“Rough Equality of Means” – Reversing Economic Inequality

Note: this is a cross-post from The Realignment Project. In order to not clog up the front page with lots of re-posts, I'll just mention that I have additional posts out this week that are on a similar topic - one on the abolition of poverty (a similar, but different object from ending inequality), and the other on the establishment of a Fisc - that might interest people here at Economic Populist.

Introduction:

A recent paper by Professor Emmanuel Saez of U.C Berkeley provides further evidence for something that we've sensed already - economic inequality has never been greater in American history. We have finally succeeded in accomplishing that most dubious of accomplishments: we are now officially more unequal, more elitist, and more disproportionally in-egalitarian than the benighted America of 1929.

In 2007, the top 10% of Americans received 50% of the nation's wages. That number, the sheer unreality of the idea that a tiny fraction of the population should have the sheer unmitigated selfishness to claim every other dollar in wages paid out, pales before an even more troubling figure. The top 1% of Americans captured 2/3rds of income growth and 1/2 of economic growth from 2002-2007. At the same time that the rich have gotten even richer, the rest of us have not fared as well - indeed, even before the recession, the average working-age household lost $2000/year of income since the year 2000.

Can this state of affairs continue? And how can we stop it?

Background:

Consider the following chart:

I apologize that this was the only chart I was able to find, as Saez's charts mostly focus on the extreme expansion of wealth among the top 10, 1, and .1% of the country. However, As Saez's paper shows, economic inequality has dramatically worsened since 2002 - the top 15,000 families in America (.1% of the population) now own 6% of the national income, and the top 10% now own 50%. What's even more staggering, and what Saez's paper shows that this chart does not, is how concentrated this increase of income has been, even within the top 10%. Those in the top 10-5% range and those in the top 5-1% range have seen only the most modest of increases over the last decade, whereas the top 1% have seen their income shoot up by roughly 10 percentage points.

This throws a massive monkey-wrench in the conventional explanations for economic inequality, which focus heavily on the impact of de-industrialization, the decline of unionization, and the increasing need for education in an "information economy." While this could conceivably explain why the 5th and 4th quintiles have seen their share flatline in the last thirty years, it does not explain what is going on at the top. There simply is not that much difference between members of the top 10% to account for the enormous variation we see within the group - members of the top 10-5% all graduated from college and hold advanced degrees, and in all likelihood attended the very same institutions and made the same connections, and all likely work in the same kinds of jobs as those within the top 5-1%, and the top 1%. Can claims of higher industry or intelligence or thrift of daring really explain why one group of wealthy executives virtually indistinguishable from their peers prosper and the others not?

No.

Moreover, in addition to the moral injustice of this vast inequality, which is increasingly beginning to resemble the gulf between the feudal aristocracy and serfdom in the Middle Ages, there is the sober fact that this economic inequality is by itself damaging our economic system. When too much of the national wealth is distributed up the income ladder, the aggregate propensity to consume decreases as fewer people at the bottom have the income they would need to express their potential demand, and the people at the top show an ever-greater propensity to save and invest. When too much of the national income is directed towards savings and investment and too little towards consumption, it should come as no surprise that we've seen one succession of bubbles after the other, as too much money tries to chase too few sound vehicles for investment.

Creating a more just society has become more than a moral cause - it has become a necessity.

Redistribution Done Right:

The scale of this inequality should make one thing clear - efforts to regulate executive compensation are completely inadequate to the task.

Rather, we must be prepared to redistribute wealth far more substantially.

Progressive Taxation - the first step in achieving a more equal society is to make our tax system more progressive. We should work to gradually expand our capital gains, estate, and income tax rates, especially focusing on making these taxes more progressive by adding additional brackets at the top. For example, our current income tax brackets end at 35% of all incomes over $373,000 a year as if there were no difference between a household consisting of two affluent professionals and a household of multimillionaires. There is no sane reason why additional brackets should not be added at $500k, $1 million, $5 million, and so forth.

Progressive Redistribution - in addition to increasing normal social spending, which by its very nature benefits ordinary Americans more than the poor, we should also combine a progressive change in taxation with the expansion and progressivization of our social benefits. While I will expand more upon this subject in future posts, I believe that one of our chief mechanisms of redistribution must be the expansion of the earned income tax credit and the various child-related tax credits into a guaranteed minimum income for workers. Just to take the current EITC, the credit at present is virtually worthless to single people and couples without children (maxing out at $428 a year), while the maximum benefit of $$4,716 is restricted to those with two or more children.

The Goal: I believe that our goal must be to gradually push economic distribution back towards where it was in 1979, when the quintile distribution of income looked like this (2007 numbers shown in parentheses):

1st Quintile - 44% (49.7%)

2nd Quintile - 24.7% (23.4%)

3rd Quintile - 16.9% (14.8%)

4th Quintile - 10.3% (8.7%)

5th Quintile - 4.2% (3.4%)

You will see that this is hardly a dramatic levelling of the sort envisioned by Marx or Engels; indeed, the top quintile of Americans would lose a mere 6 percentage points of their income, which would hardly bring anyone to penury. It's also worth noting how broadly increasing inequality has been felt - the 2nd and 3rd quintiles have lost far more ground, absolutely, then the bottom 4th and 5th quintiles in the last thirty years. In this sense, redistributing wealth would be almost as far from "class legislation" as one can imagine, in that it would benefit 4/5ths of the population.

Accomplishing this by means of taxation and redistribution would mean, as Larry Summers(!) points out, that the top 1% of households would lose $500,000 a year from additional taxes (although given that the top 1% starts well over $250k a year, this shouldn't be too painful), and the bottom 80% of Americans should receive $8000 per year per family - easily accomplished by expanding the EITC (or a combination of the EITC and the Child Credits) to a universal and automatic $8000 rebate for all Americans making less than $100,000 per year. Moreover, all of this could be gradually accomplished if that would soothe the fears of those solicitous of the rich, turning the yearly bite on the rich to no more than, say $25,000 a year.

Conclusion:

A scheme to redistribute some $670 billion in wealth might seem to risk attacks of "class warfare." Certainly, the Blue Dog and New Democrats who balk at income tax surcharges on the wealthy to pay for universal health insurance would quickly run out of superlatives should a proposal of this scope ever be seriously introduced. However, as the 2008 campaign and the subsequent battles over the stimulus, the budget, health care, and even something so babies, apple pie, and flags as "Cash For Clunkers" have shown, we will be attacked for "class warfare" no matter what we do.

So let's be rather be hanged, if hanged we will be anyway, for stealing a sheep than a lamb. Let's have a real fight over what kind of society we want to have, one in which America has the same wealth distribution patterns we had under President Reagan, or one in which America has the same wealth distributions as we enjoyed under President Bush.

Meta: 

Comments

some thoughts

Firstly I think this disposable worker motif from corporations has to be stopped through a host of tax disincentives, improvements on employment law and vigorous action on cases, strong legal action on age discrimination cases as well as stop, ban and curtail global labor arbitrage through a host of policy changes.

That just kills any income equalization because people are constantly being considered as temporary and not only lose their income, but also benefits.

Then, I think they need to revitalize the pension system in the United States. Pensions have been robbed blind and most people next to retire do not have anything to retire on. This is not true in comparison of the people currently in retirement.

Then, educational costs need to be nearly free for U.S. citizens.

But how to pay for all of this? Much of the ideas are investments in the U.S. citizen and workforce and it can really pay for itself in increased tax revenues as well as business revenues generated from a supported workforce.

If one notices globalization is really putting a damper on U.S. restructuring the economy.

I also think we need major reforms in corporate governance and executive compensation.

In other words, I think incentives are better than way to reshape society than just "lump sums".

Take poverty as an example, how many single women are poor because they cannot take care of children and go to school or obtain the skills? How about child care and support that really works for the circumstances which created the poverty in the first place?

How many cannot get to college because they cannot afford it?

I don't believe it's college and advanced degrees. I think if one drills down into that data, it's also going to be certain occupations and certain categories of jobs within those occupations....where the income inequality really pops out.

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I agree with what you are saying

Here is the challenge. Reagan Administration did an incredible job w/transforming the entire country - economic and political structure. He convinced many middle class people about the virtues of 'trickle down' economics. And we are seeing remnants of this today with these 'tea baggers'. He demonized labor costs and unionization. He was able to did because he had a huge machine/apparatus behind him. He had an entire administration - cabinet members, media, academia (certain segments) and business groups that believed in this neo-liberal theology.

It was a huge social experiment.

Side note: I just heard one of the dumbest statements that came from one the 'tea baggers' who said they were against a surtax on rich to pay for HCR. Asked why, they said because I be rich some day. WTF? Maybe if you the lottery! Class mobility is practically non-existent in this country but people have been brain washed into thinking that working for slightly above min. wage with very few benefits will get them a better life someday - not with the status quo.

Until we recognize this nothing will change.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Good points

1. Re: "Disposable worker." Part of what could be done is to generally replace at law the concept of "at-will" employment with some kind of general floor of "just cause."
2. Pensions I have talked about; check out "Social Security 2.0" at The Realignment Project.
3. Ditto with education, see "The Balance Wheel of Society" at same.
4. The problem with reshaping society with incentives is that, in the end, you still have the issue that 10% of the people have 50% of the income. In the end we're going to have to get part of that income to the other 90% of the population, so why shilly-shally about it?
5. Regarding cause, I'm much more of the opinion that it's more about the strategic position to take yourself out of the market - executive pay is decided by committees of other executives, and the link between short-term management strategies and management ownership of stock is far too dodgy. Back in the day, we called this "rent-seeking."

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incentives

it's not like there is a static basket of money sitting around and if you give incentives to grow a corporation that automatically means less for others. In other words, they do not have to be mutually exclusive.

Just as an example, it used to be that corporate executives believed they had a responsibility to the shareholders but also to the employees and their well being. The idea is to reinstate those types of incentives.

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they've dumped the COSTS of shitty decisions

onto the community, therefore they only think about themselves.

I think it someone on here who commented that a 70% tax rate would FORCE long term thinking - if you want to get rich rich rich, what your company does is going to have to be sustainable for 10 years, NOT 5 quarters of banditry.

BTW - we SHOULD treat employees like charmin, kleenex and tampons.

YOU ARE F'ING DISPOSABLE.
WE'RE GONNA USE YOU, AND FLUSH YOU.

The Cost to Business of NOT focusing on their widgets is shitty widgets.

The Cost of treating people as disposable is ... 5.1 billion living on 10 bucks a day or less?

THE COST of mass poverty, THE COST of too little investment in the community ?? THERE IS NO BODY TO F'ING RICH OFF OF!

Part of your pay is going to pay for YOUR opportunity!
No Opportunity = YOU AIN'T FREE, YOU F'ING JACKASS.

YOUR OPPORTUNITY package is an investment, it is a FOUNDATION upon which YOU get to BUILD.

Opportunity Package:

1. Health care system INDEPENDENT of your job.
2. retirement funding INDEPENDENT of your job.
3. a retraining system INDEPENDENT of your job.
4. 4 weeks vacation AND 10 paid holidays AND 10 paid sick days so YOU can invest in and nurture and support your support network that keeps you going the 52-8 = 44 weeks of the year.
5. NATIONAL and international work rules, so your a'hole boss can't pit workers against each other in a race to the bottom. ( I diary this on kos every memorial, independence and labor day )

rmm.

Yond Cassius has a lean and hungry look;
He thinks too much: such men are dangerous

(p.s. - comments are a pain in hte ass on this site, in that I need to keep logging in )

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Yond Cassius has a lean and hungry look;
He thinks too much: such men are dangerous

rage, comments, progressive taxes

I'm all for increasing the tax rates on individuals as well as corporations, although I want to make sure, because this is the day of globalization, that the U.S. remains competitive and then the incentives to innovate are not removed.

Logging in, just don't remove the EP cookie. The site uses cookies to keep you logged in as well as the database identifier to find all of your comments and put them in that "my account" tab.

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Steven have you seen Margarat Blair's work?

I overviewed some of it, in Have a say on pay, with links to more in depth research work & testimony.

Ralph Gomory has written a few things on this topic as well, but the problem is fundamentally multinational corporations no longer align or act in the national interest. It goes along with income inequality in that not only is executive compensation into the stratosphere in profit percentages, but the incentives themselves do not even align the corporate strategy correctly and especially anything long term.

This kind of kills two birds with one stone, firstly to stop this feudal kingdom creation but to also realign what is the definition of a corporation in the United States to what is in the best interests of the United States....
which is going to increase profits, increase jobs, increase worker compensation as well.

I mean right now we have a very, very weak bill, Say on Pay, which passed the house and even that is supposedly going to be blocked in the Senate.

With the public outrage over AIG, and TARP bonuses, I don't believe for a second the public doesn't want legislation to stop these beyond belief executive compensation packages, esp. the ones which compensate for failure and incompetence.

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No I haven't, but I will

I agree that the current pay legislation isn't the end-all of people's hopes, but I think it's redirecting energy and attention to what, in the end, is a sideshow.

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Mythology

We need to get rid of of this myth that mega- million dollar pay packages are necessary to keep the CEO and key staff from walking out the door. How much was Ken Lay's pay package, anyway?
Frank T.

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Frank T.

A good part of that

Would be to do some empirical work as to how much executives actually add to their corporations, and whether increasing an executive's paycheck from $3 million to $5 million actually improves their performance.

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compensation linkage?

Are there any studies done linking executive compensation/ bonuses with dividends paid or shareholder value returns. I suspect that the correlation of compensation to real returns is not as good as in an "old school business" model, but I haven't come across one. Any links?

Side note- my dad was in real estate sales and land investment
in the 50's and 60's He spent most of his earning years in the 70-90% marginal tax bracket. He was forced/incentivized to use incorporation and long term capital gains rates to retain more of his earnings. He retired at 45. Maybe not "rich" but certainly no hardship. I think greed was still an obscenity in civilized company back then, though.

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from what I've read

The correlation is quite bad. I know there's been studies of CEO compensation in high-performing/low-performing companies, and there isn't as much of a spread as there should be.

The problem is especially exacerbated by "golden parachutes" and the like, which often mean that incompetents who get canned early on still make out like bandits.

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complete disconnect

I've read huge bonuses for mergers/acquisitions, then you get corporations making huge acquisitions which do not make sense financially or strategically and hurt the corporation in a long term strategy move.

Pre-IPO of the "dot con" era...it was astounding, one company was bankrupt in something like a year and a half from launch, yet they were forced to pay two executives 3 million a year....for life...regardless of the collapse and the complete fiction of the business model.

It's also eating up in actual corporate profits....i.e. hurting the corporate earnings which is a direct hit on shareholders at minimum.

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Bonus or Bribe?

There are many ways to loot a corporation. All the more reason big shareholders need to be watchdogs, not sleeping dogs. If you stand to gain big fees/ bonuses, you can more easily be persuaded that there is "synergy" in a merger or acquisition.
Frank T.

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Frank T.