Lessons on Killing the Golden Goose

Wake up, this is important I say!

If you were listening closely on Thursday you might have heard the collective yawn of 300 million Americans as the US Census Bureau released its 2009 report on poverty in America. Meh, so what if 1 in 7 people and 1 in 5 children in the world's richest country are destitute with ever diminishing chances of climbing out of the cesspool of want. 4 million more people than the year before failed to surpass the threshold of despair, there are now more poor people in the US than people in Argentina (look out Tanzania, your next). It kinda reminded me of standing in front of around fifteen 22-year-old Polish university students lecturing about inequality in those same United States. There I was going over chart after chart showing how the distribution of income in the US hasn't been so unequal since the beginning of the last century and trying to get them to come up with ideas about why it was happening and what repercussions it might have. I mean, what was I thinking? Better yet, what we're they thinking? A few possibilities:

"I can't wait to get home and stream last night's Desperate Housewives!"
"Did he just say 'annual stimulus'?"
"I wonder how my tomatoes are growing in Farmville?"

You see, I'd forgotten the golden rule of giving a lecture. Know your audience. These kids are the first generation born and raised from birth completely free of communism. Equality is the last thing they want, all they want is to be living in a country just like America. If they only knew that if we had been in America, most of them wouldn't have the opportunity of sitting in a classroom such as that one. Well, unfortunately what is happening in America isn't happening in isolation and it has repercussions for us all.

Just to be fair, I suppose I should do to my readers as I did to my poor students and put you all through a little inequality 101 primer:

The first decades of the 20th century were a time of crisis for capitalism in America. No one had tried to measure income inequality as measuring income was impossible before the introduction of federal income tax in 1913 but it was clearly a problem. It was the time of the robber barons and Standard Oil. Vanderbilt, Astor, Rockefeller, Carnegie and J.P Morgan showed the world how unrestrained markets led to accumulated wealth, monopolistic behaviour and distorted markets that retarded growth. The ideas of Marx were mixing in a potent cocktail of labour unrest. Something was wrong with capitalism. When in 1915 a statistician at the University of Wisconsin named Willford I. King published The Wealth and Income of the People of the United States he was astounded to find that the top 1% of the population accounted for about 15% of the income. That figure was to climb to a peak of 23.9% in 1928. Coincidentally, the next year saw Black Tuesday as the stock market crashed on October 29th kicking off the Great Depression.

The effects of the depression combined with progressive taxation, the New Deal and World War II to usher in an era of dwindling income disparity, referred to by some economists as the Great Compression. Provided you were a white, Christian male of non-drafting age, this period of time could be viewed by many as the golden age of American life. There was no better time to be a middle-class American and the numbers grew and grew in a virtuous cycle. America had won the war and they were tasked with powering the global economy. Foreign competition was minimal, resources were abundant, each decade added a year to average educational attainment and unions ensured workers earned a salary that allowed them to purchase their employers products. The gap between rich and poor reached it's historic low in the 1970s as the top 1% was taking in about 9% of total income, a little over a third of what it had been 45 years earlier.

Oh, this is the top 0.01%. Not bad!

Then, something happened causing what Paul Krugman has termed the Great Divergence. The trend completely reversed itself and we've seen a growing disparity between rich and poor, rich and richer along with poor and poorer ever since, to the point where the top percentile's income share reached 23.5% in 2008. Notice any similarity between that number and the one eighty years ago, you know, right before the Great Depression? Correlation isn't causation and all that, but do you think the fact that a smaller piece of the pie being available to the majority of the population could have something to do with a slowdown in economic activity? I'm no economist, but...

Ok, so what's my point? Well, that's my point. It's not just my classroom that was bored to tears with these numbers. Imagine Faux 'news' trying to go through these facts with its viewers. Ha! Just mention the word inequality and the next thing you know you'd probably be shouted down for being a socialist-communist-terrorist pedophile with an evil plot to turn the country into a government controlled death camp in preparation for an alien invasion. Or something like that. Americans truly believe that what has made their country great is the independent/innovative/entrepreneurial spirit of its population facilitated by having a small, unobtrusive government. They've been brainwashed into believing that the only economic prescription for tough times is to cut taxes and liberalize the market. Funny they don't seem to remember that it was government policies that created the conditions for growth (and a couple of little World Wars that knocked out the manufacturing capacity of much of the world) seen in the 20th century. Anti-trust legislation, the minimum wage, social security, the 16th and 17th amendments, the Civil Rights Act, the Voting Rights Act, Glass-Steagall. Oops, see, we've gotta be vigilant or the next thing you know these things could be gone.

So, before figuring a way out, or even if we need to, the first question is, what happened? Economists have variously pointed fingers at race, gender, the breakdown of the nuclear family, immigration, technology, Republicans, the demise of organized labour, globalization, federal policy, and the decline of K-12 education. Well, I blame it on the 1970s. No, not disco (well, a little bit), nor the designated hitter rule, the Big Mac or the Bicentennial. Why were the seventies such a turning point? The oil crisis, Vietnam and Nixon closing the gold window to allow for an unchecked expansion of the money supply led to stagflation. At the same time American corporations were just figuring out that the rebellion against conformity of the previous decade wasn't a threat but in fact their greatest opportunity. Value and lifestyle marketing. It was in the corporations interest to encourage people to feel they were unique individuals and then sell them ways to express that individuality. America's (and the developed economies) were rescued by the self-actualizing individuals who became the motor of what became known as the new economy. Consumerism became the path to self-actualization. This was not only observed and practiced in the market for goods and services but politics too. New individualism was leading an attack on fifty years of government interference in people's lives. Well, we know where that led to now. Reagan/Thatcher ushered in an era of deregulation at the same time as the right-wingnut mantra chant became the only correct way to think: Government is not the solution to our problem. Government is the problem. Products and false idols allowed people to express what they felt was their individuality. "The generation that once rebelled against the conformity imposed by consumerism now embraced it because it helped them to be themselves." (Do watch the whole series, this is the 3rd of 4 parts)



Middle America's recent embrace of the Tea Party and their populist slogans really isn't that surprising. Anything that allows the mind to shift the burden of blame away from itself is much easier than looking within, finding the errors of one's ways and correcting them. No matter how much they yell and scream about the 'Obamanation' that they see as the cause of their ills, there's no escaping the fact that it is in fact us who are too blame. We allowed the mass marketing gurus to convince us that the road to happiness could be found in the modern day houses of prayer, the strip malls, that sprung up all around them and powered the new economy for 30 years. As the economy grew however, our wages didn't keep pace, the median male worker earns less today than he did in 1980, so we adapted in order to be able to continue to sate our unlimited desire to buy new things. How? Women continued to stream into the workforce making the two-income family the norm. In 1966 only 24% of mothers with young children worked outside the home; by the late nineties that figure had reached 60%. When this wasn't enough, we all worked longer hours, and not just in America - by the middle of the oh-ohs (2000s) the average male worker was working 100 more hours a year than two decades previously (almost 2 more hours a week! - the typical female was working 200 more hours!). Is it any wonder that no one was able to notice what was happening around us? With less and less time people came to rely more and more on opinion instead of news. Why bother to read and learn about a subject when it's much easier and quicker to simply digest what your told to believe as quickly as possible while scanning your iPad/Phone/Blackberry for news and updates on Facebook. Oh internet, you had so much promise! The worse was yet to come for Jack and Jill Average though as they found they still couldn't keep up with the Jones' next door (or at least what all those Lifestyle's of the Rich and Famous types the boob tube kept telling them were so much better than they were). When Jack and Jill found they had charged up their Visa cards over the limit, they discovered they could use their homes as credit cards. Oh, the joy they had in going up the hill, as housing prices always went up, right? So nothing could ever go wrong, could it? From 2002 to 2007, American households extracted $2.3 trillion from their homes leading to a tumble that has broken more than our crown.

Meanwhile their corporate masters took a growing slice of a stagnant pie (untasty!). They allowed the post-Reagan acolytes to dismantle their only defense against this onslaught, the unions, first smashing the air-traffic controllers union in a display of might and power, then slowly removing market stability legislation that had been in place since the New Deal. Today, organized labour is down to about 7% of the private workforce. While the workers were losing their voice, the plutocrats were just finding theirs. With all the hoopla surrounding bankers' pay last year it was somehow missed that this isn't an anomaly but a trend. In 1970 US CEOs were paid 28 times more than the average worker; by the oh-ohs this figure was hovering around 500 to 1, peaking at 548. Do you think their jobs got twenty times more difficult, twenty times more stressful, twenty times more demanding or they did a twenty times better job? Ha! Cough! Yike! The fact is the Friedmans of finance, those gurus of GDP, gods of globalization, have used every crisis over the past few decades to tighten the screws a little bit tighter on Joe Sixpack (yes, Jack and Jill's neighbour whose home is also under water), reducing benefits, outsourcing labour and increasing the profit margin. The rise of lobbyists and PACs has meant that those with the most money have the loudest voice in forming public policy, ensuring that every piece of legislation, from health care to financial reform, will have one intended winner, not the people but the Masters of the Universe. The Citizen United Supreme Court ruling making corporations people will only serve to make a bad situation worse as money becomes not only speech but also the only words those in power will bother to listen to. There's a reason politicians are vastly more responsive to the views of affluent constituents than those of modest means, they know who butters their bread. As Larry Bartels notes in his study on income inequality and political representation, what we are seeing is a "debilitating feedback cycle linking the economic and political realms: increasing economic inequality may produce increasing inequality in political responsiveness, which in turn produces public policies increasingly detrimental to the interests of poor citizens, which in turn produces even greater economic inequality, and so on".

Money poured into "think tanks" and "research centres" in an effort to mold a new and unchallenged economic model. Industrial dynasties have spent not insignificant parts of their fortunes on the conservative agenda. In the1980s , the Olin family, which owns a chemicals-and-manufacturing conglomerate, became known for funding right-leaning thinking in academia, particularly in law schools. And during the nineties Richard Mellon Scaife, a descendant of Andrew Mellon, spent millions attempting to discredit President Bill Clinton. But the real wizards behind the curtain are the Kochs. Only the brothers know precisely how much they have spent on politics. Public tax records show that between 1998 and 2008 the Charles G. Koch Charitable Foundation spent more than 48 million dollars. The Claude R. Lambe Charitable Foundation, which is controlled by Charles Koch and his wife, spent more than 28 million. The David H. Koch Charitable Foundation spent more than a 120 million. Meanwhile, since 1998 Koch Industries has spent more than fifty million dollars on lobbying. Separately, the company’s political-action committee, Koch has donated some eight million dollars to political campaigns, more than eighty per cent of it to Republicans. So far in 2010, Koch Industries leads all other energy companies in political contributions, as it has since 2006. In addition, during the past dozen years the Kochs and other family members have personally spent more than two million dollars on political contributions. In the second quarter of 2010, David Koch was the biggest individual contributor to the Republican Governors Association, with a million-dollar donation. Other gifts by the Kochs may be untraceable; federal tax law permits anonymous personal donations to politically active nonprofit groups.

Have you heard of the Cato Institute? Heritage Foundation? The Hudson Institute? The Independent Women’s Forum (seriously!)? The Mercatus Center (yeah, part of George Mason Univerity, publicly funded but fighting to end public funding)? Citizens For a Sound Economy? Citizens For the Environment (with no citizen membership)? Economic Education Trust or Triad Management? Remember the climategate kerfuffle over the leaked emails from the University of East Anglia. Wonder why formaldehyde isn't listed as a "known carcinogen to humans" substance by the EPA? Confused as to why “voters believe there is no consensus about global warming within the scientific community”? All are Koch created or funded, their main purpose helping ensure the maintenance of the status quo, the one that enriches them while raping the planet. Their activities and goals dovetail menacingly with the secret 1971 memo that then Virginia attorney Lewis Powell wrote two months before being nominated to the Supreme Court. The antiwar movement had turned its anger on defense contractors such as Dow Chemical and Ralph Nader was leading a public-interest crusade against corporations. Powell, writing a report for the U.S. Chamber of Commerce, urged American companies to fight back. The greatest threat to free enterprise, he warned, was not Communism or the New Left but, rather, “respectable elements of society" - intellectuals, journalists, and scientists. To defeat them, he wrote, business leaders needed to wage a long-term, unified campaign to change public opinion.

Convincing people to oppose action to save the world!

Um, did I mention so what? Why should we care that equality is not only increasing, but set to get worse even faster. Simple. Inequality is/was the major cause of the Great Recession. No, I'm not only pointing to the fact that income inequality was at similar levels just prior to the Great Depression and it's less powerfully named sibling, the Great Recession. After all, then I'd have commentators screaming that correlation is not causality. There's too much else going on here. Bank failures tend to coincide (notice the influence of financial deregulation) with times of growing income inequality. The growth of household debt has followed a pattern strikingly similar to the growth in income inequality. Finally, inequality has a substantial negative impact on overall consumption by creating a drag on effective demand. This is intuitive as well as scientific as it is obvious that the rich spend a lower percentage of their income than the rest of us thus robbing the economy of the demand it needs to keep growing and creating jobs. Worse yet, the rich don't necessarily spend their earnings and savings on and in their own country, being far more likely to spend it where they will get the highest returns, whether in a tax haven such as the Caymans or a holiday on the French Riviera. Remember that top 1% of earners? Well from 1980 to 2005 they took in more than 80% of the total increase in Americans' income. 80%! Leaving 20% to add to the spending power of the rest of us. Is there any wonder WalMart is so big?

You like graphs? We've got 'em!

A rising tide lifts all boats? What was once true is simply no longer the case. If you're born in rags, you're more likely to die in those same rags than those born in previous generations. Let's take a look at the most obviously method of perpetuating a plutocratic society. Estate taxes had been used for much of the century to help distribute wealth from top to bottom. There's no question that it should be everyone's right to pass on what they have created in their lifetime to their children. The question is how much is enough while trying to encourage a society in which members can move up and down the social ladder based on their knowledge, contribution and a little bit of luck. Once upon a time, this movement, let's call it social mobility, was fluid in the United States. Over the past 30 years however (why does that number keep coming up?) we have seen a dramatic calcification of this process. No matter, if you have a lot of money, you're happy with the new reality and therefore want your children to carry the mantle, after all meritocracy is so overrated. We need to eliminate the estate tax. Enter the right-wingnut spin doctor. Abracadabra, alakazam, poof - the estate tax becomes a 'death tax'. Fun with words! "No one likes a death tax! Let's get rid of it". And it was so, a one year moratorium that Republicans now want to make permanent, give to the rich and pass the costs on to the rest. Never mind that the estate tax was the most progressive and meritocratic tax in the country with the first $3.5 million being tax free impacting only the richest 0.3% of estates. We can always continue to misquote Alexis de Toqueville: "America is the best country in the world to be poor". That way we can delude ourselves into believing that Horatio Alger still exists. Sorry folks, "It’s called the American Dream because you have to be asleep to believe it."

Finally, income inequality is one of the worst diseases a society can have. People in more equal societies simply live longer, healthier, and happier lives than people in more unequal societies. And not just poor people in these societies - all people. In a project intended to solve the reason why health within a population gets progressively worse the further one moves down the social scale, Richard Wilkinson and Kate Pickett accidentally made a discovery big enough to change political thinking. It is no wonder rightwingnuts have been so vehement in their condemnation and more fantastical than usual in their attempts to discredit Wilkinson and Pickett's The Spirit Level: Why Greater Equality Makes Societies Stronger. What they found was that in states and countries where there is a big gap between the incomes of rich and poor, mental illness, drug and alcohol abuse, obesity and teenage pregnancy are more common, the homicide rate is higher, life expectancy is shorter, and children's educational performance and literacy scores are worse. Unsurprisingly, the Scandinavian countries and Japan consistently come at the positive end of this spectrum having the smallest differences between higher and lower incomes and the resultant best record of psycho-social health. Those nations with the widest gulf between rich and poor come out worse and have the most health and social problems - Portugal, Great Britain and of course the United States of America. Oh, it's not only the poor who suffer from the negative effects, everyone does. For example, rates of mental illness are five times higher across the whole population in the most unequal societies.

Instead of facing reality and looking in the mirror, the rich will attempt to keep the the status quo while trying to maintain the belief of the plebs in the false gods of market liberalization and tax cuts by stoking the populist anger at the heart of groups such as the Tea Party. Their success has been breathtaking, twisting the truth to suit their purposes. From climate change to death panels and tax policy, misinformation has been the key to their success in controlling the media's agenda. Take the economic stimulus package, instead of acknowledging its limited success, limited by the fact it was too small, the right-wingnuts have managed to turn it into a dirty word. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted GDP by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that GDP. would have been almost half a trillion dollars lower. Yet polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they’re opposed to a new stimulus plan. The hostility has numerous sources. Many voters conflate the stimulus bill with the highly unpopular bailouts of the banking sector and the auto industry; Republicans have done a good job of encouraging such misconceptions, as when Representative Mike Pence, of Indiana, referred to the “bailout stimulus.”

Oops!

No, it is much easier to attack and criticize than reflect and offer solutions. The battle over the upcoming expiry of the Bush tax cuts will be instructive as to the direction America chooses to go. Does it want to continue to perpetuate a broken system, one in which California has built only one new college since 1984, but 21 new prisons, or will she decide to heal herself by implementing policies to guide us back to sanity. Things don't look good with money not only pouring in from special interest groups but ever more staggering amounts are also being spent by candidates themselves. At times I find myself wanting to see the Tea Party lead the Republicans to victory in the mid-term elections and ride the wave of misinformation through 2012 to usher in the era of Palin just to see how bad it gets but I know we'd all be swept away by the ensuing tsunami. Instead of letting ourselves be tricked into chasing bogeymen who are figments of our imagination we need to go about fixing the problems that we're faced with. The economic progress made over the past couple of centuries since the days of Adam Smith are undeniable, truly a goose laying golden eggs. Greed leads us to want to slice it open and grab all the gold today. A tool is only as good as its user, and capitalism, no matter how superior an economic system, is just that, a tool. We have to remember the users here are little different than monkeys and we all know what happens when monkeys are given tools.