Some Thoughts on Inequality

I was reading the Book of Mormon a few days ago and came to Alma 16:16. Alma and Amulek had gone out preaching repentance, the result being that “the establishment of the church became general throughout the land.” One specific consequence of this work was that “there was no inequality among them.” This is, of course, a common theme in scripture. Wherever the gospel is accepted and practiced, the result is (ideally) no rich or poor, economic equality. Joseph Smith and Brigham Young spent years trying to make this ideal work among the Latter-day Saints, and, although they had minimal success in the long run, I think both would be rather shocked at the attitude among many twenty-first-century Mormons about economic equality (or perhaps I should say against economic equality).

A small minority of Latter-day Saints belong to a political party that would do more if it could to increase equality in the United States. The vast majority, on the other hand, belong to a party that has either (1) ignored the runaway inequality we are experiencing, (2) claimed that it is not a problem to worry about, or (3) extolled the virtues of such inequality. Consequently, this party’s proposed (and already enacted) economic policies actually encourage even greater inequality. I find it odd that most Mormons, despite their scriptures and their history, are so opposed to policies that would increase equality in the land. I find even more odd the convoluted arguments they put forth to justify their politics. These arguments include the notion that economic freedom is the highest among several competing values and that taxing people is “forcing” them to be “charitable.” Another argument is that increasing the minimum wage is a bad thing, even though it is, in real terms, where it was when I was born, and various real-life experiments with increasing it at the state level have failed to produce the dire consequences predicted by conservative theorists. By contrast, the absolutely abysmal performance of supply-side policies is well documented, but this does not stop conservatives from ignoring the facts in either case. One very popular conservative idea is the flat tax. If there was ever a gift-wrapped gratuity going from the poor to the rich, this is it. Most millionaires would grin in delight over this one, but not all. A group calling itself Patriotic Millionaires are calling for Congress to stop giving special tax breaks to the wealthy and to require them to pay their fair share. The cherry on the top of this collection of conservative arguments for greater inequality is the fact that many, many online Mormon commenters have stated that they see nothing wrong with the idea that in our capitalist system people of industry can make as much money as is humanly possible (even if it comes by paying their employees less than a living wage). These commenters apparently don’t see the larger ramifications of their attitude.

The Dual Pay System

Back in 1993, when I was doing a fair amount of writing about economics, I came across a book by Peter Block titled Stewardship: Choosing Service over Self-Interest. In this book, Block describes our particular version of capitalism as a dual-pay system. In essence, with a few notable exceptions, there are two groups of people in America—those who are paid as much as possible and those who are paid as little as possible.

The small group that is paid as much as possible is composed of the owners and controllers of capital. These would be primarily the large stockholders, corporate executives, and entrepreneurs who benefit from profits generated by their business interests. Now, before someone comes up with the brilliant observation that stock ownership in America is widespread, let me nip that misconception in the bud. In 2010, the top 1 percent owned 35 percent of all stock; the next 19 percent owned 56.6 percent. That left 8.4 percent of all stock for the poorest 80 percent of the population. And the trend isn’t moving toward greater dispersion of wealth. The numbers in 2001 were, respectively, 33.5 percent, 55.8 percent, and 10.7 percent. No one should be surprised by this trend.

Controlling capital is a big deal. It means not only that you can be paid as much as possible and funnel an ever-increasing portion of the created wealth into your own pockets, but also that your wealth gives you disproportionate influence over government policy, which means that you also benefit disproportionately from those policies. This is too obvious to even spend much time on, but we can see the results from what has happened in America since Ronald Reagan implemented the wealth-friendly policies that we collectively term supply-side economics. G. William Domhoff, a professor at UC Santa Cruz, puts it this way: “Here are some dramatic facts that sum up how the wealth distribution became even more concentrated between 1983 and 2004, in good part due to the tax cuts for the wealthy and the defeat of labor unions: Of all the new financial wealth created by the American economy in that 21-year-period, fully 42% of it went to the top 1%. A whopping 94% went to the top 20%, which of course means that the bottom 80% received only 6% of all the new financial wealth generated in the United States during the ’80s, ’90s, and early 2000s.”² So, predictably, the minority that is paid as much as possible is doing very well, thank you.

But what about the other group? Well, it doesn’t take much imagination to see what’s going on here. But sometimes we don’t understand why. The vast majority of American workers fall into this second category and are paid as little as employers can get away with. Let me put this as crassly as I can. These people are human resources. And what is a resource? It is a thing that is used to produce something else, and when it is used up, it is discarded or replaced. These people are, quite simply, a cost to be minimized. They are merely a factor in the production equation. In a former life, I spent nine years teaching production and operations management at BYU’s Marriott School. Most of what I taught was applied math. But behind the mathematical models, if you looked carefully, were certain assumptions. And this was a primary one: labor is a cost to be minimized, if at all possible. This is why businesses ship jobs off to Third World countries and replace people with technology. Labor is a number.

And we’re not talking about just blue-collar types here. I remember several years ago, when many of my neighbors were employed by a high-tech behemoth in the area. Quite frequently, they would be informed that cuts in the workforce were coming, and they would wonder if their heads would be on the chopping block with each new wave of layoffs. Eventually, most of them were guillotined. And these were programmers and project managers and technical writers and other relatively high-paid white-collar employees. Why were they laid off? Was the company in dire financial straits? Hardly. It was making money hand over fist. The labor cuts were entirely cosmetic, simply to make the numbers look better, which would boost the stock price, which, in turn, would increase the wealth of those who get paid as much as possible. It was all about the numbers.

We often use demeaning terms to refer to this second group. One is human resource. Another is labor market. Think about it. What is a market? It is a place where things are bought and sold. In this case, people. Companies are buying, but who is selling? Well, people are selling themselves, and there is more than a whiff of economic prostitution in this whole arrangement. I can’t tell you how many times I heard the business students admonished to market themselves well, to package themselves better (dress for success), to hone their marketable skills. Most of them thought this was great advice. Certainly, presenting yourself well to others is a positive thing, but when we use the terms of the marketplace to liken human beings to things like pork bellies, toothpaste, or Pontiacs, we turn them into something they are not (or at least should not be): commodities.

The main point here, though, is pay. People are being paid as little as possible for the simple reason that they are not viewed as human beings. They are just products in the labor market. The dual pay system I described above is evidenced by the fact that wages for the bottom 80 percent of Americans have stagnated for the past thirty years while the wealth of the top 10 percent, and especially the top 1 percent, has increased substantially. When you have a majority of the population who are paid as little as the market will bear, you have a situation where the imbalance in wealth will eventually come back to haunt you. And we are already there in America, which is why Bernie Sanders’s message has hit home with so many younger voters. They can see what their elders have done to them (that would be my generation). You might think Bernie is a bit of a crackpot. He’s certainly a one-note symphony. But don’t fool yourselves. Bernie is the tip of the iceberg. And when the angry and undereducated finally figure out that Trump is selling snake oil, they might just start to see the sense in what Bernie has been preaching from his peripatetic pulpit.

The Plight of the 90 Percent

So, what happens in an economy when almost all the wealth accumulates in the hands of a small minority—say, the top 10 percent? Well, to begin with, you start having an imbalance between supply and demand. The wealthy tend to not spend proportionally on consumer goods like the consumer classes do. I mean, how many computers or cars or chainsaws will you buy, even if you’re a billionaire? How much food can you eat? Yes, the wealthy buy more expensive items, but the whole point of being wealthy in our society is not how much you can spend. The point for the wealthy is how much they can invest, so that they can accumulate even more wealth. And if good productive investments are not available, they tend to invest in speculative financial instruments.

I’m not saying that not spending all their money is bad or that investment is an unproductive use of their wealth. What I am saying is that the unrelenting aggregation of wealth at the top has negative effects on the economy in general. When too much wealth goes to the top, not enough goes to the consumer classes (middle and lower), and they simply can’t purchase enough stuff to keep the corporations and their owners happy. Insufficient demand will stifle an economy, regardless of how much supply-side impetus you pump into the system.

And this brings us to the plight of the 90 percent. The one lesson that has been pounded into the heads of the consumer classes is that it is their responsibility to consume, to spend, not to save. They are responsible for keeping corporate America in business. But starting with Reagan, when tax cuts, opposition to unions, and the easing of restrictions on corporations started the massive shift of wealth from the bottom and the middle to the top, average American families have had an increasingly difficult time maintaining their standard of living (or, you might say, purchasing all the stuff corporations need them to buy). So these strapped consumers have employed three sequential strategies to keep their heads above water. First, women entered the workforce, which gave many families two wage earners. Next, when that option wasn’t enough, both men and women started working either extra jobs or longer hours. Finally, when they still couldn’t make ends meet, they started purchasing more on credit. That strategy blew up in 2008 with the housing bubble, the financial crash, and the Great Recession. Since then, we’ve had a tepid recovery, and although many have tried to pin this on Obama, if you want to blame a president, you’d really have to go all the way back to Reagan, who started this particular ball rolling. President Obama has actually done an admirable job considering the withering opposition he has faced from an intractable Republican Party.

Another consequence of this shift in wealth actually has ramifications far into the future, especially regarding the national debt, which Republicans have been seriously worried about (although not so much in practice as in rhetoric and not so much now as a few years ago, which may tell us something about how serious they really were in the first place). This particular consequence is the fact that 31 percent of Americans, and nearly 20 percent of those ages 55 to 64, have no retirement savings at all. And of those who do have some savings, most do not have nearly enough to maintain their standard of living after retirement. “As of 2013, the median retirement account balance among all households ages 55 to 64 was only $14,500. Even after excluding all households that had saved nothing, the median account balance of near-retirement households was still only $104,000.”¹ That’s not going to last a family very long, especially since most companies have terminated their pension plans. In short, a huge proportion of retiring Americans are going to be dependent on Social Security and Medicare, which the Republicans keep claiming they want to shrink.

The dilemma most middle- and lower-class American families have faced over the past thirty years is the duty to spend coupled with the need to save, all in the context of stagnant or declining wages. And what solutions have the Republicans offered for this dilemma? Reducing taxes on the wealthy. This has been their answer to every economic question for thirty-five years now. To borrow a term from the title of one of my books, this is economic insanity.

What Can We Do?

So, given the bleak future we face if we allow economic inequality to continue to balloon, what can we do? Two courses of action are fairly obvious. First, we need to attack the inequality at its source, and not just after the fact with progressive taxation. We need to do something about the initial distribution of wealth. This involves sharing profit with those who actually create it. How we go about this isn’t as important as resolving to do it somehow. There are many options. Businesses must stop treating workers as human resources, as a cost to be minimized, and start treating them as human beings who deserve to be paid as much as possible as long as this doesn’t damage the long-term viability of the business. Ideally, this will involve sharing ownership with workers so that they receive a fair share of the profits they create. This would enable businesses to pay workers as much as possible, similar to how owners and executives are paid. Some inequality will still exist. This is inevitable. And ownership should be apportioned with such factors as seniority, skill level, and education taken into consideration.

Sometimes we think there is nothing we can do to rein in corporate behavior. But we must not forget that all businesses in our economy exist by the good graces of the people. We the people. Government is our servant, and it charters corporations; in addition, all businesses must obtain licenses from government in order to operate. We have all sorts of laws already that limit how enterprises of all sizes may do business. Once upon a time, corporations were chartered in America for the express purpose of serving a public need. We the people have the right, if we can elect representatives in government who will do our bidding, to restructure laws governing corporations so that they once again serve our needs rather than just their own. There is much we can do to ensure that businesses distribute their profits in a more equitable manner.

But encouraging more equal pay will not completely solve all problems in our economy. There will always be those who are ill, who are disabled, who are elderly, who are unable, for one reason or another, to work and provide for their needs. We must collect taxes from businesses and individuals to take care of these citizens. Leaving this to charity simply falls far short. And beyond these humane efforts, we have many other needs—from police protection and the common defense to roads and highways and health services—that a civilized modern society should provide. As I pointed out in my last post, there are many, many things even die-hard conservatives expect government to do for them. We need to acquire the willpower our parents and grandparents had to tax sufficiently to pay for all the things we want and expect government to do. We are nowhere close to being overtaxed as a society. The only sensible way to bring things back into balance is to enact a more progressive tax code so that those who have benefited most from the economic environment government maintains pay a larger share of taxes than they currently do.

As mentioned above, even if businesses distribute their wealth more equitably, there will still be significant inequality in the system. And without the ameliorating effects of a progressive tax code, the inequality will naturally increase over time, as disparities in income create an exponential disparity in wealth, as we are seeing today. In order to prevent this disparity from sinking the economy in a sea of oversupply and underdemand, we must increase the top tax rates. This will have the doubly positive effect of reducing our national debt and preventing too large of an imbalance in wealth to accumulate.

So, what can we do in the short term to help move the country in the right direction? How about not voting into office the party that is doing everything in its power to increase the inequality?

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1. Keith Miller, David Madland, and Christian E. Weller, “The Reality of the Retirement Crisis,” Center for American Progress, January 26, 2015, https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/.

2. G. William Domhoff, “Wealth, Income, and Power,” Who Rules America? Available at http://www2.ucsc.edu/whorulesamerica/power/wealth.html.

Are We Really Overtaxed?

One of the common refrains we hear from Republican politicians and conservative commentators is that Americans are being overtaxed. Our taxes are among the highest in the world, if you believe the rhetoric. This line of argument is being used to promote terminating the inheritance tax, eliminating the payroll tax, adopting a single-rate tax system, and reducing income, capital gains, and business tax rates.

Another refrain is that the federal debt is at crisis levels and must be reduced. Since we are already overtaxed, the only way to deal with this is to shrink government spending. As I mentioned last week, if you want to reduce government spending, you are going to have to deal with Social Security, Medicare, and the military. The rest of the budget is pocket change, relatively speaking. But since Republicans want to increase military spending, their primary target for saving money is what they call “entitlements,” which include Social Security, Medicare, food stamps, CHIP, unemployment compensation, and veterans programs.

Some Republicans are so up in arms about the “debt crisis” that they want to pass a balanced budget amendment. How they plan on balancing the budget while cutting taxes is a mystery. Maybe we can use Paul Ryan’s magic asterisks. To put this in perspective, in 2015 the deficit was $439 billion, the smallest it has been since 2007. Still, cutting $439 billion in government spending would be quite a hatchet job and would certainly plunge the economy into another major recession. So that pipe dream ain’t gonna come true. At any rate, no Republican politician is going to seriously try to cut Social Security or Medicare, not with the Baby Boomers retiring in droves and most of them without any retirement savings to speak of.

In spite of the facts, though, every one of the 31,000 or so GOP presidential candidates vowed to cut taxes, especially on the wealthy. Estimates for the carnage ranged from $9.5 trillion over its first 10 years for Trump’s plan (and another $15 trillion in its second decade) on down to about $6.8 trillion for Rubio. Of course the estimates vary widely, depending on various assumptions. But all the plans had two things in common: the debt would balloon by trillions and the wealthy would make off like bandits.

So, if we do want to reduce the national debt (and that wouldn’t be a terrible idea), we need to look at increasing taxes. Well, what’s the truth about our tax burden as Americans? I’ll copy a chart here from the Citizens for Tax Justice website.

 

Oh my! Can this be accurate? Of the countries belonging to the OECD (Organization for Economic Cooperation and Development), only Chile and Mexico tax less than the United States? Well, yes. We’re overtaxed? Gee, try to sell that whopper in Denmark. By the way, the numbers behind this chart include all federal, state, and local taxes.

So, let’s look at the U.S. over the 32 years stretching from 1979 to 2010. The following chart compares U.S. tax receipts with the average of our OECD friends.

 

A couple of trends are notable. First, our OECD partners’ taxes have increased slowly over time, but by less than 2 percent in 32 years. Second, U.S. tax revenues peaked during the end of the Clinton presidency (remember, when we ran a budget surplus). Second, the Bush tax cuts had an immediate and predictable effect. Tax revenues dropped from a high of 29.5 percent just before Bush took office to a low of 26.3 percent in 2008. We can throw out 2009 as an anomaly because the Great Recession skewed the numbers. Supply-side dogma insists that cutting taxes will increase growth, and Republican politicians are still trying to sell that snake oil after three decades of proof that it just. does. not. happen. Consequently, when you take steady spending (which is basically what we have had over the years, despite Republican the-sky-is-falling rhetoric), stir in reduced tax revenue, add a major recession, and fold in two pinches of unfunded wars, you have the perfect recipe for, well, ballooning debt.

So, where are we now? The latest comparative numbers for OECD countries were for 2010. In 2015, though, the federal government collected $3.25 trillion in taxes. State and local taxes collected were $1.33 trillion. Total tax revenue, then, was $4.58 trillion. GDP for 2015 was about $17.9 trillion. This means tax revenue was 25.5 percent of GDP. Still 4 percent below our 2000 revenues . . . and about 22 percent below Denmark.

Anyway, next time you hear a politician or a talk radio personality complaining about how horribly high our taxes are, remember the numbers and say, “Nice try. Do your homework.”