There is no larger political issue in the US right now than the progress of income inequality. Polls show that most Americans think it is a serious problem, and more importantly that work does not create opportunities for advancement. Concern over this situation falls somewhat along party and generational lines, but when we talk about potential solutions that debate becomes much hotter. Should wealth actively be redistributed by government policy?
Into this debate comes Thomas Piketty, a French economist whose work has culminated so far with “Capital in the 21st Century”. His decades of research in the field is laid out to show that wealth is concentrating, and more to the point naturally will because return on investment outpaces wage growth. That argument has been called into question, but another central point has not – that this generation’s wealthy are not a “leisure class” but a “working rich”. They have a power beyond their own money in that they control corporations and funds – other people’s money. Taken properly, it’s political high explosive.
Carnegie rose from nothing – and gave it all away.
The problem with today’s wealthy is not simply that they have all the money. If that were the case, they would increase their fortunes by investing wisely and, at some point, harvest a return. In between there would be opportunity for those who did the work for them to also rise. Our last guilded age saw many men rise through the system created to serve the leisure class at the end of the 19th Century – Carnegie, Rockefeller, and Ford among them.
Today’s rich do not hire others to manage their holdings, but do it themselves. Their primary source of income is not from investment returns, per se, but from a salary. A salary combined with options, perks, and many other ways of turning corporate money into personal income.
The difference is important. The old system exploited labor where it could, but ultimately relied on labor to fuel its expansion. Industry at the time was far less productive per employee, meaning that growth always demanded more hiring. The value of the barons that owned a company was directly related to the growth of the value of that company, so constant expansion was assumed.
Ford knew – he could only sell cars to people that had a way of affording one.
There was a natural balance to this system. Growth in consumption meant a growth in the consumer economy, meaning that more worker pay did benefit everyone. There was also only so much skilled labor to go around, meaning that anyone with a college education could demand a decent living.
Not so today. The working rich make their money by extracting from a company, not necessarily growing it. There is less incentive to expand and little incentive to hire, especially with productivity per employee running much higher in an information age. With considerable evidence that this system has only so much paid work to go around there is constant downward pressure on wages, meaning that opportunities to advance are necessarily limited.
Piketty’s work does not emphasize this problem as much as it should, but it is an obvious imbalance in the system that limit not only income but opportunities for growth in the future. It is a recipe for an economy that is monetarily and social stagnant, with little room for advancement.
Does your baby have the stacks it takes to make it today?
Worse yet, the working rich can set the standards for those who have access to the few jobs that pay the stratospheric salaries by defining the terms on their own. That’s why competition for the best schools often starts with pre-school today – missing out on the path that leads through Ivy League to the best jobs is has a huge penalty.
When phrased as a lack of opportunity, the question goes from a traditionally Democratic concern to a Republican one. The latter’s response to labor’s demands for more income has always gone along the lines of, “Better yourself and take advantage of opportunities.” As those opportunities close down and the working rich control all the capital of the nation – not just their own – the politicians that should be the most alarmed are not the ones that call themselves progressives.
An America with little to no opportunity for advancement, and no reward for hard work, is an America that simply will not be willing to protect the privilege of the wealthy forever. The basic social contract is broken.
Will this ever get better? The short answer is that we will know that it is getting better when Republicans formulate market oriented solutions to the problem of diminishing opportunity. Until then, there is only one answer on the table – actively redistribute income through an aggressive tax policy.
Is that what America wants or needs? Without any other viable answer, it does. Is that really the only answer, however?
Barataria - The work of Erik Hare 
You still come up with the problem of equity, in my opinion. A working rich guy is working and therefore earning his salary. To force income redistribution essentially means stealing his rightfully earned income to give it to someone else. It requires a whole slew of arbitrary decisions on the part of some administrator who probably won’t know or care about anything else than “work guy” has money and “poor guy” should get some of it.
It’s theft, for one thing. The money was earned by “rich guy”, not by the government administrator or the “poor guy”. To take it from “rich guy” to give it to “poor guy” is immoral.
That theft is also unwise because reduces the incentive for “rich guy” to work hard since he won’t get to keep what we pretend to pay him. It also reduces the incentive for “poor guy” to get off his rusty-dusty and do something to improve his own life circumstances. Why shouldn’t he just continue to sit on his ass since it seems like he’ll get paid for doing that and it’s so much more relaxing than working hard.
There’s a bigger picture as well. Every entrepreneur I know is working hard with the idea of improving his life circumstances. Most of them are not there yet, but they hope to be one day. Watching their government steal the wealth of those who have already made it and give it to people who show little or no ambition to improve their lot already makes these people nervous. The greater the government steals, the lesser the incentive for these young entrepreneurs to even start their businesses, since they know they can never actually succeed because as soon as they do, they will be subject to the same thievery.
So they’re working hard to be not quite as poor as the guy who is not working at all. Do you see the problem with that? The 2008 recession created a lot of entrepreneurs as people lost jobs and had to find new ways to make an income. I know several of those people and given time, they will grow viable businesses that infuse the middle class with opportunities, mainly because they’re blue-collar companies that will need workers — provided they have an incentive to grow the companies they’ve started. Income redistribution takes away that incentive, because just about the time a company gets big enough for its owners to enjoy the fruits of their labor, you start stealing the fruit. And, they can see that before they even get there, which is why they hide money and don’t hire people in an effort to keep your hands out of their cookie jar.
Income redistribution in the Soviet Union resulted in an entire society that subscribed to the “if they pretend to pay us, we’ll pretend to work” philosophy. In the 1980s that finally caught up to them. Is that really what we want in the US?
Wouldn’t it be better to find ways to encourage the “rich guy” to create jobs voluntarily rather than have his income stolen?
To answer your question at the end, “Yes, of course, that is far, far the preference.” So how do we make that happen?
Income redistribution has to be a big part of any solution in the short term, as there is not enough work to support the population, and without support, there is not enough monetary flow to drive demand, and without demand, job growth will be negative. In time, especially as the demographic shifts older, I’d hope this would self rectify, but we will have the capital costs of resource extraction to deal with which may prevent it from happening.
A freeing of the market could accomplish much, and might blunt the need for extreme income redistribution. However, there is a sucker born every second, and thus even putting the brakes on market restrictions is anathema to politicians of both parties.
Consider a rewrite of SEC part D as concerns fundraising… rich and poor alike will scream bloody murder, rather than taking responsibility for failing to exercise due diligence. On a smaller scale, consider failed kickstarters… far too many donors are looking at funding projects as purchases, that they will receive a reward for their donation… The only real reward is to be on the front end of something new, which may, or may not come to fruition.
Its the same way with work, or education, you work hard, you roll the die, and maybe you will get lucky, maybe you wont, maybe you will loose your shirt and a whole lot more. It seems somewhere along the way US society has become so risk adverse, that short of a tiny number, few are willing to act anymore. Its not just the average Joe, the uber wealthy which drive the flow of money are just sitting on it. I think until we address this risk paranoia, and/or the fear of social unrest eventually drives things forward, the status quo will continue.
That’s the problem, isn’t it? As a chruch-going Christian, many of the upper middle class I know attend church and already give a large slice of their income to the church, which distributes it to various charities – food bank, rescue mission, a literacy program, an agricultural mission in Africa. The business folks I know provide jobs for others. They do this voluntarily because it helps their bottom line, but one friend also hires ex-cons as a ministry, using his business top do God’s work.
It’s pretty easy to get moral people to understand the concept of voluntary giving. But how do you get someone like Warren Buffet to contribute? He knows there’s a problem, but he won’t give unless the government mugs everyone. If he really believed in wealth redistribution, he could easily give his money to churches, hospitals, create foundations, or he could fund small businesses, but what he really favors is mugging any one with a comfortable income to create jobs for bureaucrats who will tell us all how to live and what to do with our income. I don’t think they care at all about income disparity. They just want to control society by confiscation of income and any sort of accumulated wealth.
It would be lovely if the wealthy who want wealth redistribution would just do it. Nothing is stopping them, which makes me wonder what they actually hope to accomplish. I don’t think his aim is wealth equality, because his behavior doesn’t match his rhetoric.
As I was writing this, Eric Cantor was losing his primary for many of the same reasons noted here. His Tea Party challenger has very different solutions than what I do, but won at least in part by going after Cantor as a “Crony capitalist who favors big business over main street”.
So, that happened. Let’s see where it goes.
It doesn’t do you any good to tell republicans what they should stand for. The same thing said here applies to the democrats as well. Both parties are there for the highest bidder.
This IS what defines politics on both sides. It’s just not obvious because both sides still talk mainly about bu!!sh@t things rather than what people want to hear.
There is no opportunity these days and the first person with a plan to create more that makes sense I will vote for. I don’t see any redistribution system working anywhere near as well.
“How has poverty changed over time?
In the late 1950s, the poverty rate for all Americans was 22.4 percent, or 39.5 million individuals. These numbers declined steadily throughout the 1960s, reaching a low of 11.1 percent, or 22.9 million individuals, in 1973. Over the next decade, the poverty rate fluctuated between 11.1 and 12.6 percent, but it began to rise steadily again in 1980. By 1983, the number of poor individuals had risen to 35.3 million individuals, or 15.2 percent.
For the next ten years, the poverty rate remained above 12.8 percent, increasing to 15.1 percent, or 39.3 million individuals, by 1993. The rate declined for the remainder of the decade, to 11.3 percent by 2000. From 2000 to 2004 it rose each year to 12.7 in 2004.
Since the late 1960s, the poverty rate for people over 65 has fallen dramatically. The poverty rate for children has historically been somewhat higher than the overall poverty rate. The poverty rate for people in households headed by single women is significantly higher than the overall poverty rate.”
http://www.npc.umich.edu/poverty/
We live now in an age of revolution. Foreign policy is more important than economics.
Pingback: Bizarro World Finance | Barataria - The work of Erik Hare