Inequality in America

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

Part 3:  Political Forces

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.


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