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Reducing Income Inequality Is the Key to Economic Growth -- Time to Pass the Buffett Rule

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It's not rocket science.

The chief goal of our economic policy is to increase per capita economic output -- measured by per capita Gross Domestic Product. That's what allows people to live better next year than they did the year before. That's what allows our children to live a better life than we do. That is the basis of the American Dream.

Increased per capital economic output is made possible by increases in productivity. When productivity increases, the same number of hours of work generate more goods and services.

But it should be obvious to anyone that if all of the income that results from increases in economic output flow to the top one percent of the population, then the rest of us won't have that income to buy the increasing number of products and services that result from the increased productivity.

What happens, then, is simple: economic growth stalls. Companies won't hire people to produce more products and services if no one has the money to buy them, so they lay people off. Taken as a whole, the economy then has even fewer people with the money to buy new goods and services.

Simply put, increasing economic inequality is a straight-forward formula for economic stagnation.

At the beginning of the Great Depression, income inequality, and inequality in the control of wealth, were very high. Then came the great compression between 1929 and 1947. Real wages for workers in manufacturing rose 67 percent while real income for the richest 1 percent of Americans fell 17 percent. This period marked the birth of the American middle class. Two major forces drove these trends -- unionization of major manufacturing sectors, and the public policies of the New Deal.

Then came the postwar boom 1947 to 1973. Real wages rose 81 percent and the income of the richest 1 percent rose 38 percent. Growth was widely shared, but income inequality continued to drop.

From 1973 to 1980, everyone lost ground. Real wages fell 3 percent and income for the richest 1 percent fell 4 percent. The oil shocks, and the dramatic slowdown in economic growth in developing nations, took their toll on America and the world economy.

Then came what economist Paul Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan administration magnified income redistribution. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while real income of the richest one percent rose 135 percent.

The Republican Congress has staunchly resisted President Obama's attempts to pass tax policies that require the wealthy to pay their fair share and stem the flow of income to the very top. As a result, economic concentration has continued.

In 2010, according to a study published this month by University of California economist Emmanuel Saez, 93 percent of income growth went to the wealthiest one percent of American households. Everyone else divvied up the seven percent that was left over.

In order for companies to hire new workers, consumers have to have the money to buy their products. This is not hard. But Mitt Romney and the Republican Party don't get it.

Yesterday the Brazilian President Dilma Rousseff visited Washington and met with President Obama. Last week, I attended a seminar in Sao Paulo on Brazilian economic and energy policy along with my wife, Congresswoman Jan Schakowsky.

The most striking thing you come away with after visiting and studying Brazil is that there is a clear political consensus that the top priority of Brazilian economic policy is to reduce economic inequality.

The Brazilians have pursued this policy, not only because it is right, but also because they understand it is critically necessary to their long-term economic growth.

Over the last 20 years, Brazil's policy of reducing economic inequality has brought 40 million people out of poverty and into the consumer economy. The Gini coefficient of inequality fell from .63 in 1989 to .53 in 2011.

As a result, Brazilian Gross Domestic Product per capita has grown to $13,000 in 2012 from $3,000 in 2002. It has more than quadrupled over only 10 years. The political consensus in Brazil is that the reduction of poverty -- decreased economic inequality, creating more consumers and educated producers -- is the principal engine of long-term economic growth for the entire society.

Brazil has a long way to go. But it is now the sixth largest economy in the World.

Two examples of Brazil's policies aimed at reducing economic inequality are particularly instructive.

  • Brazil just raised the minimum wage by 14 percent. And it indexed the minimum wage both to inflation, and to increase in Gross Domestic Product. In other words, if the GDP goes up 2.7 percent, so does the share of income going to the lowest earners in the society.
  • Brazil has a program of cash transfers to women in its poorest families. To receive these payments, mothers have to make sure that their children attend school and get medical care. That program alone has converted millions of formerly desperately poor families into consumers. By the way, it has also reduced levels of domestic violence. Men are apparently not so eager to abuse women who have their own sources of family income.

In other words, then, the Brazilians are committed to the economic principles that America once embraced -- principles that lead to the creation of the American middle class.

But in the mid seventies, the corporate CEO class and the far right organized a movement to undermine the American consensus that ending income inequality was necessary for our economy. They set to work cutting taxes for millionaires, putting the brakes on spending for education and children, attacking Social Security and Medicare and -- perhaps most important -- attacking unions whose muscle defended middle class incomes, both at the bargaining table and the ballot box.

In the end, that has increased income inequality in America. That, coupled with the deregulation of the big Wall Street banks and their reckless speculation, led to the Great Recession.

Next week the Senate will vote on the "Buffett Rule" -- a bill supported by President Obama and Democrats in the Senate that is aimed at requiring that, at the very least, millionaires should not pay a lower percentage of their income in taxes than ordinary people like their secretaries.

The Buffett Rule -- named after billionaire Warren Buffett, who is its chief advocate -- would be a major first step in eliminating the spectacle of multi-millionaires like Mitt Romney paying an effective tax rate of less than 15 percent, while ordinary middle class people pay substantially more.

It would effectively end the so-called "carried interest" rule where hedge fund managers like John Paulson, who made $5 billion dollars in 2010, pay marginal tax rates of only 15 percent on what they made speculating (and creating nothing of value) while ordinary working people may pay 20 percent, 25 percent or even 35 percent of income earned by producing useful goods and services.

There is simply no excuse for the Republicans in Congress fighting to maintain these kind of tax give-aways for millionaires and billionaires -- especially while Republicans argue they are "forced" to cut Social Security and Medicare benefits.

But Republicans like Mitt Romney will throw themselves on the railroad tracks to prevent increased taxes on the top 1 percent. It is their chief political mission. It is why people like Paulson and the Koch brothers give huge sums of money to Republican candidates and super PACs.

They think of their investments in politicians the same way they think of investments in other financial assets. They are looking for a return -- in some cases a return of billions of dollars in lower tax bills. And of course, as a guy worth $250 million, Mitt Romney himself would benefit handsomely from his policies.

Of course, the Senate vote on the Buffett rule will not be the last opportunity to turn the economic tide against increased inequality. In the fall election the choice between President Obama and Mitt Romney could not be more stark.

Over the next seven months, we must mobilize Americans to reject economic inequality -- to embrace the politics and economics of inclusion -- to vote for a society where we all stand together, where we have each other's backs -- and where we return the goal of reducing inequality to center stage where it belongs. And we should do it both because it is right and because it is the only way to create long-term economic growth for us all.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com. He is a partner in Democracy Partners and a Senior Strategist for Americans United for Change. Follow him on Twitter @rbcreamer.

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