Inequality Hurts Us All

Editorial

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Published October 25, 2012, issue of November 09, 2012.
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The marginal tax rate was typically 90% in the late 1940s and 1950s; now it is 35% (with a certain presidential candidate paying at less than half that rate.) The top capital gains tax rate dropped from 25% in the 1950s to 15% today. Meantime, the difference between compensation for top CEOs and average workers has ballooned. According to the left-of-center Economic Policy Institute, the ratio was about 20% in 1965. In 2011, it was 231%.

But this rising tide of luxury yachts does not lift all boats. This is the significant new thinking among some economists who have found that inequality correlates with shorter periods of economic expansion and thus less growth over time. In developing countries, this is connected to political unrest, which makes economic investment unappealing, something we hope doesn’t happen here. In the U.S., as Annie Lowrey noted recently in The New York Times, the “recession seems to have cemented the country’s income and wealth inequality, not reversed it.”

The CRS report, for instance, found no correlation between tax cuts and economic growth after examining decades of data. None. Reducing those top tax rates doesn’t necessarily spur saving, investment or productivity. But reducing tax rates is associated with concentration of wealth at the top.

Robert Frank cited his own research that found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress. Even after controlling for other factors, he contended, these counties had the largest increases in bankruptcy filings, in divorce rates and in commuting times, because cheaper housing tends to be farther away from many workplaces.

Meantime, voters are less willing to support basic public services like infrastructure improvements and the education needed to break into the new economy, which in turns stifles growth.

This is where the economic consequences of inequality meet their political enablers. In dominating the public discourse through unbridled campaign spending, the very rich can shape public policy in ways that benefit them and only pretend to benefit the vast majority of Americans.

One other point: Lest anyone on the campaign trail shrug off income inequality as an inevitable byproduct of what makes America great, consider the results of a fascinating study by two economists released in September and discussed by Jordan Weissmann of The Atlantic, who wrote: “American income inequality may be more severe today than it was way back in 1774 — even if you factor in slavery.”

The study argues that on the eve of the Revolutionary War, income was distributed more evenly in the 13 colonies than in any other place in the known world. Surely it is no coincidence that this was also the birthplace of our special kind of democracy.

The growing crisis of income inequality in America should offend our moral consciences. It should cause us to worry about the effects on the civic fabric, when both economic and political power is increasingly concentrated among a few.

But if those earnest warnings aren’t persuasive, if lofty calls to justice and fairness can be dismissed, then consider the economic argument. If we truly want to grow our economy and minimize financial distress, then we must attack income inequality as the menace it is. That doesn’t require the idealism of sh’mitah, just an unbiased acknowledgement that what is good for the many is good for the whole.


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