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Income Disparity and the Road to Socialism

July 15, 2011

I was watching Sean Hannity a couple weeks ago, and he was trying to make hay over a “dramatic overnight plunge” in Obama’s approval rating. The poll results showed a drop of about 5%. Hannity was reporting that Jon Huntsman had just thrown his hat into the ring and was implying that Obama’s chances for re-election were crumbling in the face of it (he didn’t point out that the margin of error for the poll was +/- 3%).

Sensing a non-story there, I flipped up a couple channels to MSNBC, where Ed Schultz was blowing just as hard in the other direction. He was all fired up about income inequality, shouting “I’d like someone, anyone, to come on my show and explain how this is good for America!” In contrast to Hannity, Ed’s graphic was pretty dramatic.

I was trying to construct a lesson from this, maybe something about the presentation of meaningful data to support a narrative. Then the other night, I saw this article on NPR’s homepage.

What I found interesting was that the income gap was being discussed not as a social justice topic but one of economic interest. The article notes the shift in this conversation. There is, of course, still outrage every time the CEO of a TARP-supported bank takes home a multi-million-dollar bonus check, but in addition to a moral argument, it raises the question: “Is income inequality putting the brakes on the stalling economy?”

“This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently.” This is a quote not from some MSNBC ideologue, but from Fed Governor Sarah Bloom Raskin. An income gap so large encourages a host of problems: an increased crime rate, decreased savings and decreased faith in public institutions, to name a few. These in turn drag down the economy.

The rate of this increasing disparity doesn’t look like it’s going to slow anytime soon. According to this next graph, the curve of the top line is going to keep getting steeper. If income inequality is bad for the economy, as the NPR article suggests, this is not a good trend.

There are several theories, but no consensus as to what is causing the widening income gap. Some theories include:

  1. The decimation of U.S. manufacturing in the new global economy.
  2. Deregulation of the banks, as those with the money to invest obviously stand to gain the most when the markets go hog-wild (of course, this is the same deregulation that set the stage for our recent meltdown).
  3. Social patterns tend to concentrate wealth. Rich people marry rich people. People from wealthy families tend to getter better educations and then better-paying jobs. And wealthier parents tend to have fewer children.
  4. Minimum wage has decreased relative to inflation.
  5. Lower education standards.
  6. Decreased power of the unions.

Schultz makes that final argument in this segment:

Although there is an undeniable correlation, I don’t think he makes a convincing case for causation. But what is more interesting in this clip, again, are the stark numbers. Our income gap puts the U.S. in uncomfortable company: Uganda, Ivory Coast, Pakistan, Ethiopia, Kazkhstan. Shultz conveniently fails to mention Norway and Sweden by name, tossing them away with “and some other countries,” but the point is made. The Ivory Coast is in the middle of its second civil war in ten years. Uganda is frequently cited by human rights organizations for its use of torture and the bill it was considering that would have made homosexuality (or even being HIV-positive) a crime punishable by death. Most of these are not countries we would normally be compared to.

ONE FOR ALL AND ALL FOR 1%

According to the New York Times, the average worker’s pay increased .5% last year (during which inflation was 1.5%). The unemployment rate hovered just under 10%. And the average CEO salary increased 23%. These, along with the bonus announcements from investment banks and the like, are the kind of numbers that cause moral outrage.

The narrative of the right for the last 30 years has been that the earnings of the ultra-wealthy should not be curbed because they are the job creators. The wealth will trickle down. The rising tide raises all ships. All fine metaphors, but the effectiveness of this approach is debatable. If it were that simple, the skyrocketing wealth of these job-creators would, one would assume, lead to job creation. And what the NPR story suggests is that the imaginary rope tethering the poor to the wealthy could work in reverse—the poor could be dragging the economy down and the wealthy with it. In this case, the rising tide may be sinking all ships.

The question I find most interesting is not about the morality of the inequality. It’s why a democracy allows for a system that so disproportionately benefits so few people. Why don’t voters vote into office representatives who will do something about the inequality (for a moment, let’s table exactly what they might do)? If most people agree that the income disparity is not good for the country and that an annual income of $11.4 million (salary of the average Fortune 500 CEO) is somehow unfair, then why don’t they change the system?

One cynical answer, although probably somewhat true, is that the wealthy have more money to influence elections through campaign contributions, etc. Add to that the fact that voter turnout tends to be marginally higher among the wealthy. But I think the impact of both of these factors is rather small (relative to the 99% vs 1% of the population).

I came across a better, though almost unbelievable answer the other day in Jedediah Purdy’s A Tolerable Anarchy. He presents these baffling results from a 2001 poll (conducted during the debate about repealing the estate tax). In that poll, 20% of respondents identified themselves as members of the nation’s wealthiest 1%. Beyond that, another 19% said that although they weren’t currently in the nation’s wealthiest 1%, they believed they one day would be. In other words, nearly 40% of those polled believe they are or will be in the top 1% of income earners. And everyone’s child is above average.

What this indicates is a distorted view of reality in which a disproportionate number of people believe they are privileged. Which means that if one assumes that the country’s current market structure favors the ultra-wealthy (and the trends certainly suggests that it does), 40% of people believe they are or will be reaping those benefits. So when one asks why so many people would support a system that favors so few, one possible answer is that the “so many” are simply delusional. They think they are part of the few.

In advertising, we talk a lot about being aspirational. The people we cast, the kitchens they clean, the cars they drive—these things are often selected as an ideal, the things that don’t necessarily reflect our target market but reflect the kind of life they aspire to and the kind of people they aspire to be. It’s why commercials are full of so many pretty people.

We know that people don’t necessarily vote for the candidates who will most benefit them. They vote for the candidates with whom they most identify. Is that what’s going on here? Are these 39% of people who aren’t the super-wealthy but think they are just being aspirational?

THE PRINCIPLED ON A SINKING SHIP

The primary reason people would oppose measures curbing the income disparity is that that the obvious measure is increased taxes on the wealthy. The notion of increased taxes is to poison to politicians. The absurd and wasteful dance in Washington over the role of taxes in debt ceiling negotiations shows how contorted the arguments get and how stubborn the arguers can be when it comes to raising (or not raising) taxes on anyone.

The other day, majority Leader Eric Cantor claimed that the solution “has got to be revenue-neutral.” Aside from the fact that a solution isn’t realistic without compromise from both sides (i.e. cuts and revenue increase), this indicates just how wed the new right is to their principles. Rather than closing loopholes in the tax law (“loophole: noun. an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded”), they’re willing to risk crashing the economy.

Sticking to your principles regardless of how much it hurts you could be considered either admirable or foolish. I would argue that sinking the ship for them puts it in the latter category.

I thought David Brooks made that point well in his recent column “The Mother of All No-Brainers.” He argues that the Republicans are foolishly risking damaging their image for the last few concessions in what has otherwise been a thorough routing of the Democrats, if one is keeping score.

Today, the Economist published a similar editorial. “We have long argued that the main way to right America’s finances is through spending cuts. But you cannot get there without any tax rises… America’s tax take is at its lowest level for decades: even Ronald Reagan raised taxes when he needed to do so.”

The problem, as pointed out on a recent Slate Political Gabfest, is that the GOP is beholden to these ultra-principled (or stubborn idealists, depending on your viewpoint) tea-partiers. They need their campaign contributions and they need their votes. But how many of the ultra-principled tea partiers actually benefit from maintaining the loopholes in the tax code? They most certainly aren’t all 1%ers. They’re voting on principle, not for their own benefit.

David Plotz (also on Slate’s Political Gabfest) once said that the U.S. system of government works. Yes, it can seem messy. Yes it can be frustrating. But compared to other countries, our government is stable. We don’t have coups every other decade. We’re like a car lumbering down the road, jerking to the right and then left, but at least staying on the road. The principled wing-nuts holding the current debate hostage seem to only know how to turn the wheel one direction.

If you factor these tea-partiers in with the 40% of people who believe they’re a part of the top 1% of income-earners, you get your answer to Ed Shultz’s question: “Who thinks this is good for America?” It’s a coalition of the delusional and the wing-nuts.

THE ROAD TO SOCIALISM

The pundits sound like broken records with their “road to socialism” argument nowadays—you can hardly mention the idea that everyone deserves reasonable medical care without that reactionary card being slapped down on the table, as if the smallest modicum of human compassion is equivalent to tattooing a portrait of Karl Marx on your cheek. But I get uncomfortable suggesting that people are making too much money and should be curbed just because they’re doing well. That does seem pretty anti-capitalist. Do they make too much? I think so. But do I think that gives the government a right to regulate it? Absolutely not.

That said, loopholes are loopholes. If people feel like those loopholes are important, then they should be made into law. And while government regulation may seem to go against Adam Smith’s “free hand of the market,” we don’t have a purely free market. We need enough sensible regulation to avoid the kind of mess we experienced with the mortgage/banking crisis. And if that causes the top line of that first chart to level off a little, that’s probably not a bad thing.

But there are two sides to that gap. It seems to me that figuring out ways to increase that bottom line should be the more important priority. Not through welfare or handouts, but through programs that promote education primarily. And programs that promote job creation so the educated have somewhere to work, something to hope for. They don’t need to be government programs. We need to be creative about it. We need new ideas. The same old argument of lower taxes vs more government spending isn’t enough. Because the scariest thing about the income gap is not that it’ll drag the economy down slowly. It’s that that kind of inequality, fair or not, is what sparks overreaction, undue course corrections and revolutions. Socialism is the boogeyman of the right-wing pundits, but as other countries have experienced, the boogeyman can sneak up from both sides.

I’m sure there are people much more qualified than myself to parse these issues. If you’re one of them, I’d love to hear from you.

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3 Comments leave one →
  1. November 29, 2011 7:06 pm

    Very interesting article, thank you. Your arguments are well thought out and well presented.

  2. James permalink
    August 5, 2012 6:45 am

    I believe a lot of information gets lost in the percentages. For example. in order to raise the income by 25% of someone who makes $40,000 it takes $10,000. In order to raise the income by 281% of someone who makes $500,000 it takes $1,405,000. We keep comparing 25% to 281% when we should also be comparing $10,000 to $1.4 million.

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