There's More to the Story

06/27/2013 04:47 pm ET | Updated Aug 27, 2013

American journalism has generally believed that any important issue can be put into a box called a "story." And each story can be treated as a distinct, self-contained entity that can be understood in relative isolation with little reference to much else. As a result when the media is confronted with a really large issue it does an imitation of the proverbial blind men groping an elephant.

Today both our politics and our public policy is confronted with three immense issues: the first involves the debate over the need to deal with unemployment versus reducing the deficit. The second is the massively uneven distribution of wealth and income. The third involves taxes, partly as to how they should be use to deal with the first two issues, and partly how the tax system itself should be reformed. These issues are deeply intertwined but rarely discussed as such. Stories that cover one, more or less, ignore the other two. The result is that a far larger issue get lost altogether. All three issues come back to a basic question about how wealth and income gets distributed in our economy.

As has been frequently pointed out, and confirmed by a number of polls, where one stands on the jobs versus deficit debate depends largely on where one is on the economic ladder. The further down, the more likely one is to consider jobs and the economy generally to be more important than dealing with the debt. For the wealthier the reverse is true. Indeed the budget deficit has become the subject of almost insane obsession among the wealthier and their mostly Republican allies.

In purely intellectual terms this jobs-budget debate is over. In fact its been over for quite sometime. Outside the ranks of the ideologues there is wide recognition that the economic stimulus worked. Perhaps not well but well enough to make a solid case for more rather than less. Virtually all respectable opinion (i.e., that which respects evidence over ideology) now concedes that the immediate need to create jobs and get out of the recession deserves priority over any effort to cut the budget. Reducing the deficit now will do nothing but make things worse, including the deficit. But in the world of politics the debate has never been fiercer. The Republicans have if anything become increasingly vehement in predicting that the profligate spending of the Administration and the free money policy of the Federal Reserve will produce an economic catastrophe in the immediate but somehow ever receding future. Worse, in the ill-defined longer run, the current debt will result in a crushing burden on the next generation. In order to spare our children this fate, conservatives are eager to hack away at spending for schools and nutrition programs for those same children.

Unlike the jobs-debt debate the income and wealth inequality issue has only begun to sink into the public awareness. The sheer scale of the wealth and income redistribution to the very top of the economic ladder is not generally understood. Those who do understand seem willing do anything to avoid having to talk about it. With few notable exceptions much of the media coverage of the issue has been very misleading. To the extent that the subject has been covered at all, the focus has been on the disparity between the poor and the upper end of the middle class. Looking at inequality from this perspective makes it easy to attribute it to vague or intractable causes such as "globalization" or to disparity in education.

Only quite recently have there been a few voices raising the question of what effect strangling the middle class has on the performance of the economy as a whole. The idea that transferring income from the middle class to the very rich is a bad idea when consumer spending is at levels below what is needed for full employment is rarely mentioned.

For Republicans any suggestion that taxes could be used to restore some viability to the middle class is vile heresy. The mention of taxes evokes a unanimous and passionate cry of "no" from them and their wealthy supporters. Their opposition to any effort to further stimulate the economy with additional government spending is opposed not merely because they reject the likelihood that it might do some good - that is increase employment - but because they recognize that such spending now will probably require higher taxes at some point in the future. Worse, actually far worse from their perspective, is the probability that such future taxes might actually be progressive.

The notion that the gargantuan growth in wealth and income at the top of the income ladder is the result of cosmic forces beyond anyone's control serves a vital purpose for the very rich and their political allies: It deflects any exploration of the fact that the massive shift of wealth and income was the result of conscious and deliberate public policy. As causes of inequality, globalization, changing patterns of international trade, technology, lack of worker skills, all pale into insignificance compared with the effects of a deliberate public policy of shifting wealth and income to the very top.

The role of public policy in the upward redistribution of wealth and income is now a matter of overwhelming economic evidence. (One might note that the economic evidence has been around for a long time; recognition of the implications has been slow in coming.) The political history of this process has been described by a number of scholars, but it has been most meticulously documented by Hedrick Smith in his book Who Stole the American Dream. And, as Smith demonstrates, central to that policy was the use of the tax code.

Several trillion dollars were added to the wealth of America's superclass by the Reagan and Bush tax cuts. Starting in 1981, Reagan lowered the top personal income tax rate from 70 to 28 percent, the capital gains rate from 28 to 20 percent, and the corporate tax rate from 46 to 35 percent. Even though Reagan presided over a couple of modest tax increases, the windfall from his tax cuts for America's wealthiest 1 percent was massive- roughly $1 trillion in the1980s and another $1 trillion each decade after that. The Forbes 400 Richest Americans, enriched by the Reagan tax cuts, tripled their net worth from 1978 to 1990.

Likewise the Bush tax cuts of 2001, 2002, and 2003 favored the wealthy by lowering the top income tax rate and the capital gains rate and phasing out the estate tax on America's top 2 percent. No similar mercy was shown for the middle class. The payroll tax which funds Social Security and Medicare and falls hardest on the working middle class went from 3.45 percent to 7.65 percent.

But the economic strangulation of the middle class was not just a matter of a shifting of tax burdens, as Smith chronicles, the middle class suffered a death of a thousand cuts. An aggressive assault on labor organizations, draconian changes in bankruptcy laws, destruction of pension rights, predatory credit card practices, and mortgage practices also made their contribution to massive shift in wealth and income to the top.

Not only does the myth of cosmic forces (globalization, technology, lack of worker skills, etc.) obscure the causes of the exploding inequality, more importantly it avoids any intelligent discussion of what can be done about it. If inequality was the result of public policy, then there should be a public policy remedy. If tax policy helped create the problem, then tax policy can help undo it?

Of course to the conservative mind there is a simple answer. The government should have no role at all in the allocation of economic rewards. Anything else smacks of socialism and would violate all our basic American principles. We believe that the distribution of economic rewards should be left working of the free market. As we are regularly told, we believe in equality of opportunity, not equality of results. Hard work and ability deserve greater rewards. The government should have no role in sorting out who gets what. This position has the virtue of being both appealing and very simple. It also has two big problems. First, and most obvious, it reeks of hypocrisy. After three decades of using the government to suck out of the middle class everything that wasn't bolted down and give it to the top one percent, it gets difficult to invoke benign and impartial market forces.

Second, the argument has a big problem on its own terms. If, as the wealthy and their political allies would have it, the current distribution of wealth and income reflects the inexorable working of the free market - i.e. simply rewarding the most able and productive members of the economy in proportion to their contribution - there is a nasty and inconvenient corollary to be dealt with. If the top 1 percent deserved to take almost the entire growth in GDP, then it must also be true that entire middle class got next to nothing because that is all it deserved. It got none of the increase because it contributed nothing to the increase. The rich got it all because they did it all.

Logically compelling as this is, it is a fairly outrageous proposition. It certainly is not something an ambitious politician, trying to defend our current income distribution, would want to put in a stump speech. It means that the entire middle class - engineers, computer programmers, doctors, policemen, teachers, chemists, nurses, etc., etc. - contributed nothing to the growth of the economy. The absurdity of this conclusion gets worse when one looks at who makes up the top income earners. They essentially come from the top of corporate management and banking and finance. The notion that the people in these classes alone produced all the growth in GDP for the entire nation is not something that the ordinary member of the middle class is likely to find compelling. The growth of management compensation has taken on gargantuan proportions over the last few decades. Scholarly efforts to relate management compensation to actual performance have been dismal failures. As to the contribution of the financial and banking sectors, recent history speaks for itself.

One is left with an overwhelming sense that there is something wrong with the way wealth and income are being distributed in our economic system.

If all this is sounds circular, it is because it is. The questions of jobs, growth, wealth and income distribution, and taxes all come back to the same question. What is, or should be, the role of government in the American economy? What kind of society do we get if we rely only on market forces? More fundamentally, how do we distinguish market forces from public policies? Even more fundamentally, what kind of society do we want? What kind of incentives do we need to keep growth and productivity increasing? How much concentration of wealth is compatible with our democracy?

These are questions that we cannot intelligently discuss without facing the implications of where we are and got how we got there. At the moment we are not getting much help from either or political leaders or the media.