Inequality Hurts Us All

Editorial

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Published October 25, 2012, issue of November 09, 2012.
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Biblical Judaism knew what to do about income inequality: observe the sh’mitah, the sabbatical year. Every seven years, according to the laws of Leviticus, debts are to be forgiven and all agricultural activities — plowing, planting, pruning and harvesting — are to be suspended. The gap between rich and poor, those who have and those who do not, would not so much disappear as recalibrate, pushing the reset button, as it were. The poor would be released from their debts and the land only maintained, not improved.

And if the trees bore fruit, it could be picked by anyone.

This utopian vision serves a spiritual purpose: to emphasize egalitarian principles and the belief that men and women are stewards, not owners, of the land and what it produces. Even though this idea seems quaint and unworkable in today’s nonstop global economy, it does exert a certain moral power. It seems right that the playing field be equalized every so often, and that the poor get another chance. It appeals to our American sense of fairness.

In this endless election year, when improving the economy remains the highest priority and deepest obsession, the issue of income inequality is raised as a moral argument, if it is discussed at all. Or occasionally it is bandied about in an Occupy context, with one side contending that the concentration of wealth in the hands of a few will lead to social unrest and polarization, and the other side responding with accusations of class warfare.

No wonder it’s more fun to talk about Big Bird and bayonets.

Both the moral and the civic arguments are true and sound, but they are not the only case for addressing income equality. There’s something even more basic: The widening gap between the very rich and everyone else is hampering economic growth and adding to social distress. This is referenced sometimes by Democrats and largely ignored by Republicans, even though a growing body of research argues the point persuasively.

“Some moral philosophers address inequality by invoking principles of justice and fairness,” wrote Robert H. Frank, an economic professor at Cornell University, in a New York Times article. “But because they have been unable to forge broad agreement about what these abstract principles mean in practice, they’ve made little progress. The more pragmatic cost-benefit approach… has proved more fruitful, for it turns out that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries.”

Even the International Monetary Fund has begun sounding the alarm, warning the United States that economic growth accompanied by increasing income inequality is more fragile and unstable, and therefore less likely to be maintained.

How large is the gap? The Congressional Budget Office issued a long-awaited report last year showing that between 1979 and 2007, the incomes of the wealthiest 1% nearly tripled at 275% and the next richest grew by 65%. But middle class incomes grew just under 40% during those decades, and for the bottom fifth of Americans by only 19%. While it is true that the wealthiest suffered during the subsequent Great Recession, history shows that they bounce back quite nicely, thank you. Not so for everyone else.

That’s because the wealthiest 1% get to keep more of their money, paying the smallest proportion of their income in federal taxes than anytime since the end of World War II. This isn’t some political rhetoric. It’s a statement of fact based on a new report by the Congressional Research Service, a nonpartisan government group.

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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