By Eduardo Porter, The New York Times, May 5, 2015
The United States economy is one of the most effective on earth in terms of generating new wealth. But for all the wealth it generates, it does an exceptionally dismal job at sharing it broadly among Americans.
Is this the best we can do?
Over the last four decades the debate in Washington about poverty and inequality has been bogged down in a somewhat pointless, often surreal debate about the size of government and the amount spent on behalf of the poor.
Over that same period, the earnings of workers in the bottom half of the income pile have progressed little. American society has buckled under the strain.
The actual size of government? Measured by the taxes we pay, it was about 25 percent of our gross national product in 1970. It is still about 25 percent of our G.D.P. today. And the share of our wealth spent on the poor, apart from money devoted to the rising cost of health care, has not changed very much, either.
And yet there are other tools. In the furious partisan bickering, the debate has bypassed all the other ways the government affects the distribution of the nation’s prosperity, selectively placing its thumb on the scales.
The trick to achieving a more equitable society might simply be to turn the government from an active participant in widening inequality, to one that at least seeks — through norms, laws, regulations — to narrow the gap.
What has driven the stagnation of the incomes of typical workers? It’s clearly not just lagging educations or a drop in their productivity. Olivier Giovannoni of the Levy Economics Institute at Bard College calculates that the share of national income going to the entire bottom 99 percent of workers has shrunk by 15 percentage points since 1980.
The task is to redress this dynamic. This requires acting on many fronts — economic but also legal and regulatory.
Joseph E. Stiglitz, the prominent left-leaning Nobel laureate in economics, has just published a second book on inequality called “The Great Divide” (W.W. Norton & Company). He stresses a range of economic and institutional changes weakening ordinary workers that serve to benefit the wealthiest in society.
This includes, he argues, the weakening of unions and the proliferation of trade agreements, which have protected the rights of corporations to move operations outside the country and done little to protect the formerly middle-class workers on the wrong side of trade.
It includes the steady tightening of intellectual property rights and the rise of finance, with its lavish rewards for activities of dubious social value. It includes the furious consolidation of industry, which has reduced competition across the economy.
Professor Stiglitz is particularly incensed by the Obama administration’s attempt to include investment pacts in trade agreements it is negotiating with Asia and Europe, which would allow multinationals to sue governments for compensation if regulation hurts their profits.
“We have been consistently weakening workers’ bargaining position,” he told me. “We are creating a legal framework for rules that lock in inequality.”
Shi-Ling Hsu at the Florida State University College of Law articulates a similar thought in a critique of the central proposition of Thomas Piketty, the French economist. Perhaps it is true, Professor Hsu concedes, that inequality will grow relentlessly because the rate of return to the capital of the rich is higher than the rate of economic growth, as Mr. Piketty proposed.
Still, he notes, “Piketty, his supporters and his critics are all missing a huge piece of the puzzle: the role of law in distributing wealth.” Subsidies, tax treatment, legal protection and other mechanisms conspire to aid the wealthy while often serving to damp economic gains.
Grandfathering existing businesses to protect them from new regulation is a classic way to protect profits, shielding incumbent businesses and deterring new entrants that would face costlier regulations. Granting water rights to whoever first uses the water amounts to another gift to business that can entail large social costs.
While the power of money in politics should never be underestimated, institutions can be changed. Thomas Philippon of New York University and Ariell Reshef of the University of Virginia argue, for instance, that financial deregulation produced a huge wage premium for finance executives, even as it increased risks for the rest of society.
One solution, Professor Hsu argues, would be to replace options in bankers’ pay packages with subordinated debt, to impose losses on executives if their bets went bad down the road. Banks could be forced to issue contingent capital that converts to preferred stock in times of distress, imposing losses on existing shareholders.
This kind of thinking is gaining purchase beyond our borders. In his forthcoming book “Inequality, What Can Be Done?” (Harvard University Press), due to be published this month, Anthony B. Atkinson of Oxford puts forth a set of proposals to reduce inequality in Britain.
They include not just a higher minimum wage — set at a living wage standard — but also a guarantee of government employment up to 35 hours a week, to address unemployment and the proliferation of unstable hourly jobs that make it so hard for the working poor to earn a living.
He proposes strengthening unions and creating a “social and economic council” where representatives of labor and civil society could have a say in policy, offering a counterweight to corporate power.
The government could aim its research budget toward technologies that might help the employability of workers rather than substitute for them. It could reform antitrust law, to broaden its narrow focus on efficiency and explicitly consider its impact on the distribution of wealth.
At the same time, marginal income tax rates could be pushed higher — Professor Atkinson proposes a top rate of 65 percent in Britain, compared with just under 50 percent today — not only to raise more revenue but also to reduce the incentive for executives to do whatever it takes to increase the next quarter’s profit and bolster their own compensation. (Top marginal rates in the United States, including state and local taxes, can also reach around 50 percent, but few actually pay anything close to that.)
To give ordinary workers a real stake, he calls for a universal capital endowment for every adult — financed through a substantial wealth transfer or estate tax — and a sovereign wealth fund to invest in promising companies. And he argues for a government bond that offers a real return — perhaps linked to the rise of average household income — to evade the predatory fees that banks impose on the middle class’s investments.
Dreaming? Indeed, many of these ideas may strike classic American economists as outdated lefty proposals that already failed in the 1970s.
But they look increasingly relevant in what many are calling the Second Gilded Age. “One of the key messages, given the kind of redistribution we need, is that we can’t achieve it simply through taxes and transfers,” Professor Atkinson told me. “We are stuck in a narrow set of ideas. The most important thing is to broaden the agenda.”