Column: Rising Tide of Income Inequality Is Politically Unsustainable
A homeless man pushes a shopping cart full of his belongings across an intersection in the Skid Row area of Los Angeles, Friday, March 29, 2013. The area, originally agricultural until the 1870s when railroads first entered Los Angeles, has maintained a transient nature through the years from the influxes of short-term workers, migrants fleeing economic hardship during the Great Depression, military personnel during World War II and the Vietnam conflict, and low-skilled workers with limited transportation options who need to remain close to the city's core, according to the Los Angeles Chamber of Commerce. (AP Photo/Jae C. Hong)
International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a news conference at World Bank Group-International Monetary Fund Spring Meetings in Washington, Saturday, April 12, 2014. ( AP Photo/Jose Luis Magana)
FILE - House Budget Committee Chairman Paul Ryan, R-Wis., goes before the House Rules Committee for final work on his budget to fund the government in fiscal year 2015, at the Capitol in Washington, in this April 7, 2014 file photo. The plan being considered Thursday April 10, 2014 is a nonbinding framework aimed more at engaging GOP voters than rival Democrats. The budget plan from Rep. Paul Ryan, R-Wis., revives a now-familiar list of spending cuts to promise balance, including $2.1 trillion over 10 years in health care subsidies and coverage under the Affordable Care Act; $732 billion in cuts to Medicaid and other health care programs; and almost $1 trillion in cuts to other benefit programs like food stamps, Pell Grants and farm subsidies. (AP Photo/J. Scott Applewhite, File)
Inequality has come out of the fiscal shadows. U.S. President Barack Obama, a scrupulous consensus-builder who long avoided all zero-sum formulations, is now rallying citizens to stand with him against “the relentless, decades-long trend” of income inequality. Bill de Blasio became New York’s mayor by campaigning on the issue. And earlier this month, Christine Lagarde — the executive director of the International Monetary Fund (the epicenter of neo-liberal orthodoxy) — told The New York Times she was very concerned about the macroeconomic effects of rising inequality.
Everyone’s a convert — except, of course, for the Republican Party. Rep. Paul Ryan’s budget plan (which the GOP-controlled House has now adopted) proposes to cut the top tax rate both for individuals and corporations from 35 percent to 25 percent and to sharply reduce virtually all forms of domestic spending which benefit the poor and even the middle class.
It’s almost impossible to imagine a scenario in which the Ryan plan would not increase what is already the most unequal distribution of income and wealth in the industrialized world. If the Republicans were applying for an International Monetary Fund (IMF) stabilization package they’d be laughed out of the office. Republican intransigence virtually assures that efforts to address inequality in the United States will be carried out at the local rather than the national level.
Wealth distribution in the United States is now as skewed as it was in ancien regime France, according to Thomas Piketty’s new work, Capital in the Twenty-First Century. But not only are there no signs of bread riots, the American economy is now growing faster than that of all but a few Western nations, including France and England. The problem with gross inequality is that it’s so, well, gross, that one tends to assume it will produce terrible effects that it may not yield — for example, increasing labor unrest.
Economists remain very much divided over those effects. In another New York Times interview, sociologist Lane Kenworthy, author of an upcoming book on inequality, said he saw no evidence that rising inequality in the West had limited economic growth or reduced employment, though it had hobbled middle-class income growth, among other things. And ultimately, Kenworthy concluded that there was more than enough reason to pursue redistributionist policies.
Whatever those doubts, Lagarde’s open embrace of the subject means that the effects of inequality will be on the IMF agenda. And that, in turn, may help remove the stigma that only lefties who would rather redistribute revenue than generate it care about inequality. The argument for dramatically increasing the minimum wage is big in Seattle, where techies feel guilty about low-paid baristas, but not in Pittsburgh. Occupy Wall Street, the revolt of the many against the few, fizzled.
Yet the moment of quickening may not be far off. A debate over the salience of inequality has already begun to split the Democratic Party, with de Blasio and Massachusetts Democratic Sen. Elizabeth Warren on one side and New York Gov. Andrew Cuomo and former Secretary of State Hillary Clinton on the other. Piketty’s Capital feels very much like a Category 4 hurricane that hasn’t yet made landfall. A French economist, Piketty draws on a vast store of historical data to argue that the broad dissemination of wealth that occurred during the decades following World War I was not, as economists then mistakenly believed, a natural state of capitalist equilibrium, but rather a halcyon interval between Belle Époque inequality and the rising inequality of our own era.
“Broadly speaking,” Piketty writes, “it was the wars of the twentieth century that wiped away the past to create the illusion that capitalism had been structurally transformed.” Piketty’s most provocative argument is that the discrepancy between the high returns to capital and much more modest overall economic growth — briefly annulled during the mid-century — ensures that the gulf between the rich (who profit from capital investments) and the middle class (who depend chiefly on income from labor) will only continue to grow.
Is capitalism itself the cause of rising inequality? Or rather is it, as others argue, that globalization has turbocharged wealth while hollowing out much of the middle class?
Whatever the case, inequality in the West is increasing in ways that seem politically, if not also economically, unsustainable. Piketty points out that the dynamic of redistribution upwards is so remorseless that only two years after the immense wealth-destroying effect of the global financial crisis, the upper-tenth in the United States once again received 46 percent of national income, not counting capital gains, as it had in 2007. Still, that understates real disparities, since the top 1 percent take home 20 percent of national income.
The United States is the outlier both in degree of inequality and in its resistance to addressing the problem. Yet, as Piketty points out, it was a deep national aversion to inherited privilege that in the years after World War I led the United States to raise the top income tax rate to over 70 percent, where it remained until Ronald Reagan became president. Throughout the middle decades of the century, the United States and Britain — today’s joint guardians of the citadel of economic liberalism — led the world in confiscatory taxation; both also taxed “unearned” income yet more heavily.
Sustained economic growth had dulled the appetite for redistribution.
Americans will tolerate even vast inequality so long as a rising tide lifts all boats. But middle-class incomes have been flat for a generation. Today’s right-wing populism will eventually run aground on the rocks of economic stagnation.
A recent IMF policy paper notes that rising inequality is producing rising demands for redistributionist policies. Indeed, the authors point out that one good reason to address the problem is to forestall populist solutions that could kill the goose that lays golden eggs. It was prudent reform, after all, that prevented the Great Depression from destroying all faith in capitalism.
But the free-market conservatives who now dominate the Republican Party insist that all such solutions kill the goose, or at least severely limit the goose’s egg-laying gifts. They will argue that to the death. The authors of the IMF paper, however, conclude that “redistribution appears generally benign in its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth.”
In a separate account of policy prescriptions, IMF economists suggest that developing nations address rising inequality through “means-tested cash transfers” rather than policies offering universal benefits, and by targeting health and education spending towards those services used chiefly by the poor.
In the West, where up to half of national income is taxed, slowing inequality means returning to the more progressive tax policies of an earlier era. Piketty’s chief policy prescription, which he concedes is “utopian,” is a global tax on all forms of capital — i.e., a wealth tax. He also supports restoring the top rate on income taxes to the levels of half a century ago. I’m guessing that many economists, not to mention all rich people, will question his belief that an 80 percent tax on incomes over $500,000 or $1 million will not harm economic growth in the United States.
The best reason to raise tax rates is not to punish the rich, of course, but to raise the revenue which the United States needs to invest in infrastructure and research, not to mention to pay for Social Security and health care. That investment gap poses a clear and present danger to American global economic leadership. Rising inequality exacerbates the problem by sapping the collective political will needed to address the problem.
The obvious, and very discouraging, analogy is to global warming, where the problem grows ever more real, and more threatening, but the political system, in thrall to beneficiaries of the current state of affairs, remains paralyzed. “Without a radical shock,” Piketty concludes, the “current equilibrium” will likely persist: “the New World may be on the verge of becoming the Old Europe of the twenty-first century’s global economy.”
James Traub is a fellow of the Center on International Cooperation. He writes the Terms of Engagement column for Foreign Policy magazine.