. history”.
PovertyAnother good indicator of the financial well being of a community or nation – though one that you rarely see used as an “economic indicator” – is the poverty rate.
There is no question that FDR’s
New Deal lifted millions out of poverty. New Deal policies included, among others: Progressive taxation;
labor protection laws; and several policies to provide a social safety net for Americans and otherwise reduce income inequality, including the
Social Security Act of 1935, the
GI Bill of Rights, and the development of several policies to facilitate
job creation.
Then consider the
graph and page 11 of the U.S. Census Bureau publication, “Income Poverty and Health Insurance Coverage in the United States: 2006”. That graph shows that beginning with President Lyndon Johnson’s much maligned “
War on Poverty” in the early ‘60s, poverty in the United States declined precipitously, from about 22% to 12% before leveling out beginning around 1970. Then, with the onset of the “Reagan Revolution” starting in 1981, poverty began to rise again, reaching a maximum of about 15% twelve years later, just prior to the Clinton Presidency. The poverty rate then began a slow steady decline, to about 11% by the end of Clinton’s presidency, followed by another rise with the onset of the Bush II administration, to 12.3% by mid-year 2006, where the latest census statistics end. However, that is not the end of the story, by any means. The current economic downturn (or recession) will in all likelihood (and it’s probably already started)
send another 5-10 million Americans into poverty, thus raising the poverty rate in our country another 1-4%.
These statistics are no accident. President Johnson’s “War on Poverty” reduced poverty substantially in our country. The only rises in poverty rate we’ve seen in our country since FDR’s New Deal (which
decreased poverty) began with the Reagan and Bush II administrations, which are the only two presidential administrations since that time to substantially lower the top marginal tax rate, along with other fiscal policies that favor the wealthy at the expense of the poor and the working and middle class.
So the bottom line is that poverty is another indicator that tax reductions for the wealthy do not trickle down to the rest of us and do not improve the financial well being of most Americans.
Pricing the rest of us out of the marketBarbara Ehrenreich, in an article titled “
This Land Is Their Land” discusses what severe income inequality means to the rest of us in practical terms. First, she notes a recent vacation of hers that was going pretty good until she found out that even with a 60% discount she couldn’t find a sleeveless cotton shirt for less that $100. That experience made her recall the first rule of today’s income inequality, which is “If a place is truly beautiful, you can’t afford to be there”. For example, on the subject of Key West, Florida, for which that rule did not apply as of 1986, Ehrenreich notes:
Then, at some point in the ‘90s, the rich started pouring in…. They drove house prices into the seven-figure range. They encouraged restaurants to charge upward of $30 for an entrée. They tore down working-class tiki bars to make room for their waterfront “condotels.”… As for Key West’s characters – with the traditional little conch houses once favored by shrimpers flipped into million-dollar second homes, these human sources of local color have to be prepared to sleep with the scorpions under the highway overpass…
Once they’ve made (or inherited) their fortunes, the rich can bid up the price of goods that ordinary people also need – housing, for example… dispersing the urban poor into overcrowded ranch houses, while billionaires’ horse farms displace rural Americans into trailer homes. Similarly, the rich can easily fork over annual tuitions of $50,000 and up, which has helped make college education a privilege of the upper classes…. Going out to a ballgame has become prohibitively expensive… Superrich collectors have driven up the price of artworks, leading museums to charge ever rising prices for admission… The more expensive a resort town gets, the farther its workers have to commute to keep it functioning.
DepressionInside of Gabriel Thompson’s article in
The Nation is a graph titled “
Plutocracy Reborn – Re-creating the Gap that Gave us the Great Depression. Here it is:
This chart plots income inequality, measured as the ratio between the average income of the top 0.01% of U.S. families, compared to the bottom 90% (that would be most of us at DU). Note that preceding the great stock market crash of 1929, which plunged us into depression, the ratio rose from about 250 at the start of the 1920s to a peak of about 900 by 1929. The ratio then plunged, and by the start of WW II it had declined to about 200, where it remained with some relatively minor ups and downs until the beginning of Ronald Reagan’s Presidency. It then began another precipitous climb, with a sharp decline beginning during the last year of Clinton’s Presidency, but then another sharp increase beginning at about the time that the Bush tax cuts for the wealthy first went into effect, so that by the end of 2006 we’ve exceeded even the peak ratio of 1929 that preceded the Great Depression. The three green bars in the chart represent the stock market crash of 1929, the last pre-Reagan year, and the present. Scary stuff! Not much “upside” there! It is also relevant to note that below the above noted graph is another graph, titled “Our Incredible Shrinking Top Marginal Rate”, which shows a trend that is approximately the inverse of the above noted graph.
Shrinking governmentAnother way in which huge tax breaks for the wealthy hurt most of us is through the effect that they have on our government. When the wealthy are given huge tax breaks, one of three things or a combination of them must occur:
1) The cutting or eliminations of government programs of all kinds which are good for the American people. These include health care, educational assistance, a safety net for the most vulnerable of us, and our infrastructure. All of these things have suffered greatly as the result of Bush’s huge tax cuts for the wealthy. I’ve already noted the increasing costs of a college education. The
cutting of Pell grant funding has made the increasing costs of college even harder to bear for many of our college students; cuts in Medicare, which George W. Bush
has proposed, will make health care less affordable for many elderly Americans; and abandonment of infrastructure funding during the Bush administration has resulted in several disasters, including the Katrina disaster of 2005, which
could have and
should have been prevented for a small fraction of what it ended up costing; several deaths and injuries due to a
collapsed bridge in Minnesota in August 2007; and, tremendous economic damage and a few lives lost as the result of the recent
levee failures along the Mississippi River.
2)
Expanding national debt, that decreases the value of our money and mortgages the futures of our children and grandchildren.
3)
Increases in state and local taxes to pay for what our federal government can no longer afford.
The end result of all this has been an
economic disaster for our country, with the great majority of benefit going to those at the upper end of the income scale, and a consequent expanding wealth gap. Nearly 25% of the benefit of the Bush tax cuts has gone to the top 1% of income earners. The net result has been negative rather than positive for most of the rest of us.
Tax policy I’ve already discussed in this post several important indicators of the economic health of a nation that show a strong
negative association with income inequality and a strong
positive association with top marginal tax rate. The weight of all this evidence should show beyond any doubt that, contrary to the claims of right wing ideologues that income inequality and tax reductions for the wealthy are good for our economy, just the opposite is the case.
In addition to all this evidence, Norton Garfinkle shows, in his book, “
The American Dream Vs. the Gospel of Wealth: The Fight for a Productive Middle-Class Economy”, that even when the traditional indicators of economic growth are considered, still there is no negative relationship between top marginal tax rate and measures of economic growth. A key paragraph in Garfinkle’s argument is this:
A review of the literature shows empirical evidence supporting the supply-side claim (that marginal tax rate cuts help the economy) to be sparse to nonexistent. Surprisingly enough, a pair of studies by the leading supply-side theorist, Martin Feldstein, and Douglas Elmendorf
found virtually no net growth benefit from the Reagan supply-side marginal rate cuts of 1981… Feldstein and Elmendorf explicitly ruled out that supply-side tax incentives were a factor in the recovery… In other words, found no empirical evidence to support a direct relationship between marginal tax rate cuts and growth in employment or GDP.
I’ll end this post with a brief discussion of how the two major party candidates for President of our country differ on the issues discussed in this post. The differences between the two candidates are huge.
McCain’s idea of an
economic stimulus plan is to cut the corporate tax rate from 35% to 25%, claiming that such a tax cut is “essential to U.S. competitiveness”, “will expand the U.S. economy, creating jobs and opportunities for prosperity”, and “lead to higher wages”. Other
McCain ideas for tax cuts include lowering taxes on capital gains and dividends and fighting “the Democrats’ crippling plans for a tax increase in 2011.”
What McCain means by that last statement is that he will ensure that the Bush tax cuts for the rich, including the
total elimination of the inheritance tax, become permanent in 2011. An
article in the
Wall Street Journal estimates that McCain’s tax cut proposals will cost our government as much as $400 billion a year.
McCain’s plan for dealing with the housing crisis is to
bail out banks, without providing substantial help to ordinary Americans who lose their mortgages, whom he refers to as “financial and property speculators”.
Obama’s tax plan is in many ways the opposite of McCain’s. It would
reverse the Bush tax cuts for the rich, while reducing taxes and simplifying filing for working and middle class Americans. Specifically, he has said:
The Bush tax cuts – people didn't need them, and they weren't even asking for them, and they ought to be relaxed so we can pay for universal health care and other initiatives.… We have to stop pretending that all cuts are equivalent or that all tax increases are the same…. At a time when ordinary families are feeling hit from all sides, the impulse to keep their taxes as low as possible is honorable. What is less honorable is the willingness of the rich to ride this anti-tax sentiment for their own purposes.
In addition to his tax proposals, Obama has an
extensive economic plan, which includes:
fighting for “fair trade” instead of “free trade”, as manifested by NAFTA;
job creation; restoring workers’
rights to unionize; the creation of a
universal 10% mortgage credit to give relief to homeowners; a
crackdown on mortgage company abuses; and a
crackdown on predatory lending policies.
In summary, John McCain would retain and even expand upon the disastrous Bush economic policies which have done so much to increase economic inequality in our country to the great detriment of our economy and the American people. Barack Obama would reverse the Bush economic policies and work towards the restoration of the hugely successful New Deal policies that resulted in “the greatest sustained economic boom in U.S. history”.
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