Why Income Inequality Matters

UPDATE: Yves Smith, filling in for Glenn Greenwald at Salon.com, has a thoroughly well-written piece on why income inequality is bad for rich people, the very same point I make in this piece. The piece contains this juicy passage: “Japan, which made a conscious decision to impose the costs of its post bubble hangover on all members of society to preserve stability, has gotten through its lost two decades with remarkable grace. The US seems to be implementing the polar opposite playbook, and there are good reasons to think the outcome of this experiment will be ugly indeed.”

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As I write this, the ongoing saga surrounding raising America’s debt limit continues with little certainty as to whether our political leaders will be able to hammer out a deal to avoid a government default. Like a Greek tragedy, it drags on while ordinary Americans remain perplexed, annoyed, and in same cases utterly aghast. My mother and my girlfriend both asked me recently, probably rhetorically, “How did we ever end up here?”

I didn’t have a very good answer for them, largely because I am not an expert in economics nor a political operative. I don’t even have a political science degree. Yet I did have one opinion, one unshakeable belief, that has come to motivate my entire political outlook. If you want to know a little piece of how we ever got to this point¹, I think you have to start by looking at one thing: Income inequality.

Or, as I like to call it, the wealth gap.

EconomyWatch.com has this definition of the phenomenon: “The existence of disproportionate distribution of total national income among households whereby the share going to rich persons in a country is far greater than that going to poorer persons.”

Translation: Income inequality is when the richest few have dramatically more of the wealth than the vast majority. Exactly how much more? Well, take a look at this chart:

I snagged this graphic from a larger piece in Mother Jones that paints a stark and compelling portrait of the issue of income inequality. I’m going to use a few of their charts, but they deserve the credit for aggregating the research and I encourage you to go look at their full article.

On the left is average household income, adjusted for inflation, over the past three decades. Notice the red line on the top? That’s the wealthiest 1% of Americans, and you’ll see their average income has skyrocketed, multiplying by a factor of four since 1979. Now, do you see all the other lines? Try to pick them apart. They’re a little squished together down at the bottom. Yes, your eyes do no deceive. Their average incomes have remained stagnant.

That’s a before tax chart. Now look at the graph on the right. That shows the share of income after taxes over the same period. This time, the picture is bleaker still. Not only has the share of income for the wealthiest Americans grown at a pretty stunning clip (120% increase for the top 1% and almost 30% increase for the top 20% since 1979), but the share of income amongst the remaining 80% of Americans has actually declined.

Put another way, income inequality has gotten dramatically worse in the past three decades.

What does that mean in real dollars? According to an analysis done by professors at Yale University and UC-Berkeley², 90% of Americans have made less per year, up to $10,000 less on average, than they would have if their incomes had risen in the past 30 years as it had in previous decades. In other words, since 1979, 90% of Americans have given up income while the top 10% have taken home more than ever.

That is a massive redistribution of wealth upwards. It’s like Marxism in reverse, with 10% of Americans controlling two-thirds of the wealth, and the rest of us making do with less. If you’re wondering what happened to the American middle-class and their disposable income, the disposable income that has powered economic growth for a generation, that’s where it went. To millionaires who collected close to $700,000 more per household per year, all of it at the expense of middle-income families, thanks to economic policies that have widened the gap between the richest few and the average American. It’s not even about rich versus poor. It’s about the rich versus everybody else, even those of us who would never in a million years consider ourselves impoverished.

Why does this matter? Is this just sour grapes from the people who look with jealousy at those who’ve worked hard to reach the top of our economic system? Life isn’t fair, right? Never has been, never will be.

Let’s be clear: This has absolutely nothing to do with fairness. Income inequality makes it virtually impossible for a society to sustain itself over the long term. The wealth gap, as it turns out, is a cancer at the heart of our economy and political system. Income inequality is functionally problematic. Fairness is like an amusing side show to the real argument.

Noted economist Joseph Stiglitz pointed this out in an article for Slate a month ago:³

With so much of U.S. national income going to so few, growth could continue only through consumption financed by a mounting pile of debt. [full article]

His point is simple enough. With so many people (almost everybody, just so we’re being clear) making less and less as a part of the overall economic pie, there has simply been less and less actual capital for them to spend. As they’ve had less to spend, the only way the society could grow was to finance that growth with debt. Like a starved body feeding on itself, the combination of decreased incomes and increasing debt eventually reduces the larger society to an emaciated husk.

That is exactly what we’ve seen in the past few years. Economics are complicated. The sociopolitical influences are what make it so damned complicated. Put another way, humans and their irrational behaviors, are what makes economics such a fascinating roller-coaster. Yet however complicated you want to make it, there does remain the simple truths.

For an economy to grow and continue to sustain a society, everyone has to see their income grow. That’s fundamentally impossible if the gap between the wealthiest few and everyone else keeps getting larger. Economic growth in real dollars isn’t a zero sum game, but the percentage of the pie is. If one group gets a larger share of the overall income, another group has to get less.

What does that have to do with the debt-ceiling and the game of political and economic chicken going on in Washington? As has been alluded to in this article, by Stiglitz and Hacker in particular (check your footnotes), the biggest driver of income inequality has been tax policy.

One upon a time, conservatives latched onto the idea that the one thing dragging this country down was taxes. If the government could just give back all of that money it took from you, then you could spend that money and invest that money, and start companies with that money, and the engine of the economy would hum along. You may have heard of “Trickle-Down Economics,” a pejorative political description for the school of thought called “supply-side economics.” Supply-siders believe that the best way to encourage economic growth is to make it easier for people to produce goods and services, and they believe the best way to do that is to reduce regulation and taxes on corporations and businesses and the wealthiest individuals who finance such ventures.

For the past thirty years, across Republican and Democratic administrations, America has followed this school of thought right off a cliff. We’ve made it so much an assumed part of our political discourse, that there are those on the right who are fundamentally opposed to any tax increases or regulation. It’s like religion. It’s an ideological maxim for them. Regardless of the economic facts of the past few decades, they fundamentally believe this is the one true way to a sustainable society.

And they are wrong. They are so wrong it hurts to hear them, because their policies are driving the debate in Washington. They’re the ones standing underneath the Capitol dome and holding the country’s financial health hostage unless we slash government spending, slash government regulation, slash the safety net, and never, ever, consider raising taxes to increase revenue. You’ve got millionaires who’ve gamed the system and you’ve got ordinary people who’ve bought the snake oil and turned into an ideological litmus test, and then you’ve got ordinary Americans.

You’ve got people like my father and my mother who’ve worked themselves to the bone to give me the best life possible, and worry their lifetime of struggle won’t mean anything when the government slashes the safety net out from under them. You’ve got people like my girlfriend, who works with children as a speech pathologist and watches too many of them slip away because Medicare keeps getting nibbled away by conservative budget-cutters.

How did we ever get to this day? Take a look past Main Street, past the shuttered shops and empty parking lots. Look a little further, towards Wall Street. Look to Pennsylvania Avenue. Look to every part of America where an elite few bought and paid for policies that served their interests, but forgot that they live in the same country as the rest of us. In the long term, the interests of a few cannot be served at the expense of the interests of everyone else.

Joseph Stiglitz said it best in Vanity Fair, so I’ll let him say it again here:

“The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live.”