March 2011

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ON the ECONOMICS and POLITICS OF INEQUALITY

by Peter Bearse

 

The brouhaha over Republican Governor Scott Walker’s so-called “campaign to destroy collective bargaining” (and thereby, some claim, unionism itelf) has also been billed as the “opening shot of the 2012 (Presidential) campaign.” These attitudes reflect the usual politics of the moment -- the chronic short-term-it-is of the political class. The real, long-term significance of the Minnesota budget balancing bill, however, is that it is the opening shot of a long-awaited and now, hopefully ongoing, debate on the economics and politics of inequality.

 

This is a time-bomb of an issue, one that has been ticking for years. The urgency of it has been brought home with a vengeance by the now-named, still lingering “Great Recession” (GR). For the failure to see a rate of recovery anywhere near those of the rapid rates following previous recessions has finally driven home what economists and others have observed for many years -- two prime facets of what we used to call “our” economy [as we like to think of “our” politics and “our” government] -- (1) the stagnation of middle-class wages and salaries; and (2) a steadily, increasing inequality of income and wealth. The latter has been so striking -- with over 34% % of wealth now owned by the top 1% of American households -- that it has put one of the most vaunted features of American exceptionalism -- equality of opportunity -- open to question. As the editors of N+1 recently noted: “Class mobility in the US peaked around 1980 and has been on a down-slope ever since.”[1]

 

In the past, those with lower levels of wealth had a significant chance of “getting rich;” now, the odds are much less. This fact has been obscured by news accounts of many big businesses going out of business and many rich folks losing their shirts. Consider, however: From 1972 - 2001, median personal income was stagnant, while the income of the top 10% rose 34%; the top 1%, 87%; the top 0.1%, 181%; and the top 0.01%, 497%.  

“Despite our economy being mired in the deepest recession since the 1930s, people in the top 1% continue to own as much wealth as those in the bottom 90%.”[2]

 

Meanwhile, the news have not overlooked another consequence of the GR -- Immiseration of the Middle Class. This is not only a factor in the growing inequality; it is also due to several factors that further aggravate inequality. Most important are:

 

Ä     Skewness in the growth shares of rising productivity. These have been appropriated, not necessarily earned, by those who occupy the upper reaches of our society in terms of power and money.

Ä     A growing gap between financial and real growth, as revealed by the most recent “bubble” in our economy, the bursting of which led to the destruction of over 40% of the wealth of the middle class.

Ä     Loss of manufacturing jobs to a significantly greater extent than the gradual, long-term negative trends that have affected U.S. manufacturing would dictate.

 

What’s most important to recognize in the above is that these economic factors and consequences are not simply economic; they have been and are influenced significantly by government policies, laws and regulations. For example, the legal foundations of corporate governance influence the distribution of productivity and profits. Financial bubbles were encouraged by Federal Reserve policies and lack of governmental oversight. Loss of manufacturing jobs was aggravated by government policy, starting with a pro-financial sector federal government policy declaration of 1980 and federal failure to confront the rising threat of worldwide competition from Chinese manufacturing.

 

Another basic fact has also surfaced for all to see: The increasingly incestuous relationship between big business and big government [BB/BG] -- more generally, the increasing connection(s) between politics and economics. Not the only, but the primary, factor at work here is the growing dependence of big government upon big money through campaign contributions and well-financed lobbyists. Campaign finance reform (CFR) has failed. It never affected lobbying, anyway,  As a result, Congressional legislators have had to spend increasing amounts of time “dialing for dollars” to raise a minimum of $10,000 a week for their reelection campaigns.

 

The BB/BG connection, in turn, also surfaced for all to see as the federal government used “TARP” and “Stimulus” funds to bail out the big boys. They then proceeded [how un-gratefully!] to employ cheap federal money to trade in the financial markets and provide big bonuses to already overpaid financial executives rather than lend money to entrepreneurs and productive enterprises. Federal government interventions also served to increase consolidation in the banking sector. This further increased the market power of the “big boys.” Altogether, however, these developments gave rise to the Tea Party movement -- a new, trend-breaking and potentially countervailing source of power. In the past, the rise of big money had been one of the factors discouraging people’s participation in politics. Not so this time.

 

“Potentially” and “countervailing” are words to reflect upon if the great American Middle Class is to be restored and  the un-American rise in inequality arrested. As jazz pianist Les McCann sang in 1978, “Let’s make It real…compared to what?.” We can’t do so if we can’t recognize reality. Two major weaknesses in the Tea Party approach to change are tendencies to exalt the “market” and denigrate government. Both fail to see what’s real in both worlds and how they interconnect. The Tea Party does right to fight the power of a bloated central government. But what about the rising power of huge financial and multi-national firms in the marketplace? And how is such power to be countered, if not by selective, judicious applications of the lawful power of democratically elected governments? Where do the allegiances of huge, multinational corporations lie when more than 50% of their revenues come from outside the U.S.?

 

The full extent of both diagnosis and prescription to restore equal opportunity and the middle class are beyond the scope of this brief piece. Some types of initiatives to consider, though, include:

 

v     Entrepreneurship: There needs to be a much greater promotion, education, training and other support for “Be Your Own Boss.” Most of the 8 million jobs lost during the Great Recession will never be replaced unless a significant portion of the long-term unemployed are encouraged and enabled to create their own job(s).

 

v     Tax reform: Redefine the basic terms in our economy’s tax code -- consumption, savings, investment (&c) -- and define a new one: “hoarding.”[3] Substitute a consumption tax for the income tax and discourage hoarding. Tax capital gains at high rates that arise from either short term or unproductive investments. Give favorable tax treatment to productive, long-term (greater than 5 years) investments and to investment in new or early-stage (less than 5 years’ old) enterprises. If a consumption tax system cannot be devised to avoid regressivity, a supplemental progressive tax on those with high incomes may have to be considered.

 

v     Investment: Change law and regulation to -- (a) Encourage community banking; (b) Break up the large, “too big to fail” banks into smaller units; (c) Enable community investment in new or local enterprises; and (d) Encourage investment in new or early-stage businesses (as above, and perhaps other ways as well).

 

v     Manufacturing: Levy or increase tariffs on foreign imports to the extent their producers are subsidized by state policies. Cut incentives for firms to move plants overseas. Provide incentives to encourage firms’ investment in U.S. manufacturing and discourage investment abroad. 

 

v     Campaign finance: Reform the “reform” so as to value contributions of people’s time much more than donations of big money. See Bearse, Peter (2004), WE THE PEOPLE: A Conservative Populism, for more.[4] 

 

As the latter suggests and the Tea Party movement has demonstrated, the only real hope to turn our country around lies with “We the People.” To the extent that people continue to wake up and recognize that they have to “get involved” to “take our country back,” there’s a real chance that we can do so. Otherwise, all bets are off and fulfillment of the American Dream will be in danger.

 

            PETER BEARSE, Ph.D., International Consulting Economist and 2010 Republican Candidate for Congress in NH CD 1. Feedback and critical remarks would be welcomed to pjbearse@gmail.com.



[1] In an article “Revolt of the Elites”, 12 January, 2011. Also see Chistopher Lasch’s 1994 book of the same name.

[2] Quoted from www.faireconomy.org. Also see: www.faculty.fairfield.edu/faculty/hodgson/courses/so11/stratification/income&wealth.htm for tables and graphs of relevant statistics. 

[3] These suggestions owe to my colleague, Carmine Gorga, Ph.D., by way of recent conversations and reading his 2010  paper “On the Development of a Concordian Economics.” Gorga can be contacted via cgorga@jhu.edu.  

[4] Since the publisher, Alpha Publishers, Inc., has since gone out of business, copies can be obtained directly from the author for $10 each plus $5 for shipping and handling from P.O. Box 70 Danville, NH 02819.