Inequality in America

On November 8, 2013, in Latest News, by The Somerville Times

Part 3:  Political Forces
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shelton_webBy William C. Shelton

(The opinions and views expressed in the commentaries of The Somerville Times belong solely to the authors of those commentaries and do not reflect the views or opinions of The Somerville Times, its staff or publishers)

Over the last thirty years, globalization and technological change have transformed economic reality. All developed countries had to cope with these forces, and most, to a greater extent than the U.S. But America became the most unequal in wealth and income.

So stark national differences in inequality are not so much the result of global economic forces, but of how nations manage them. They are political differences rather than economic differences.

Changes in employee compensation and in public policy have driven America’s growing inequality. Both are determined by who has power in the marketplace, government, and civil society.

Declining union power

The graph below tells a compelling story. The lower line is the percent of the workforce that was unionized, going back to 1917. The upper line is the percent of national income that went to the wealthiest 10% of Americans over the same period. To a remarkable degree, the two lines inversely track each other—the more the workforce is unionized, the less unequal is the distribution of income, and vice versa.

Inequality vs. Union Membership (click for larger view)

Inequality vs. Union Membership

Collective bargaining enabled unionized workers to get substantially better compensation than nonunionized workers. The more sectors of the economy that unionized, the more compensation increased in many nonunionized sectors as well.

Unionization had a more powerful impact on limiting inequality in the U.S. than it did elsewhere, since public policy in most developed countries provides universal healthcare, ensures that the minimum wage is a living wage, and funds public retirement accounts that are more generous than our Social Security.

Through their political power, unions advanced public policies that wove a social safety net, supported by a progressive income tax and a regressive payroll tax. Improved worker compensation sustained stable demand for goods and services.

But moneyed interests passed legislation that constrained unions’ ability to organize. Then a conservative filibuster in 1978 blocked labor law reform. The 1979 Chrysler bailout set the “too-big-to-let-fail” precedent. Ronald Reagan’s union busting and anti-worker Labor Relations Board further weakened unions, as did trade deals with Mexico and China.

The unraveling safety net

Developed societies have social policies that smooth over market failures, reduce the economic insecurity of job loss and recession, and ensure that those who are unable to work still have a human existence.

U.S. social policies have always been meaner than those of other developed countries. Nevertheless, social security dramatically made the elderly more economically secure, 80% of whom had previously lived in poverty. Congress extended in to the disabled in 1956.

Lyndon Johnson’s “Great Society” programs, including Medicare, Medicaid, Headstart, workforce development, and civil rights legislation are credited with reducing the poverty rate from 20% to 12%.

But Nixon’s “New Federalism” turned responsibility for important social programs over to the states, many of which reduced their scope and funding. And the Reagan administration dismantled or nickeled and dimed social programs, declaring, for example, that ketchup was a vegetable in subsidized school lunches.

Bill Clinton and a Republican Congress ended “welfare as we know it” in 1996, cutting participants and benefits in half. The economic bubble of the late 1990s initially masked the full impact of this change. But while the old welfare program had reached about 80% of poor families with kids at the end of the 1970s, the new one now reaches 27%.

Today, the Right argues that the nation cannot afford Social Security “as we know it.”

Disappearing employment-based benefits

U.S. social policy always assumed that the safety net would serve as a backstop for health insurance and pensions provided by the private sector, an arrangement unique among developed countries. But even when the economy and the safety net were strongest, only half the work force enjoyed private pensions, and 70% received job-based health insurance.

Since then, the decline of middle- and low-wage workers’ pensions and health benefits has followed the decline of unionization. The portion of the private sector workforce that receives these benefits is a quarter less than it was in 1979.

Over the same period, job-based health insurance has decreased in coverage and quality, and increased in cost, while out-of-pocket expenses grow far faster than inflation. Before the Great Recession, medical emergencies accounted for two-thirds of all private bankruptcies.

The shift from defined-benefit pensions to 401-K-style accounts has exposed workers to greater market risks. The rate of poverty among households of retired people who do not have defined-benefit plans is nine times greater than among those that do.

All of these declines reflect labor’s reduced bargaining power and employers’ increasing ability to evade or abolish legal obligations.

Minimalizing the minimum wage

The Fair Labor Standards Act of 1938 included minimum wage legislation intended to set a floor that was also a living wage. The idea was to “underpin the whole wage structure…[to] a point from which collective bargaining took over.”

The legislation provided for regular adjustments to keep pace with inflation. Ronald Reagan blocked increases to the minimum wage throughout his two terms, after which it had lost over a quarter of its value. The Clinton Administration “devolved” to states the authority to set the minimum wage, further weakening it.

Extensive corroborating research demonstrates that minimum wage increases do not kill jobs or discourage investment. Most people who receive it work in jobs that cannot be outsourced. And a majority work for large corporations, not small businesses. Historically, increased productivity and economic demand have followed minimum wage increases.

Yet, if the minimum wage had maintained the value that it had in 1969, it would be $9 per hour. If it reflected productivity gains and economic growth since them, it would be $14-20 per hour. The living hourly wage for a single adult in the Boston area is $12.65.

Regressive taxation

America’s economic growth has been greatest when its marginal income tax rates were most steeply progressive. The top rate never dipped below 90% in the 1950s, nor below 70% in the 1960s. Tax revenues supported economic growth through investments in education, infrastructure, and basic research, while financing the social safety net.

The Reagan Administration pushed through reductions of the top marginal personal tax rate to 50% in 1981 and 28% in 1986. It cut the top corporate rate from 50% to 35%. These changes did not produce promised economic growth. Unsustainable deficit spending did that.

The Clinton administration was able to increase the top marginal rate to 39.6%, but the Bush II administration reduced it to 35%. Bush and a Republican Congress slashed taxes on income derived from wealth—capital gains, dividends, and inheritance. So those who realized the most income gains also received the greatest tax cuts.

Inequality and the deficit exploded. Investment and job growth did not.

Extensive federal budget cuts have forced states and local governments to pick up the slack. But their forms of taxation, along with federal payroll taxes, are more regressive, promoting inequality.

Space constraints permit me to only mention two other drivers of inequality. Deregulation and other factors have enabled the financial services sector to dominate other industrial sectors, while becoming less efficient. Finance has made high-risk bets that are wildly profitable when they succeed and covered by taxpayers when they fail. It has robbed the economy of resources, skilled workers, and growth capacity, while exponentially increasing its high earners’ wealth and income.

Macroeconomic policy—government budgetary policy and control of the money supply—have increasingly favored the wealthy. Traditionally, macroeconomic policy involved a tension between stimulating economic and job growth, and restraining inflation. But over the last thirty years, inflation exceeded 5% only once (in 1990). But the share of national income going to stagnating wages has continually shrunk, while cycles of recession and unemployment worsen.

Estimating the relative importance of all these forces is probably impossible, since they continually influence each other. But they have this in common: they result from and reinforce the shift of political power from the great majority of working Americans to the wealthiest among us.

And they produce dire consequences for economic growth, individual opportunity, public health, and democracy itself. These consequences are the subject of the next column.

 

5 Responses to “Inequality in America”

  1. Edwina says:

    Bill, I read your article and it sounds like you’re saying that higher taxation, more unions and a higher minimum wage will stop the effects that globalization and technology have had on wages/jobs in the US? I get the sense that you’re saying if we increase the minimum wage, tax businesses more and force unions on to more industries that it will reverse the trends in your graph?

    I would love it if what you said (increase taxes on businesses in the US, make the average worker cost increase (higher min. wage) and increase union participation (seems unions would add cost to the average worker, right?).) were true, but with just wishful thinking of some utopian economy I just have to laugh and shake my head. Why would businesses want to come here or stay here if it’s 5 X more expensive to do business here? Because we’re Americans? LOL.

    The real solution? In a free trade global economy those with the skills will thrive – those without won’t. Period. Whether you live in a mud hut in a Somalia or a mansion on Beacon Hill – this holds true. We as a society need real education reform – we cannot allow our a large % of our kids to come out of schools stoned and stupid. People need skills to compete – skills in High Tech, Biochemistry, healthcare – not skills in how to fill out a form for an EBT card, section 8 housing or low-end service jobs. We don’t need more people DEPENDENT on he government or unions – we need less.

    I have very little sympathy for those who are of able body and mind, but choose to exercise neither or their off-spring. If you allow your children – thru bad parenting or laziness – to be unskilled and/or uneducated than you reap what you sow.

    Why should those of us (and our off-spring) pay for people who are given the same chances to succeed as those of us who have, but who choose or chose not to? If someone chooses NOT to have marketable job skills in a global economy – then they have to live with those consequences. Living with less is one of the consequences. Begrudging those who worked hard and thinking you’re entitled to a cut of their earnings (and then the government enabling that attitude) should not be one of them.

    If you’re going to write an opinion piece please present real solutions – not just old tripe that has been debunked time and time again. Otherwise you are just enabling those so inclined to be lazy and make bad choices.

  2. Matt C says:

    Bill, your bring up a number of points some of which i agree with and others I don’t.

    I think we have seen the positives and negatives of organized labor. It was very necessary at a time when there was little regulation and organizations like osha did not exist. Their impact in education reform where seniority is more important than quality, manufacturing where we have seen industries crumble under the weight of UAW obligations or locally where the MBTA provides mediocre service yet some of the best benefits seen in the state. Unions need to be a partner of industry and work to find a better balance that enables industries to survive in the states and deliver the highest quality services possible.

    One area I agree has suffered is that of safety nets. I believe these are critical part of the society I want to live in and I am willing to pay to have those. But like all safety nets they should be means tested and this includes medicare and social security… this said a transition to means testing must be gradual as people need time to adjust their savings process.

    The minimum wage is a joke in the US. it is near impossible to live in the greater boston area working two minimum wage jobs full time. There needs to be a process by which we can grow the minimum wage while assisting small businesses that cannot survive $10-15/hr wages (consider small supermarkets). One approach is a reasonable increase in minimum wage and a safety net supplement as part of that wage based upon family need.

    Lastly tax law… its messy. I would like to see the US move to more of a consumption based taxing system where basic goods (food, clothing under $50, books and education) were not taxed and maintaining a capital gains system. Additionally a VAT style tax would make goods made here less expensive versus imported goods. Lastly corporate tax in the us is some of the highest in the world and is a reason why much money is kept offshore. We must be competitive here if we want to keep businesses local.

  3. Bill,

    “All The Kings Men”, with A.Hopkins, J. Law, S. Penn. It illustrates much of what continues to go on today– how power corrupts and what great lengths the wealthy will do to prevent the political idealist to support the working class in attaining same status as middle class. The days of owning your own home, without a mortgage are long gone. Millions of homeowners who fell prey to the predatory bankers got wiped out. They did the same in the 1920’s and during the S&L scam, so how are the homeowners to blame for the mess created by the WS chain gang?

    “The Last Hurrah”, based on the life of J.M.Curley, who fought hard for the poor only to be beaten down in the end by the wealthy bankers and their influential upper class business partners. There are complicated factors involved in politics, you can never make everyone happy, but there are slippery slopes which are at times unavoidable.

    The most important issues you point out which led us to where we are today:

    “Bush and a Republican Congress slashed taxes on income derived from wealth—capital gains, dividends, and inheritance. So those who realized the most income gains also received the greatest tax cuts”. Old money created morality–New money has created moral decay.

    Billions of off shored tax havens “made legal” was our greatest fall, along with two decades of ongoing wars “for natural resources and political alignments” in the middle east. Now the burden is on us to carry the massive load.

    “Inequality and the deficit exploded. Investment and job growth did not”. Outsourcing, layoffs, company closings are a direct result of H-business school models and Corporate Raiders, like Romney and the company he represents. Remember what happened to the airline workers with nowhere else to go in the movie, “WallStreet”?

  4. “Extensive federal budget cuts have forced states and local governments to pick up the slack. But their forms of taxation, along with federal payroll taxes, are more regressive, promoting inequality”. This is another issue which needs to be addressed. A call to reform state agencies -MBTA, DOR and others. What we saw happening in the Probation Dept., highlighted in Boston Globe articles does not just happen in one area of state government, it happens in a lot of places, some many would be surprised, as in the non-profit sector. HMO’s were also a bad idea since many of the top administrators are overpaid and this cost goes to the insured. Pharmaceutical giants is another serious problem–for many reasons, just two- questionable drugs and campaign contributions. Time to cut the fat–hold people accountable in their positions and cut salaries at the top. If they quit, good riddance. Some time ago in one of Capuano’s speeches, he pointed out just that, among the WS & freeloaders, he told them to fire those, “who created this mess”, and urged them to hire younger, more qualified employees who would not burden us with their undeserved $50 million dollar bonuses per AIG employee.

    Many of us who did the research understand that the poison has taken hold–the all consuming lust for greed and power turns some into a relentless villainous creature unfit for high levels of the financial sector, government or any other position which is responsible for the safety and economic livelihood of millions.

    “Deregulation and other factors have enabled the financial services sector to dominate other industrial sectors, while becoming less efficient. Finance has made high-risk bets that are wildly profitable when they succeed and covered by taxpayers when they fail. It has robbed the economy of resources, skilled workers, and growth capacity, while exponentially increasing its high earners’ wealth and income”. DITTO

    “……….they result from and reinforce the shift of political power from the great majority of working Americans to the wealthiest among us. And they produce dire consequences for economic growth, individual opportunity, public health, and democracy itself”.

    Our country has become one giant corporation, Bill.

  5. Bill,

    I’m still waiting for your piece on Gentrification. I’d also like to see some in depth research on the housing bubble. You may want to contact the whistleblower insider and author of “The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures” by PAM MARTENS.

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