Why Growing Income Inequality Is Bad for America
The recent controversy over the huge bonuses at financial firms like AIG and J.P. Morgan Chase have served to highlight both the disproportionate growth of the financial sector, and the perverse incentives that led traders and executives to take reckless risks with their companies and our economy.
But they have also shined the spotlight once again on the grave threat posed to our society by the growing income inequality that was the trademark of the last thirty years of our economic history.
Some facts:
* The CEO of the average company in the Standard and Poor's Index makes $10.5 million. That means that before lunch, on the first workday of the year, he (sometimes she) has made more than the minimum wage workers in his company will make all year. That translates to $5,048 per hour -- or about 344 times that pay of the typical American worker.
* Most people would consider a salary of $100,000 per year reasonably good pay. But the average CEO makes that much in the first half-week of the year.
* And that's nothing compared to some of the kings of Wall Street. In 2007, the top 50 hedge and private equity fund managers averaged $588 million in compensation each -- more than 19,000 times as much as the average U.S. worker. And by the way, the hedge fund managers paid a tax rate on their income of only 15% -- far lower than the rate paid by their secretaries.
There is simply no moral or economic justification for this kind of greed. Just as important, growing income inequality is a cancer that is attacking both the economy, and the social and political fabric of our society. A look at economic history makes several things clear.
1) Growth of income inequality does not result from "natural economic laws," as conservatives would like us to believe. It is the result of systems set up by human beings that differentially benefit different groups in the society.
At the beginning of the Great Depression, income inequality, and inequality in the control of wealth, was very high. Then came the "the great compression" between 1929 and 1947. Real wages for workers in manufacturing rose 67% while real income for the richest 1% of Americans fell 17%. 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 that were sparked by the Great Depression.
The growing spending power of everyday Americans spurred the postwar boom of 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, but income inequality continued to drop.
From 1973 to 1980, everyone lost ground. Real wages fell 3% and income for the richest 1% fell 4%. 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 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%, while real income of the richest one percent rose 135%.
Much as they like to tout the magic "natural" effects of the market on levels of wages, conservatives have not been shy about using the power of government to affect the distribution of the fruits of the US economy. They have slashed taxes for the rich and for corporations, and increased the relative tax burden on working people. And by cutting taxes for the rich, they have transferred wealth to the most affluent people in America from all of our children by increasing the federal debt.
2). Increased income inequality is completely unrelated to the relative contribution of various groups in the population to the nation's economic prosperity.
Who could argue that the executives and traders of the Wall Street financial firms, whose reckless speculating ultimately sent our economy into a tailspin, made any meaningful contribution to our economic welfare? Yet they often made hundreds of millions of dollars.
Remember, much of the financial sector does not produce anything. The principal missions of the financial sector are to take on risk and allocate capital effectively. Some in the industry -- especially many community and regional banks -- do just that. But in the last year, the financial sector as a whole didn't "take on risk," it shifted risk to ordinary Americans through gigantic taxpayer bailouts. Many Wall Streeters themselves escaped the recent economic debacle, having salted away hundreds of billions of dollars.
Fundamentally the financial sector is made up of middlemen, who spend their time creating schemes that allow them to funnel society's money through their bank accounts so they can take a sliver of every dollar off of the top.
Right now, the private health insurance industry is busy trying to defend its turf against a public health insurance option. It wants to maintain its "right" to take that tribute off the top of as many health care dollars as possible. Remember, the private health insurance industry doesn't deliver any actual health care.
Does the CEO of CIGNA who is going to retire this year with a $73 million golden parachute contribute more to our well-being than a nurse who actually delivers health care?
The same is true of most of the financial sector, many of whom are essentially professional gamblers. It is the farmers, manufacturing firms, the health care providers, the transportation companies, the guys who sweep up buildings, the cops and firefighters, the people who teach our kids -- those are the people who produce the goods and services that we consume in our economy. The real incomes of these Americans have dropped by $2,197 per year since 2000, while the "bonus party" on Wall Street continues even though these Americas were asked to reach into their jeans and pony up hundreds of billions to bail out Wall Street's catastrophic mistakes.
3). As political scientists Nolan McCarty, Kevin T. Poole and Howard Rosenthal show in their book Polarized America: The Dance of Ideology and Unequal Riches, inequality in income distribution causes political polarization. It divides our society. Their study found that there is a direct relationship between economic inequality and polarization in American politics.
McCarty, Poole and Rosenthal measured political polarization in congressional votes over the last century, and found a direct correlation with the percentage of income received by the top 1% of the electorate.
They also compared the Gini Index of Income Inequality with congressional vote polarization of the last half-century and found a comparable relationship.
Want less political polarization? What a more bi-partisan spirit? Want America to be unified? Want less hatred and violence in our society? History shows that you start by once again compressing the difference in incomes between the very richest and the rest of America.
4). Finally, increased income inequality is completely undemocratic. It is a betrayal of our most fundamental democratic values. And it is dangerous to our prospects for long-term survival.
The increasing inequality of income leads inexorably to increasing inequality in the distribution of wealth. Power in the society is more and more concentrated in the hands of a few. It becomes more and more likely that some of our most powerful citizens came to that station not because of their merit, but because they got it the "old fashion way" -- they inherited it. That is directly contrary to our shared belief in a more democratic society -- where power and opportunity are broadly shared -- where no one's power or station in life are determined by accident of birth.
The earliest Americans came to this continent to escape tyranny, aristocracy and plutocracy.
Progressives who stand up against the increasing concentration of economic power in the hands of a few are standing for one of the proudest traditions of our democracy. And our commitment to the democratic distribution of power is not simply an expression of utopian idealism.
In his brilliant study of why societies in the past have failed, called Collapse: How Societies Choose to Fail or Succeed , Pulitzer Prize-winning physiologist and ethno-geographer Jared Diamond concluded that one of the most common factors was "rational behavior" by actors -- and decision-making elites -- that benefited some individual or private self-interest but was harmful to the prospects of the entire society.
He found that this was often complicated because the benefits to a small group that profited from the action were great in the short run, and the resulting damage to everyone else was not very palpable or immediate, except over time.
This problem became especially acute when elites thought they could insulate themselves from the consequences of communal disaster. Then, they were even less prone to make decisions in the public interest.
The increased inequality in the distribution of wealth and income makes this kind of decision-making more and more likely. We see when the interests of the wealthy stand in the way of solutions to the problems of climate change and environmental destruction -- or when we fail to raise enough money for the public education that benefits all children because the few who can afford private schools refuse to pay "higher taxes."
The creation of a democratic society, built on egalitarian principles, is the only real systematic means of assuring that the interests of the entire society are not sacrificed to those of powerful elites. Most stories of decisions leading to catastrophic collapse involve decision-making elites whose interests diverge from the society at large. Democracy is the only real antidote.
The undemocratic increase in the distribution of wealth and income is not only wrong. It is also dangerous to our future survival.
Robert Creamer is a long time political organizer and strategist, and author of the recent book: "Stand Up Straight: How Progressives Can Win," available on Amazon.com.
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Haven't we all contributed to this skewing of our world? We are all silent when the next guy who can throw/catch/field/carry/kick a foot/base/basket ball is given millions for such stellar ability and we'll pay more this year on the season's tickets to cover the cost.
Or the latest singer/entertainer/actor who entices/titillates/soothes us for anywhere from 2 minutes to a few hours.
Then of course, the designers of clothes/furniture/objects to whom we'll pay insane amounts of money to display his or her name across our chest/bag/butts.
I have no problem if any of them earn a lot more than an average fellow but when " a lot more" becomes 100 times to 1000 times, and more, I think we're out of control. As for the guys who don't do even these things but simply play the shell game with our money and get paid for it in dizzying sums,how did we let them become unaccountable for their abilities?
We pay a pittance by comparison to those who feed us, teach our kids, clean our sewers and drains, take away our garbage, make things for us, look after us when we're sick. But that's ok seemingly ... after all, if we tried really hard, we could one of those rich people too..... obviously 99% of us aren't trying hard enough...
Might I suggest that those concerned with inequality take the time to read the classic book on political economy, Progress & Poverty? A modern abridgment is online and in hardcopy (search on Henry George and Bob Drake, the fellow who did the abridgment).
Henry George (b. 1839, Philadelphia; d. 1897, NYC) saw the underlying problem. His analysis was widely understood and appreciated 120 years ago; with Edison and Twain, he was among the most discussed figures of the day (check the NYT archives). He also saw a very simple, logical, just, wise and efficient way to resolve the problem. Many who know of him connect his name with the "Single Tax." He saw the most logical and simple tax, and recommended its adoption, to the exclusion of taxes which burden our economy and impair its functioning. His solution is still quite logical and reasonable. Even if his "single tax" turns out to be insufficient to meet all the revenue needs (which may not be so -- it is misunderestimated by many; for exceptions, read Mason Gaffney, Fred Foldvary, and others), it is still the right FIRST tax, and its utilization will go a long way to reducing the funds available for corporate funneling to their top management and shareholders, and the distribution of those funds naturally among all workers in our society.
I commend George's books and speeches to your attention if income and wealth inequality -- or simply justice -- are high on your list of concerns.
TY Mr. Creamer for another excellent blog. This blog leads me to question directly the cost of political ignorance in America. That is, people who can't understand the issues, being divided by issues tossed out like political crumbs, much like I feed ducks at the pond.
Robert Creamer is great!
He should publish his destilized ideas on how economy correlate with social behavior. He is a forefather of a new era in the US history.
Mr. Creamer's post is a synthesis of many, many comments here at HuffPo for the last year. This conversation needs to be repeated and expanded because too many Americans feel the ground shifting beneath their feet and are not cognizant of why or how. We are inculcated from birth to believe the system works through sacrifice, investment and achievement. Now the contract between the citizen and the establishment is not only broken but abusive and predatory, and it's a rude awakening, a shock to wake from deeply held, unconscious American beliefs of the last 50 years.
Sorry, meant to write "could be a synthesis" not that it "is."
There is a big difference between income and wealth. Some of the CEO salaries are excessive, but at least they're doing something to earn money, rather than just receiving large inheritances. The $10.5 million average CEO pay is nothing compared to the $20 billion inheritances of the Walton family. However, the leadership of both parties are not even bringing up the billionaire inheritances. The true wealthy families have too much influence on both parties and John Kerry and John McCain are both spouses of the wealthy.
Those 'working' ceo's families joins the "just inherited" bunch.
I wouldn't be so miffed about the banks' officers' exorbitant compensation if it merely followed Wall Street's mantra: "Eat what you kill." So what's the matter with the CEO of JPMorgan et al being paid in toxic CDOs, valued of course at the mark-to-make-believe that the banks claim is their real worth?
The author is incorrect. $10.5M a year =s approximately $202,000.00 per week. That breaks down to approximately $40,400.00 per day. New Year's Day is a paid holiday & therefore, the average CEO makes more than many of his/her employees before they return from their New Year's holiday & work their first day of the New Year!!
"The tax policies of the Reagan administration magnified income redistribution. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%." That was the real Reagan revolution- revolutionary strides in income gains for the wealthy and losing ground for everyone else. Since Reagan, under successive Republican adminsitrations, income disparities have only gotten more pronounced. Society can not function with 90% of the wealth going to the top few percent. Sooner or later it will collapse.
It has collapsed. The only things that haven't happened yet are: 1) The full realization by the masses that their dreams have been wiped out along with their retirement funds: and 2) The revolutionary war where those who have lost everything to the greed of those with the say-so take back forcefully what they worked so hard to gain.
Don't miss another not-so-obvious consequence: Who has money to spend on lobbyists and political campaigns, i.e. who is now able to own government, as a result of being enriched at a rate 135 times the average citizen wage-earner (let alone those who make no wage at all)?
The late Robert Edmonds, an iconoclastic economist, developed data supporting the view that excess wealth concentration forces the economy into recessions and depressions.
Thus, a fairer distribution of wealth is an economic and not merely an ethical problem.
Some of Bob's work can be found in the Human Investment Tax Credit Program, which he developed with L.V. Watkins and myself in the 1970's. A few of the incentives contained in the first two Reports were included in the Jobs Tax Credit of 1977. That resulted in about 20% of all the new jobs generated that year.
The 2009 Report, updated by Watkins, and links to the earlier Reports, can be found on the website: http://www.aesopinstitute.org If you go there, click on MORE at the top to bring up these items.
Economists and others interested in Bob's work are welcome to contact me.
Mark Goldes
mgoldes@chavaenergy.com
This kind of post draws almost as many trolls as global warming posts do.
It is not the rich who built this civilization of ours, but the sweat and labor of the common people, and it is not the rich who created the science that underpins all our technology. But for some reason, the rich wind up with all the money, and everyone else gets screwed. It the top 1% were suddenly whisked off the planet in some kind of rapture operation, nobody would miss them. But take away the bottom 99%, and civilization collapses. Yet for some reason, we give all the money to the rich as if they are the vital people, and the rest of us don't contribute anything.
One point though - imposing taxes on corporations instead of people is not progressive. It's often regressive, because corporations simply tack taxes on to the cost of goods and services, and we wind up paying them as consumers.
Imposing taxes on US corporations has one significant advantage over simply taxing the corporations' shareholders: You cannot tax foreign shareholders. So by taxing the corporation, you tax the profits before they have a chance to leave the country.
Of course, that's all in theory. Both corporation and wealthy individuals continually manage to evade paying their fair share taxes.
Distributions to owners/shareholders are from pre-tax dollars.
And yet, these egomaniacs feel they deserve such rewards, while people in their company are barely getting by. Are they devoid of any social justice or compassion? Do mthey really think they're more that much or do they have no sense of self worth and need that money to make themselves feel important. Are they just monetary zombies calculating their personal value in dollars alone? That's tragic. Most humans would feel compelled to give back, to share, to spread the wealth. Are they religious people? Why aren't their priest, rabbi's or whatever, instilling a sense of community and sharing with them? It's odd how the various churches in this country aren't screaming about greed, isn't it? You would think they of all people should be leading the call for charity and equality. Do they believe in heaven or hell? Do they think their wealth will buy them into heaven or keep them out of hell? Do they believe in reincarnation and are stashing it away for the next life? How can anyone even spend $588M in a year or even a lifetime. There is something seriously wrong with these people, and enabling them is not in the interests of anyone.
yeah churches are changing too...IMHO churches are reaping what they have sown as they lose members and legitimacy.
It's not anyone's business how much private companies pay their executives. It's not up to the government to institute schemes to redistribute income to the middle and bottom because "it's not fair".
Everyone in this country has the freedom to work their way up and create their own wealth. Who's going to want to take risks starting a company when they know that the more they make, the more it will be penalized or maybe even controlled by an agency.
Don't you see the difference between Joe the Plumber and Goldman Sachs? I'm not sure Joe does.
They''re eating your lunch, my friend, and you're letting them.
We are the government, and it was formed to benefit all of us, not just the few. It is our business because if capitalism does not serve all the people in a fair and rational way, then it must be reined in and regulated until it does.
This country does not belong to the rich. It belongs to all of us.
"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%, while real income of the richest one percent rose 135%."
You have no problem with government instituting those redistribution schemes, do you.
Excellent point. And my guess would be that he also has no problem with the 13 Trillion Dollar Wall Street socialist bank bailout either.
"Everyone in this country has the freedom to work their way up and create their own wealth."
Don't forget ... "And influence government for THEIR OWN interests!" Your version of "fair" is warped.
Yeah, all 300 million of us can be in that highest 1%. Lets all do it!!! Nice math skills. How about if our country DOESN'T go into the tank for THEIR benefit.
"Who's going to want to take risks starting a company when they know that the more they make, the more it will be penalized or maybe even controlled by an agency."
LOL. Yeah! Instead of pocketing $1 million, I"m only going to get $900K. Screw it all! I'm going to food stamps, Yeah!!! What a STooPID talking point.
You're correct that the government should not regulate how much companies pay their employees (with the exception of Minimum Wage laws). BUT, the government has *every* right to regulate how much tax these employees pay.
The people who make the most money get the MOST BENEFIT from quite a few things that are built and operated with tax dollars. Would the executives of Google make anywhere near as much if the taxpayers' money didn't create the Internet? Would the executives at WalMart make as much if the taxpayers' money didn't build and maintain the highways and ports that their goods travel on?
One of the principles on which this country was founded was a deep seated dislike of aristocracy. You say "everyone ... has the freedom to work their way up". That's simply not true. Those who find themselves "up" simply by means of birth don't have to WORK for anything. And that, my friend, is profoundly un-American.
Everyone who whines about how repealing tax cuts will stop people from starting businesses makes it seem like the government will take away over a dollar for every dollar of income and that's complete nonsense. If I become "rich" and the top tax bracket by some miracle is raised to 50%, it still means that I get to keep HALF of each extra dollar I make. That's not torture, it's civic responsibility.
Can we please get Mr. Creamer on some medium where "conservatives" and "real Americans" can hear him? He makes an eloquent case for how America should be, and what was intended by "the Founding Fathers", that is failing with the complicity of uninformed patriots who swallow the Kool-Ade served up by the right-wing noise machine. Those tea partyers should be demonstrating with progressives at the banking summit, not b!tching about Obama's birth certificate.
No doubt! Why isn't this on the front page? This is one of the best articles I've read in a while.
Ooops. That was meant for the conservative talking point machine right above you. That is IF HP approves of it.
I've been saying this for quite some time now. It seems that many teabaggers out there are not riled up about health care, but are really just angry about the bailouts.
As strange of bedfellows as these folks might be, just imagine the volume of collective rage that could be brought to bear if Liberals and Conservatives would unite against the common enemy that is destroying opportunity for middle class living for ALL of us.
Once we can get everyone a decent shot at making a living, then we can go back to arguing about gays, guns and God.
Indeed, I think that the MSM's focus on the teabaggers as a bunch of racists (not that a substantial number aren't) served their corporate masters well, by dividing two groups that otherwise would be united in opposition to the banksters.
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