Economic Inequality Is Expensive… And Destructive

Lately you've been hearing a few political leaders, particularly Elizabeth Warren, Jeff Merkley, Brian Schatz and Bernie Sanders in the Senate and some of the Progressive Caucus members in the House, talking about steeply rising income inequality. They're talking about the kind of inequality that's part of vicious cycle that inevitably leads to oligarchy, plutocracy or outright fascism, in which a few families, through an accumulation of wealth and power, can dictate the laws and even the societal norms and control the mechanisms of enforcement to such an extent that they can virtually enslave an entire passive population.

It can't happen here? The manifestations are already undeniable. The greed and rapacity of the .01% has become so overbearing and their refusal to pay their fair share of taxes so debilitating that a UNICEF report I ran across this morning, a report that would have scandalized an empowered middle class anytime between the time Harry Truman was president until the beginning of the new normal under Ronald Reagan. The report goes a lot deeper than the shocking chart at top of the page which ranks 29 developed countries according to the overall well-being of their children. The 5 countries ranked at the very bottom include 4 of the poorest-- Latvia, Lithuania, Romania and Greece-- plus the U.S., which is both one of the richest and one with the least economic equality. Those 5 countries, along with Italy, Portugal and Spain, have child poverty rates higher than 15%. The only countries that have allowed the child poverty gap to widen to more than 30%. are Bulgaria, Ireland, Italy, Japan, Lithuania, Romania, Slovakia, Spain and, of course, the United States.

Some of the manifestations of America's rush to the bottom:

• The only developed countries with infant mortality rates higher than 6 per 1,000 births are Latvia, Romania, Slovakia and the United States.

• Only in Greece, Hungary, Portugal and the United States does the low birthweight rate exceed 8%.

• Only Canada, Greece and the United States have childhood obesity levels higher than 20%. The United States had the highest proportion of children overweight at both the beginning and end of the decade, reaching almost 30% by 2009/2010.

• Romania, the UK and the United States have the highest rates of teenage births (above 29 per 1,000).

• Estonia, Latvia, Lithuania and the United States are the only countries in which the homicide rate rises above 4 per 100,000. Almost all other countries fall into the range of 0 to 2.5 per 100,000.

The video above is Goldman Sachs CEO Lloyd Blankfein on CBS' This Morning on Thursday. At the 4.30 mark he was asked what he thinks about income inequality. Keep in mind he has done more than almost anyone else in the country to accelerate economic inequality, paying his bankers an average of close to $400,000 annually-- and taking annual compensation for himself of tens of millions of dollars. After a couple of seconds of stutters and stammers he said "Income inequality is a very destabilizing thing in the country. In other words, it's responsible for the divisions in the country. The divisions could get wider. If you can't legislate, you can't deal with problems. If you can't deal with problems you can't drive growth and you can't drive the success of the country. It's a very big issue and something that has to be dealt with. One of the ways of dealing with it is to make the pie grow and people are better at making the pie grow but I have to say too much of the GDP over the last generation has gone to too few of the people… If you grow the pie but too few people enjoy the benefits of it in the fruit, then you'll have an unstable society."

About 2 weeks earlier CBS' Money Watch sat down to interview economist Thomas Piketty about the implications of his new book, Capital in the Twenty-First Century. They began, "Piketty's thesis: that the rate of return on capital, such as real estate, dividends and other financial assets, is racing away from the rate of growth required to maintain a healthy economy. If that trend continues for an extended period of time-- if wealth becomes ever more concentrated in the hands of a few-- then inequality is likely to get worse… [I]nequality is evident in what are by now a host of familiar symptoms. Stagnant pay, except among the super-rich. Soaring health care and education costs. The diminished expectations commonly found in young, especially those lacking college degrees, and old alike, as retirement becomes something to endure rather than to enjoy. And at the bottom of the income distribution, a road to nowhere as the avenues of upward mobility that once led to the American Dream are closed off. In the U.S., the gap between rich and poor has today reached 'spectacular' heights, Piketty says in an interview, rising to levels not seen in a hundred years. And America, a self-described classless society, has been revealed as far more socioeconomically stratified than 'old Europe,' notwithstanding its ancient history of inherited wealth."

Piketty: "The U.S. is the country that invented progressive taxation of income and of inherited wealth in the 1910s and '20s. And largely these fiscal institutions were invented in America because the U.S. didn't want to become as unequal as the patrimonial societies of 19th century Europe. There was this strong feeling of American identity, of a country where everyone gets a chance, and you don't want to perpetuate extreme wealth concentration across generations. You want people to be able to become rich, of course. But you also don't want the wealth to perpetuate itself over time and across generations without [constraint]. This is why progressive taxation was first invented in the United States… The share of total primary income going to the top 10 percent was about 30-35 percent of total income until the 1970s. That started to increase a lot in the 1980s and is now around 50 percent."

MW: But are you suggesting that there is something inherent in capitalism that fosters inequality?

TP: It's really a matter of the choices that are available to us as a society. Capitalism and market forces are very powerful in producing wealth and innovation. But we need to ensure that these forces act in the common interest. We want capitalism and market forces to be the slave of democracy rather than the opposite.

Market forces and capitalism by themselves aren't sufficient to ensure the common good and to limit the concentration of wealth at levels that are compatible with democratic ideals. We need to make sure that we use these forces in a way that's consistent with our common interests and, in particular, the interests of disadvantaged groups. Ultimately, that's a matter of political choices and political institutions.

MW: Speaking of the choices we make as a nation, you write that a progressive tax on capital-- property, stock holdings and corporate profits, for instance-- is a better way of reducing inequality than a progressive tax on income. How so?

TP: In the past, there have been many debates between people who want only a wealth tax and no income tax and some people who want only an income tax and no wealth tax. And in fact, this debate goes beyond left and right. You have some people on the right who hate income taxes and who just have a tax on the stock of wealth, and some people on the left who feel the same. It's been a very hot debate forever. What I try to emphasize in the book is a more balanced view in the sense that both a tax on the income flow and a tax on the wealth stock have merit. We need both.

In particular, a progressive income tax is a better way to try to control the rise of managerial compensation at the very, very top. That's useful particularly in the U.S.

Now, in the future, taxation of wealth is going to become more and more important because wealth is likely to become more and more important. So the quantity of wealth that you accumulate relative to one year of national income or one year of GDP tends to rise in countries with a slowing growth rate or slowing population growth.

In the U.S., population growth has been a key driver of the overall growth of the country. Population in the U.S. used to be 3 million at the time of independence, and it's now 300 million. Is the rate of population growth going to be the same in the future-- is America's population going to be 900 million a century from now? Nobody knows. It could be that the rate of growth will continue. But if it slows down, this will have important implications for the relative importance of wealth and annual income.

I can't make predictions about the immigration patterns in the U.S., but it is likely that at some point population growth will slow down, as it did in Europe and Japan. Immigration can counter this for a long time. But if it happens that you have this growth slowdown, then the quantity of wealth accumulated in the past relative to one year of national income or GDP will tend to rise.

The other reason it's important is because our system of property taxation both in the U.S. and in Europe comes directly from the early 19th century. Property taxes in the U.S. aren't progressive-- it's proportional. Also, it doesn't take into account financial assets or liabilities. It's only based on the value of your real estate. This is because in the early 19th century, most wealth was based on real estate and land. Few people had financial assets and liabilities.

But this isn't appropriate for the the 21st century. For instance, you now have people whose home value is below their mortgage, which means they have a negative net wealth. Yet they keep paying the same property tax as people with no mortgage and those who have a very high net wealth. So this system isn't working well.

MW: You also endorse the idea of a global tax on capital as a way of reducing inequality, while at the same time conceding that such a remedy is "no doubt a Utopian ideal." Isn't it unrealistic to think that countries around the world will use tax policy specifically to combat inequality?

TP: If we're talking about a global tax administered by a global government, then it's not realistic. But there's a lot that can be done at the national level. Particularly in the U.S., you can have a more progressive income tax and a more progressive wealth tax. It's not like everybody is going to go to Mexico or Canada.

The U.S. is sufficiently large that you can go a long way toward the kind of progressive wealth tax that I describe in the book without any problem. The U.S. represents one-quarter of world GDP, so there's a lot you can do when you're that big. The U.S. doesn't have to ask permission of the United Nations or the European Union to change it's tax system.

The reason it's difficult to change the U.S. tax system lies elsewhere. The problem isn't international competition or whatever. It has more to do with the U.S. political system. In particular, property taxes are local, not federal, so that makes it difficult. But this is more a problem of internal political organization.

In fact, it was exactly the same problem with the income tax a century ago, which is that the U.S. Constitution made it impossible for the federal government to have an income tax. Then the Constitution was changed and the income tax was adopted. So the history of income, wealth and taxation is full of surprises. I am reasonably optimistic about the future. Democratic institutions can respond to threats, as they have in the past.

…MW: Beyond a global capital tax, what policies do you favor for reducing inequality in the U.S.?

TP: Better access to education-- that's really the key. In the book, I talk about access to top U.S. universities, and I give some numbers on the average income of the parents of Harvard undergraduates. Right now, this corresponds with the average income of the top 1 percent of the U.S. distribution.

This is quite extreme when you think about it. It's really hard to believe that, just on the basis of merit, it should be this way.

Of course, no country has found the ideal system when it comes to combining efficiency and equal opportunity in its education and university system. Speaking as a Frenchman and a European, I'm certainly not pretending that the university system in France is working well, because in fact it's not efficient and not fair. I'm not trying to say it's easy to solve the problem. The point is that it's a major challenge for every country to have better access and more equal access to skills and higher education.

More transparency also would be useful. One problem with the admission system in a number of universities is that there's no transparency-- we don't know the role that merit exams play, versus parental [influence]-- it's pretty opaque.

…MW: What role do you see for government in reducing inequality in the U.S.?

TP: The most obvious ways government can help by is by providing better access to education, more progressive taxation of income and wealth, and a higher minimum wage… For a long time, America defined itself as a counter-model to the sort of patrimonial societies associated with "old Europe." And it's a bit paradoxical that the U.S. is now reaching the kind of inequality that we saw in pre-World War I Europe. The structure of that inequality is different-- today's inequality in the U.S. relies more on very high managerial compensation and less on high levels of inherited wealth. But it could be that in the future you're going to combine both.

And, as if on cue, this weekend saw the floating of rumors, again, that Mister 47% could be a viable presidential candidate for the Party of Greed and Selfishness. Both Joe Scarborough and Brian Schweitzer have said so out loud; many other conservatives will only say it when there are no microphones around.