May 24, 2011

Bridging the gap

The U.S. government should take dramatic steps to reduce income inequality

There was a time before our generation when the so-called "American Dream" was more real than myth. Great economic opportunities had opened up and the middle class was expanding. From 1949 to 1979, median household income increased at a rate of 2.4 percent each year, essentially matching the 2.5 percent annual growth rate in GDP. America’s economy was booming, and the middle class was getting a proportional share of that growth. Since 1979, the annual growth rate of median income has been 0.4 percent, but the economy has been growing at an average rate of 2 percent. The size of the pie has expanded, yet the middle class’ share has shrunk comparatively. Meanwhile, income inequality has skyrocketed to alarming heights. The country’s Gini Index, has grown 18.1 percent since 1967, reflecting a substantially less equal society. This lopsided distribution puts the U.S. in the less-than-esteemed company of Russia and Iran, in terms of income equality.

Knowing this, you should have predicted that the beneficiaries of this stratified American life are concentrated at the top of the economic ladder. The top one percent of households take in about a quarter of overall income today, compared to only 9 percent in 1979. In the early 1970s, the average chief executive was paid 23 times the median income. Today, that multiple is well over 300.

"Who cares?" you ask. Maybe we should applaud the rich for their savvy business decisions and stand outside in eager anticipation for the proverbial rising tide to lift our boats. However, this mindset is dangerously misguided. Increased inequality is the flipside of another malady: Social immobility. A recent OECD report ranked the U.S. 10th in terms of intergenerational earnings mobility. Not only are American middle- class wages stagnating while the elite rake in more and more cash, but the statistical chances of social advancement for middle-class Americans are among the lowest in the industrialized world.

Reduced opportunity for middle and lower classes means that we operate in something less than a meritocracy. Talented Americans are not choosing careers that innovate, preferring instead lucrative compensation and bonuses. On campus we see firsthand how some of our most talented peers shun careers in research and development or entrepreneurship, preferring to seek work in the financial sector.

Everyone understandably wants to protect his or her money. Of course, not everyone has the sums of greenbacks necessary to game the economic system in order to ensure that protection. The past few decades have seen tax cuts for the rich and an emasculated business and financial regulation system that turns a blind eye to questionable practices and possible monopolies. This has been brought about by none other than those who stand to benefit from it. We are in the midst of a dangerous feedback cycle: Wealth buys power and power buys more wealth in return.

Even though it’s difficult to quantify a “good” level of income inequality, it’s clear that in many important ways, America’s elite have rigged political and tax institutions to reflect their own interests at the expense of the middle class. Rather than equality for equality’s sake, the goal should be to increase economic mobility. When the playing field is closer to being even, inequality will decline on its own. A return to higher levels of progressive taxation should be one part of a greater effort to increase mobility and ensure the health of the middle class. The estate tax affects a small number of very wealthy people who can afford to give up a portion of that wealth without selling core assets. Much as being born into poverty constitutes likelihood to be stuck in poverty, being born into vast wealth constitutes likelihood to remain in the upper class. Both situations are unfair because they systematically disregard merit in a capitalist economy. By giving the estate tax a larger bite, we could create a society that rewards actual innovation and hard work, rather than one that rewards the offspring of innovative or hard working people.

Additionally, popular conceptions of the progressive income tax need to be revisited. It turns out that the U.S. sustained a vital economy even when the top income bracket was taxed at a much higher rate. Before the sharp tax cuts of the 1980s, socioeconomic mobility was higher and wealth disparity was lower. After the tax cuts, the earning power for the wealthiest 1 percent skyrocketed, while real earning power for the median income slowed to a crawl and actually flat-lined during the 2000s.

A highly progressive tax rate of 50 or 60 percent would leave a not insubstantial amount for these wealthy Americans to use as they please, while mitigating the tendency toward obscene disparity and providing resources for funding projects that will increase socioeconomic mobility, specifically, education, basic research, and restored infrastructure.

In 594 BCE Athens, Plutarch wrote that “the disparity of fortune between the rich and the poor had reached its height, so that the city seemed to be in a dangerous condition.” The poor, who had endured the corrupt courts and unjust laws of a government ruled by their masters, began to whisper of revolt. The election of the eponymous archon Solon proved to be wise. Solon enacted laws that mitigated the suffering of the poor without completely enraging the rich. In part by establishing a graduated income tax, Solon diffused tension enough that Athens averted revolution.

The United States followed this moderate path during several eras, outlawing monopolies and trusts, setting minimal standards of worker compensation and safety regulation, and empowering unions. Today’s politicians face yet another historical period marked by the accumulation of wealth by the few. They can bend to the special interests of the super wealthy, but their response does not have to be uncompromising protection of the elites’ interests. Instead, they can acknowledge the corrosive effects of an economic aristocracy and learn from moderate reformers of history like Solon in order to take decisive steps to reinstate the economic mobility that will bring the middle class one important step closer to resuscitation.

Richard Martinez is a third-year in the College majoring in political science and geographical studies.