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Fixing Wealth Inequality

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Wealth inequality is having a corrosive effect on US society. Sequester is badly restraining Federal government actions. State and local governments struggle to fund education, roads, police, prisons and address homelessness, gangs, and growing numbers of desperate individuals. Unemployment, underemployment and low wage levels affect many millions, while the nation's infrastructure continues to degrade. The nation has the resources to address all these problems, but they are drained off to benefit the very top layer of society. Yet, there are few objections, no widespread outcry, no demand for change.


TRADITION: A central reason for this acceptance is that there is supposed to be inequality. America is the Land of Opportunity, not the Land of Equality. Indeed, the opportunity to become rich has always been a major driving force of the American economy. People who work harder and smarter get ahead. Few people begrudge Bill Gates being rich, recognizing his major contributions to society. There is a strong inclination to minimize government oversight and let the free hand of the market insure that the summation of actions based on individual greed actually advances overall social good. Unfortunately many people work to game the system, so some government regulation is necessary. And even though society expects that some people will get rich, there is still an underlying expectation that, as with Gates, wealth has some relation to public benefits.

CORPORATE PROFITS: A central aspect of economic opportunity is the ability of corporations to make money. That, after all, is their job. Profits come from the products and services they create, with some premium added that provides the profits. Ideally competition keeps that premium modest, though even back in the XIX Century the actions of the "robber barons" made clear that some regulation was needed so that corporations did not become simply machines to extract money from an exploited population. There was also a recognition of other stakeholders besides owners. Society in general sets the framework for corporate activity with an expectation that the efforts would benefit society as a whole; corporate taxes are a major element of this responsibility. And the workers actually produce the corporate assets. Henry Ford famously paid high wages so that his workers could afford to buy the cars they were making. But a recognition of other stakeholders has been fading with shareholders pressing for more profits even as mushrooming executive pay makes that more difficult. So now, for example, WalMart does a great job of providing quality products at low prices, but is notorious for parallel low wages. Similar problems are now prominent with wage demands in the fast food industry. The corporate focus on maximizing stockholder profits neglects other legitimate stakeholders and encourages companies to use goods, services and jobs as levers to extract wealth solely for the benefit of executives and stockholders.

BALANCED BUDGET CONCEPT: A balanced budget makes sense for individuals and companies, though even in these cases, the loan system allows short-term deviations. For countries, this flexibility is even more important. Precisely when they are under economic pressure is when government spending is needed. But pressures for balancing the budget have led to strong pressures for austerity, both in the United States and Europe, despite historical evidence that austerity only compounds the problem. This is particularly true because austerity measures tend to fall hardest on those least well off, impacting social support systems at the lowest levels - food stamps are restricted, pre-school classes are eliminated, health insurance is harder to afford (even if available). Even in the best of times, many of the benefits of U.S. social support systems are not means tested, so they go to people already relatively well off; modest benefits to the middle class are more than offset by much larger benefits to the upper class. Budget pressures focused on austerity compound this effect, at the same time that they avoid increasing taxes on corporations or those significantly better off because these groups are supposedly the engine of job creation, ignoring the fact they have also become an engine of wealth extraction by minimizing support to other corporate stakeholders

COMPLEX FINANCIAL SYSTEM: Banks provide the financial flexibility essential to operations of businesses and individual households, while the stock market provides the capital essential to economic development. Interest charges are the nourishment that keeps the banks operating, just like markups on goods and services keep companies afloat. And like with markups, competition theoretically keeps interest charges to reasonable level, though this is certainly undercut by the growth of major banks. On the operating side, the legal and regulatory system allowed banks to shift much of the risk of loans to consumers and government. This was starkly illustrated by the major government subsidies when the collapse of the real estate bubble led to massive government support for banks supposedly too big to fail, even as the government let millions be forced into foreclosure or bankruptcy. At the same time the complex system allows many well off to "play" the stock market to extract more wealth. At one extreme, high-frequency trading allows companies to secure profits while providing zero actual economic input. Hedge funds, originally set up to spread risk, have become vehicles for the very rich (typically $1 million assets required to even participate) to extract impressive sums from the markets. In 2011, a leading hedge fund manager "earned" $3 billion, though it would certainly be difficult to demonstrate how he provided $3 billion worth of benefit to the economy. Overall, the complex financial system allows the accumulation of significant wealth without any meaningful social contribution.

POLITICS & MONEY: The Code of Federal Regulations, supplemented by state and local regulations, is a massive set of restraints on business. Theoretically, all of these regulations are designed to protect the public good. But many of the regulations are the result of intense, unceasing lobbying efforts which produce winners and losers. Proponents of a regulation are often well-financed, while the public interest may have at best a diffuse constituency which has minimal impact on the results. The complex economy requires vastly complex regulations and legislation; support to vested interests typically has a very low visibility. Earmarks directly benefit specific groups, but more importantly broad provisions provide hidden benefits. So, for example, recent Congressional hearings focused on the very low tax rates that Apple had been paying. But Apple was paying everything it was required to. The problem was tax loopholes that Congress had created in the first place, loopholes that allow corporations to minimize their support of other stakeholders with favorable tax treatment, low minimum wages, and minimal requirements for worker benefits. Legislators of course don't sell their votes, but vested interests spend large amounts of money supporting candidates who are unlikely to oppose legislation in their interests. As with lobbying, much of this effort has very low visibility, with finances behind nominally independent organizations often totally hidden. Campaign advertising focuses on attractive-sounding objectives (e.g., jobs, balanced budget, economic growth) while downplaying unfavorable impacts and giving zero attention to how candidates or their programs will boost wealth inequalities. So even provisions that transparently favor the rich (e.g., favorable treatment of capital gains) are justified in terms of job creation or economic growth.

LACK OF AWARENESS: While wealth distribution was never expected to be equal, there is low awareness of how significantly this inequality has shifted in recent years and how poorly it compares with other countries. The Gini Index is a measure of the equality of wealth distribution. The CIA Factbook lists the United States as only 41st out of 168 countries. Sweden, at 168th, is best, with a score of 23.0. Most of the Nordic countries as well as Germany have scores in the 20s. The United States, on the other hand, has a score of 45.0, placing it within a large group of Third World countries. But it wasn't always like this. In the mid-1970s the index was below 40, not great but certainly significantly better.

Overall, wealth inequality is the result of dismaying complexities, exemplified by the Code of Federal Regulations, and has grown inexorably over recent decades. It has reached the point that is it having a major negative impact on US economic and social life. But it took 40 years to get to this position, and may take 40 years to get out of it. As with any problem, the first step is recognizing that there is a real problem, and then identifying the causes. As outlined above, these are complex and deeply rooted. Probably the single common thread is the impact of money on politics, something that clearly will not be changed overnight. The system needs more transparency and a public insistence that it is a legitimate expectation that everyone should be able to earn a comfortable living and that wealth accumulation should have some relation to social contributions.