“Too Much Capital In Too Few Hands”: Populist Backlash Will Keep Increasing As Inequality Continues To Rise
Listen to a typical center-left Democrat, and you’ll hear rosy things about the economy. GDP growth is solid, unemployment is low, and even wages are starting to rise. The Clinton campaign and the Democratic Party generally will be touting these achievements even as they focus on issues of structural racism and sexism while offering government support in areas like childcare.
But there’s a big problem: overall, inequality is still rising at an astonishing rate to unprecedented levels:
Financial inequality became even wider in the United States last year, with average income for the top 1% of households surging 7.7% to $1.36 million.
Income for the richest sliver rose twice as fast as it did for the remaining 99% of households, according to an updated analysis of tax data by Emmanuel Saez, an economics professor at the University of California, Berkeley.
It’s true that the 99% is doing better than it has since the 1990s, but the gains are relatively modest. Furthermore, basic cost of living has gone way up, particularly in the areas of tuition and housing. Housing in particular is a major problem driven by inequality itself: with accumulation of capital comes the need for places to store it, and real estate is a popular piggybank for wealthy investors. This in turn drives up the cost of housing, making it more difficult to afford housing in the urban areas where most jobs are located.
The bigger problem is that America already tried the 1990s approach to prosperity, assuming that rising inequality isn’t a problem as long as everyone is doing OK. What does it matter if the rich are getting much much richer, if the fortunes of the poor and the middle class are also improving even if at a slower rate?
The answer is that it’s unsustainable in both the short and long term. Over the long term high rates of inequality shrink the middle class and increase political instability. In the short term, too much capital in too few hands leads to speculative bubbles, that in turn lead to big recessions. Recessions tend to wipe out the wealth of the middle class in a much more devastating way than that of the wealthy who have more ways to protect their money. More importantly, the wealthy recover their position much more quickly as asset values balloon back, but the jobs that sustain the middle class and the poor return more slowly–often at permanently lower wage levels when adjusted for inflation.
Automation and globalization are likely to inexorably drive the trend toward rampant inequality, exacerbated by tax policy designed to protect the wealthy and overgrown financial sector. Merely tackling structural racist and sexist inequalities will do good in their own ways for women and minorities, but they will do little to address the overall problem. Targeted government programs to help citizens with childcare and other needs will help somewhat but won’t do much to fix what’s fundamentally wrong.
Only much more aggressive policies that give workers a greater say in how companies are run to “pre-distribute” wealth, as well as much more progressive graduated tax policies that distribute uneven gains more equitably, will ultimately tilt the balance back toward the middle class where it belongs. Until then, expect to see increasingly virulent strains of populist backlash from both the right and the left until something changes. Incrementalism may be all that is possible politically, but it’s not an answer for the problems that beset us and give rise to anxious backlash. As long as inequality rises, Donald Trump, Brexit and ISIS will be just the beginning of the world’s back-to-basics nativist woes.
People don’t just want the 99% to do better. As the 1% continues to outpace everyone else, a great many people in America and the world actively want the 1% to do worse. And it’s hard to blame them for that sentiment.
By: David Atkins, Political Animal Blog, The Washington Monthly, July 4, 2016
“Acting As Political Human Shields”: The Upper Middle Class Needs To Stop Coddling The 1 Percent
The most criticism I’ve ever received as a writer came from articles suggesting that we curtail tax expenditures that mainly benefit the rich, like the mortgage interest deduction or 529 college savings accounts. (Okay, second-most — the top hate mail–getter, by a large margin, was a quite different issue.)
Why? As President Obama himself found last week, the last people you want to piss off are members of the upper middle class, who are set to a hair trigger when it comes to their personal government handouts. As Paul Waldman writes, they may be “the single most dangerous constituency to anger,” because a) unlike the 1 percent, they are relatively numerous; and b) like the 1 percent, they have a lot of disposable income, which politicians love.
On one level, this is an understandable reaction to a threat to personal economic interest. But on another, members of the upper middle class are being played for fools. They are acting as political human shields for the top 1 percent, which claims more of these benefits proportionally speaking and has been raking in essentially all the benefits of economic growth. The upper middle class (let’s define this as the top income quintile, minus the top 1 percent) ought to demand a lot more than it is getting.
To start, let’s get one thing straight. Tax expenditures are indeed government benefits, economically identical to direct government spending. Preferential treatment in the tax code is just another way of jiggering the national economic structure to direct benefits to one group or another.
Not all tax expenditures are equally terrible. According to a CBO analysis, exclusions for health care and pensions are spread relatively equitably across the population, while the Earned Income Tax Credit and Child Tax Credit are major bulwarks against poverty.
However, the big deductions are unfairly skewed. Two-thirds of taxpayers can’t even use the mortgage interest deduction, because you have to itemize your deductions to get it; other countries manage high rates of homeownership without the subsidy. Overall, 1 percenters get 15 percent of the mortgage interest deduction, 30 percent of the state tax deduction, and 38 percent of the charitable contribution deduction.
Preferential tax rates for capital gains and dividends, meanwhile, are even worse. Over two-thirds of the benefits go to 1 percenters. The supposed idea is to incentivize investment and thus economic growth, but there is zero evidence this actually happens. Close analysis of the Bush administration’s cut on dividend taxes finds that it did not change anything except payouts to shareholders. Longer-term studies on capital gains tax rates finds no relationship to investment or broader economic growth. The major effect is a booming industry in legal chicanery allowing people to reclassify regular income as capital gains.
Meanwhile, over the last generation, 1 percenters have been capturing the vast bulk of economic growth, a trend that is only getting worse. Indeed, according to a new analysis at the Economic Policy Institute by Mark Price and Estelle Sommeiller, from 2009 to 2012 1 percenters literally received more than all the income growth. Because the incomes of the 99 percent fell on average, 1 percenters got 105.5 percent of real income growth. Policies that benefit the very top over everyone else are clearly to blame.
Clearly, that’s no good for anyone who isn’t in the 1 percent, including the merely affluent. But with the middle class lacking much punching power, and the poor largely ignored by everyone, the upper middle class really ought to be asking for more than the preservation of their existing government benefits. At the very least, the upper middle class could demand a cut of economic growth.
And if the upper middle class were willing to ally with the bottom and the middle, there’s reason to think it would be able to keep the structure of its current benefits (that is to say, access to college instead of merely some money to pay for it) while cutting everyone in on economic growth. Taxes might go up somewhat, but that would likely be compensated by better wages and universal benefits.
On the other hand, if the upper middle class can manage nothing but a hysterical defense of its own welfare handouts, and the American system keeps brutalizing the bottom half of the income ladder, a genuine mass movement could appear, as it has in the past. Such movements are not likely to be especially concerned with the upper middle class.
By: Ryan Cooper, The Week, February 2, 2015
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