We are stuck in an inequality trap.
The divide between the richest 1 percent and everyone else is self-reinforcing, according to the latest economic research, making it harder to resist as it worsens. We must break this cycle. But how?
Many of the solutions are well-known. They are the reverse of the policies that have increased inequality in recent decades: raising the minimum wage, strengthening labor unions, cracking down on white collar crime, raising taxes on the rich, lowering taxes on the middle class, and a host of other government programs that critics often refer to as "redistribution."
But strong forces stand in our way. Until recently, it was thought that redistribution was bad for the economy. In the neoclassical model that policymakers embraced since the Reagan revolution, the free market produced the most when the government taxed and spent the least.
And yet, over the last 30 years, as our politicians scaled back redistribution, the average American family lost 20 percent of its wealth.
The United States is not alone in this experience. In a new study released by the International Monetary Fund, a team of economists measured the economic performance of countries around the world with varying degrees of redistribution. Not only did they not find that redistribution hampers economic growth. On the contrary, they found that more redistribution consistently led to faster economic growth and longer growth spells.
It is now clear that the government can and does improve both efficiency and equality with such redistributive efforts as public school funding, universal health insurance, and other investments in the productivity of lower- and middle-income Americans.
This may come as a disappointment to the adherents of Reaganomics. In the nine months since I published my book Letter to the One Percent warning about the harmful effects of growing inequality, experts and leaders across the political spectrum have joined the chorus, unable to ignore the overwhelming evidence that inequality stifles growth. But there has been little agreement about why inequality is bad for the economy. Conservatives argued that inequality led to redistribution, as more people clamored for more taxing and spending to narrow the gap, and the inefficiency of a bigger government was responsible for the resulting economic slowdown.
This new evidence, of course, disproves their argument.
According to a new paper in the Economic History Review, that's not the only thing wrong with their theory. Not only is redistribution not harmful to economic growth, but inequality doesn't even lead to redistribution in the first place. The Spanish economist Sergio Espuelas measured the levels of redistribution in Europe and North America from 1880 to 1930, when most of the world's major social programs were first put in place. He found that, contrary to the anti-government theory (which basically blames poor and middle class people for greedily voting to reward themselves at the expense of everyone else), more unequal countries were less likely to establish redistributive programs.
Espuelas calls it the "inequality trap." More inequality leads to less redistribution, which in turn leads to more inequality.
This shouldn't be shocking to anyone who understands how politics really works. As inequality grows, the rich become more powerful than the rest of the population, enabling them to veto any policy that impedes their one-sided enrichment. They also become less empathetic toward the rest of the population, whose lives seem less similar to their own with each passing year.
Meanwhile, more citizens fall into poverty, depriving them of the time and money to invest in political activities. Inequality literally excludes them from the political process.
This isn't the first time we've been in the inequality trap. As Espuelas points out, the United States was one of the most unequal countries in his dataset.
What broke the cycle? The Great Depression. "Since a large share of the population realized that they too could fall into poverty through no fault of their own," says Espuelas, "more people became more willing to support lower-income groups' demands for social protection."
Our first step, then, must be to see our fellow Americans not as obstacles to the lifestyle we desire but rather as human beings, equal in birthright and deserving of our help when in need. For in their success, lies our success. And in that understanding, lies true enlightenment.
An abbreviated version of this op-ed was published in today's South Florida Sun-Sentinel.
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