The Rich Get Richer and the Poor Get Poorer
In the meantime, in between time,
Ain’t we got fun?

Preface:   The following distills information shared with the Book Group in February about the accumulation of wealth in our country.  The perspective is that of a Nobel economist, Joseph Stigletz – but when we think about this, we need to link it to the poisonous political atmosphere in this nation; the growing disillusionment with government and public sector solutions; the rapidity of information flow – accurate and inaccurate; the wildly out of synch costs of education and medical help; and of course the continued disregard for climate change solutions.   Is it any wonder the future looks frightening to so many?

To the Book:  Nobel economist Joseph Stigletz is furious.  And, as we know, rage often masks fear.  Stigletz is scared about our democracy.  He wants to scare us as well.  He does a pretty good job in his book The Price of Inequality. 

Stigletz is pessimistic that equality of opportunity will ever again be possible in this country.  If you read Paul Krugman, or saw the Robert Reich movie, “ Inequality for All”, you are familiar with Stiglitz’ focus:

The income gap in America is widening to a point where it may be permanent.

• Our nation is fast becoming a society of a few haves and mostly have-nots who cannot get ahead.
• Reforms are at the mercy of a political system that is almost entirely funded by the haves – who aggressively support the status quo – and that’s Republicans and Democrats alike.
• He notes that 80% of SuperPac funds came from only 200 individuals. The top 400 income earners in the US pay only 20% of their earnings in taxes; and they want to keep it that way. He condemns Republicans but doesn’t let Democrats off the hook either.  He says that Democrats simply want policies that permit the current state of inequality to persist, albeit with minor governmental tweaks.  Not a ringing endorsement.

We should be scared because inequality of income results in lower productivity, lower efficiency, lower growth and societal instability.  It fundamentally erodes the American value of fair play and equal opportunity – and that erosion undermines the nation’s political discourse.

The facts are self-evident and they are stunning.  Like many economists today, Stigletz is no longer a slave to the math and formulas of traditional economics. The outcomes produced by a combination of traditional economic and market forces, irrational behavior (Animal Spirits), and politics are creating a nation where anyone below the elite earners aren’t even staying even anymore.  They – we – are falling behind faster and faster.

Stigletz asserts that politics has shaped our markets to favor the rich because, in fact, the rich own politics.  He finds hope in the Occupy Wall Street efforts because the movement recognizes the linkage among economics, wealth, and politics.  But, he doesn’t find very much hope there.

We  already live in a dual economy; most of us  just don’t see it yet, but many of the protesters do. Dual economies are destabilizing and this is where he gets really scared.  He cites the disintegration in Egypt as an example of what happens when the economic gulf becomes too big.

Stiglitz frames the problem well and is not very hopeful about the future.  He knows the solutions are political, not economic, but he’s not much of a political strategist in my opinion.  He fears for the American culture, its optimism and its economic productivity.

He is alarmed that in the last 30 years the income gap has become a gulf so wide, it can’t be crossed anymore.

So, what’s so important about the last 30 years?  Start with Ronald Reagan and   deregulation. What Reagan and his supply siders-tapped into was the American belief that if you worked hard, you’d make it.  All folks needed was an unfettered run at self-improvement and access to as much of their own money as possible to finance this run.

But, it’s not just Republicans here; note that deregulation of the airline industry started under President Carter.  Bill Clinton as a centrist continued deregulation, particularly of financial markets, and then under Bush II, deregulation became an ideological imperative for Republicans

This noble American myth didn’t account for consequences of the tax policies that emerged to support the myth.  These tax policies disproportionately reduced what the rich paid toward the common good – in other words, their taxes.  With major reductions to state and federal exchequers, the economy shrank.  The wealthy hung on to more resources, the theory being it would be reinvested in the economy, improving life for everyone. It hasn’t happened.  They’ve held onto the wealth, which they’ve made by under-funding their own tax obligations through all sorts of breaks, and incentives.  Their new wealth is not because of increased production but because they are keeping more of their earnings than they previously did.

That would be fine, except by not tithing at rates comparable to those of the other 99%, they are restricting growth, jobs, education and productivity in the U.S.  And, that restricts opportunity for very nearly everyone.  The middle class is being robbed not only of its money, but its future.  Warren Buffet understands this, but seems alone in his commitment among the elite to make changes.

This is where Stigletz, and economists Robert Reich and Paul Krugman are permanently incredulous.  How come these facts aren’t obvious to everyone? They are appalled at the sell-outs in American politics – on the right, in the middle and on the left.

So, how do we, in brief conversation with non-believers explain what’s really happening in America? While, like Stigletz, many people are morally offended that the wealth accumulation at the top comes out of the pockets of the middle class, moral indignation isn’t always persuasive. It helps to master a few examples about the enormity of the problem Stigletz outlines.  Here are some of my favorites:

1.  The WalMart family fortune amounts to  $69.7 billion. This equals  the total wealth of the bottom 30% of our country.  That’s one family versus 30% of Americans.

2.  In 1962 the top 1% of earners had about 110 times the wealth of the average American. Today, that top 1% owns nearly 225 times the amount of wealth as the average American.  Note how the rich are really getting richer here.

3.  In the last 30 years the bottom 90% of our wage earners saw their wages grow by 15%.  At the same time growth at the top 1% equaled 150% and for the top .01%  the growth  increased by 300%.  Wow, some growth is definitely better than other growth.

4.  15% of Americans now live in poverty.  The percent of those in poverty in the US whose mean income is below the poverty line is 37%. In Mexico it’s 38.5%.   Can it be that the US and Mexican economies are more alike than different in this fundamental respect?

Why aren’t we angrier when the rich get richer and the rest, at best, tread water.  Many are drowning.  The problem in part is something we don’t see.  It’s called “rent seeking” in economic parlance.  Rent seeking is receipt of “public gifts” like an oil depletion allowance, or reduced taxes on capital gains, which produce more money than an individual or company might otherwise have earned through production of products or services.  Rent seeking does not create new sources of wealth or new products.  Instead, it “robs” the money from the common pot where it was originally intended to go.

Rent seeking policies support the status quo which is doing most of us no good at this point.   Hence, the solution is to eliminate rent seeking policies.  That means reinstituting regulation to our markets and eliminating tax breaks and incentives that support so much of American business.   Clearly, Stigletz argues, disasters of deregulation have never been more evident than in recession of 2008.  Real competitive markets don’t produce the excessive profits and bubbles that created the financial disaster of the last six years. Yet, not much has changed since then.

Stigletz offers a bevy of reforms to get us back to reality.   He fails to provide the political strategy to enact them. Given that both major parties rely on contributions from major rent seekers, the prospects for real reform are limited in his opinion.

The reforms he advocates include barring banks from creating securities, curbing excessive bonuses and shutting down off-shore banking.  He recommends revising bankruptcy laws and ending limitations on losses (see the Gulf oil spill and BP).  He urges that social safety nets be reinstituted and that full employment become an economic objective and endorses infrastructure investment.  Finally, he addresses the distortions of globalization and cautions economic planners to address them.

The kind of growth we have matters – and now it needs to focus on jobs and housing which require more money coming back into the economy and used – not held.

After a pessimistic assessment of the chances we have to fix things, he does reference a few positive political indicators.  A recent PEW registered 87% of respondents supporting equality of opportunity.  Yet, most Americans remain ignorant that it has ceased to exist in this country; they are still living the myth.

Tax inequality is rampant; ask Warren Buffet. Unfortunately, many citizens feel their taxes subsidize both the indolent poor and the corporate bandits and so movements like the Tea Party emerge, which don’t advance much at all.  Stigletz notes that only 37% of those unemployed in the recession received unemployment compensation as one of the rebuttals to this myopia.

Is there hope?  If jobs and infrastructure are our priorities, can the Democrats loosen the grip of status quo legislating?  Can campaign finance reform really happen so that Congress can govern instead of run for re-election?

Stigletz tries to put a happy face on it, but his book overwhelmingly says that we’ve nearly run out of time to fix things in this democracy.  It is being overtaken by the wealthy while the 95% ignorantly persist in the belief that they have a chance at the gold ring.  Looks like we’re all too dumb to be scared.