Economic Injustice for Most

From the New Deal to the Raw Deal

America has always had an ambivalent attitude toward equality. In contrast to the social democratic regimes of Europe, the only officially endorsed equality Americans have historically embraced is the narrow sense of equality of opportunity—as opposed to outcome. A suspicion of government interference in economic matters is an attitude that dates from the early days of the republic. When de Toqueville lauded the rough equality of Americans in the 1830s, he made it clear that it is the fluidity of the society that impressed him: “I do not mean that there is any lack of wealthy individuals in the United States....But wealth circulates with inconceivable rapidity, and experience shows that it is rare to find two succeeding generations in the full enjoyment of it.”

Lincoln made much the same point: “[It is] best to leave each man free to acquire property as fast as he can. Some will get wealthy; I don’t believe in a law to prevent a man from getting rich [but]...we do wish to allow the humblest man an equal chance to get rich with everyone else.” Yet the vast accretions of personal fortunes and corporate power that accompanied the rough-and-tumble era of free-booting capitalism in the decades after the Civil War—when men like John D. Rockefeller, Andrew Carnegie, and Jay Gould were building their empires—cast doubt on the reality of the American mythos of equal opportunity.

Carnegie loved to pose as the friend of the workingman, basking in the attendant public applause, until the searing events of the 1892 Homestead strike exposed the savage working conditions at his plants—twelve-hour days, seven-day weeks, a single scheduled day off a year, squalid little company towns, contaminated water, near-starvation wages. (After the strike was broken with much violence, Carnegie salved his conscience and burnished his image by giving the borough of Homestead a library.)

By 1890, at the height of the Gilded Age, just 1 percent of the population owned slightly more than a quarter of all the nation’s wealth. That data was reconstructed by historians, but widespread awareness of a growing, and possibly unbridgeable, chasm between the Haves and the Have-Nots fueled the Populist movement in the last years of the nineteenth century, the Progressive politics and trust-busting initiatives early in the twentieth, and Franklin Roosevelt’s New Deal. After World War II, and through the 1950s and 1960s, there was substantial leveling of wealth and income. The rich were still very rich, but programs like the G.I. Bill restored the conviction that the ladder Americans had to climb to attain real wealth evidenced the scale of the opportunity rather than the height of the barriers.

Virtually all those gains have been dissipated over the past twenty-five years or so. Instead of controlling a quarter of the nation’s wealth, as in the Gilded Age, the richest 1 percent of the population now owns about a third, and the top 5 percent about 58 percent, of all wealth. Those numbers represent the densest concentration of wealth since the peak of American wealth inequality, which was in 1929, a not entirely reassuring precedent.

The trends The recent trends in income concentration have been even more pronounced than those in wealth. This is unusual and especially worrisome. Wealth accumulations occur over extended periods, so it can take a number of years for even highly skewed income patterns to be fully reflected in wealth distributions. The current patterns of income concentration are violently out of whack with historical experience, and may indeed be without precedent.

The graph in this column tells the story. If we divide wage earners into five quintiles—from the bottom fifth through the top fifth—one can see that over the period from 1980 through 2001, every quintile but the top one saw its share of the national income pie shrink-that is, not just the poor and the lower-middle classes, but the middle classes and the upper-middle classes also. Predictably, the poorest quintile took the biggest hit, with the blow softening as one moves up the income ladder.

At the household level, total incomes barely kept pace with inflation in the lower quintiles. The annual improvement was about half a percent a year in the lowest quintile, a bit more than eight-tenths of a percent a year for the middle class, and just about 1 percent a year for the upper-middle class. Notice that even in the top quintile, the gains were highly concentrated in the top 5 percent. And note too that these are household incomes. Average real wages for all production workers actually dropped about half a percent a year over this period, so most households were able to stay even only by putting more of their members to work. The real income of full-time year-round male workers has been essentially unchanged in thirty years. (Full-time, year-round female workers have seen a strong earnings rise, though from a much lower base.)

Shocking? Well it gets worse (see graph, bottom of next column). Over the thirty years from 1970 to 2000, the bottom 90 percent of earners as a group actually lost ground. All the top 10 percent did well, but only the top 1 percent did extremely well, and even within the top 1 percent gains were disproportionately concentrated within the top hundredth of 1 percent, a mere 13,400 households.

If you read the financial news, you know that the period from 1980 through 2001 marked one of the greatest of American economic booms—when we recovered our competitive position in the world, and created entirely new high-technology industries. Well, guess who reaped all the gains from that hard work? As the table shows, almost all the benefits flowed to the very rich. The poor, the lower-middle class, the middle class, even the upper-middle class, got almost nothing at all. So much for fairy tales about rising tides.

 

What Happened?

The truth is that the amazing spurt in top-drawer incomes is so sudden, so striking, so out of keeping with experience, that it will take economists years to reach a consensus on the details of what happened, if they ever do. But there are some obvious factors at work.

The 1986 Tax Reform Act was a signal nonpartisan accomplishment, worked out between the Reagan administration and a substantially Democratic tax-reform wing of the Congress, led notably by Senator Bill Bradley. The core principle of the reform was to trade a greatly simplified tax code, eliminating almost all special privileges and shelters, for an extraordinary, across-the-board reduction in tax rates and the number of brackets. As far as possible, all income was to be treated alike—there was to be no difference in the taxation of capital gains and ordinary income, no difference between the rentier and the ordinary wage earner. Although the act was sometimes blamed for the era’s large deficits, an IRS analysis showed that tax receipts actually increased the year after its passage.

Sadly, almost as soon as it was passed, tax advocates for the wealthy began lobbying for a restoration of special tax breaks, especially in the treatment of capital gains. (Taxable capital gains, of course, accrue almost entirely to the wealthy. The current tax exclusion for capital gains on the sale of a home—$500,000 for a couple—effectively eliminates taxes on the vast majority of home sales, while the stocks and bonds owned by ordinary people are mostly in pension funds and 401(k) plans, which are already tax-protected.) By the time the capital gains tax preference was finally restored, in complicated horse-trading with an embattled Clinton administration in 1998, most of the other shelters that benefit the very rich had wormed their way back into the code also. Although there were modest increases in the top rates under the first President Bush and President Bill Clinton, actual tax rates paid by top-tier earners stayed flat or fell, even as their incomes steadily rose.

A second factor was a devastating campaign of vilification against the Internal Revenue Service by the Newt Gingrich wing of the Republican Party. A thoroughly cowed agency drastically reduced its auditing activities to the point where the working poor—who can receive a maximum $4,120 benefit under the Earned Income Tax Credit—were more likely to be audited than substantial small businesses, and three times more likely than individuals earning more than $100,000. By all reports tax evasion has soared, as evidenced by the aggressive marketing of illegal tax shelters by some of our most august financial institutions.

There was also an extraordinary outbreak of greed on the part of Wall Street executives and business leaders. By 1999, the average pay of the 100 top CEOs was $37 million. Between 1970 and 2000, the average American worker’s paycheck improved by about $2 a week each year, mostly resulting from gains made by women. At the same time, CEO pay improved $26,000 a week each year—every year for thirty years. The almost inconceivable leap in executive income has naturally stimulated a free-for-all rush for even more tax privileges and shelters-special treatment for stock options, offshore hedge funds, companies paying for personal expenses, tax benefits for owning corporate jets, and many, many more. That such unseemly looting has become socially acceptable, not to say praiseworthy, is an inquiry for social psychology, not economics.

Finally, it is worth noting that virtually all these data are from the period before the recent Bush administration tax cuts on capital gains, stock dividends, and estate taxes. Taken together, the Bush program will beam the very rich out to new galaxies of wealth far, far, away from the rest of us. The single-mindedness with which the administration has focused on benefits for the narrow band of the super-rich is astonishing. Congressional Democrats, for example, have proposed raising the ceiling on the estate tax to $4 million, or a similarly high figure, rather than totally eliminating it. The administration responds with ritual denunciations of “death taxes” on “small businesses” and “family farmers.” In fact, the most recent data on average estates at death show that for people in the 99–99.5th percentile of income, the average estate was only about $2.1 million. The big winners from the Bush program are our 13,400 friends in the top .01 percent whose average estate was about $87 million. This is a tax platform that would make Louis XIV proud.

 

Why Should We Care?

The problem is not that some people are getting rich. Lincoln was right that the fluidity and mobility of America make up a great part of its attraction. But there are many problems with developing a class of super-rich. For one thing, as the tiering of American wealth distribution stretches further and further upward, it reduces mobility. The children of the poor now disproportionately stay poor, to an extent far beyond any explication based on lower intelligence or race, while the children of the rich disproportionately stay rich, again to an extent that can’t be explained by their talent or IQs. There is also substantial evidence that a number of other developed countries—including Germany, Canada, Sweden, and Finland—now have more social mobility than America does. The justification for policies that mildly even out wealth accumulation is much like those for regulating business competition. Americans are in favor of free competition and applaud the winners, but we also believe that it is right to step in to level the playing field when competition ends in monopoly.

Then there is the problem of corruption, as illustrated by the naked bias of the current administration toward its friends among the very wealthy. New York Times reporter David Cay Johnston, in his fine recent book, Perfectly Legal (Portfolio/Penguin), has documented case after case where the administration or its congressional friends have engineered egregious giveaways to tiny coteries of the very wealthiest people in America.

These are not just theoretical problems. An obvious example of how pandering to the very wealthiest is destructive of the interests of everyone else is the administration’s insistence on outlawing Medicare from negotiating better pharmaceutical prices for its enrollees. Even more important is the current attack on Social Security. It’s a complex story but worth tracing in some detail.

By the standards of other developed countries, Social Security is modest enough, yet it is still the most important American antipoverty program. About 45 million people receive benefits from the program. More than a third of beneficiaries are disabled, or are the children and spouses of disabled or retired workers. For more than two-thirds of retirees, Social Security is more than half their income. In 1983, on the recommendations of a commission chaired by Alan Greenspan, who was then not in government, Congress passed a thorough overhaul of the system’s financing. There was a very sharp increase in payroll taxes for Social Security and Medicare, the age for full retirement was pushed up on a phased basis, and certain benefits were subject to taxation. The payroll tax increase was much larger than needed to support current Social Security outlays. The extra payments were designed to build an interest-earning surplus in the Social Security trust funds to provide a cushion against the day, now almost upon us, when the baby boomers begin to retire in large numbers.

The payroll tax itself is unusually regressive. It falls on the first dollar of income up to a ceiling (now about $88,000); upper-income people are consequently assessed a lower share of their paychecks than average workers are. For most middle-class and poorer families, the payroll tax is the largest tax they pay, and substantially reduces the overall progressivity of federal taxes. (On a lifetime basis, the effect of Social Security taxes and benefits is still mildly progressive for most people.)

The Bush administration has been loudly proclaiming that Social Security is in terminal crisis. The truth, according to the best current projections, is that assets of the Social Security trust funds will be sufficient to cover benefits for the next thirty-eight years. Additional tweaks will be required to ensure solvency beyond that; but if they’re enacted now, they can be relatively mild. Some combination of a 1-percent or so payroll-tax increase together with a modest slowdown in the rate of benefit increases, or a variety of similar measures, would about do the trick. So why is the administration shouting crisis? Because they want to “privatize” the system—that is, take the accumulated trillions of dollars in the trust funds and give them to their friends on Wall Street to manage (yes, the same folks who brought us the dot.com fiasco). A 1-percent management fee on a trillion dollars is $10 billion a year, so we’re not talking about chump change. In fact, for complicated reasons, privatization will actually make the system’s financing much worse, but the administration simply ignores that. After all, that’s what friends are for.

But the Bush tax and fiscal policies will be even more devastating for Social Security than privatization would be. The Bush tax cuts are aimed at virtually eliminating taxes on investment income—especially capital gains, corporate dividends, and accumulated estates—all of which will serve to increase the yawning gap between the very rich and everyone else. Although the administration originally sold the tax cuts as a temporary expedient to restore growth, it is now pressing to make them permanent. The consequence will be very large federal deficits, of a scale not seen since the worst deficits of the Reagan years. Although administration flacks blame the deficits on slow growth, the nonpartisan Congressional Budget Office identifies the tax cuts as the largest single factor.

Why will deficits do so much damage? Follow what happens to those payroll tax surpluses. The government takes in the cash and spends it for general government purposes like the war in Iraq, subsidies for sugar beet farmers, and Medicare. Then the government issues an interest-bearing bond in the same amount and deposits it in the Social Security trust funds. One level of government—the Social Security administration—now owns a bond, and another level of the same government has the obligation to pay it off when it falls due.

At some point, in about fifteen years or so, payroll taxes will no longer cover annual retirement payments. At that point, the trust funds will begin to cash in their bonds. Where will the government get the cash to pay them off? There are only two ways—it can raise taxes or borrow. The original idea behind the payroll tax surpluses was that they would help the government pay down its accumulated debt, so it would have plenty of borrowing power when the boomer bills start to fall due. That was actually happening at a rapid clip during the second Clinton administration.

But if the government just keeps adding to its debt by running massive budget deficits, it won’t have any extra borrowing power to manage Social Security payments, and there will also be many more claims on potential tax increases. That leaves only two expedients—just print lots of new money, and inflate away the value of the benefits; or renege on Social Security’s promises.

Federal Reserve Chairman Alan Greenspan understands the conflict between the Bush deficits and the promises of Social Security. That is why he issued a statement earlier this year calling for major cuts in benefits. Yes, this is the same Alan Greenspan who has consistently supported the Bush tax cuts, and who also strongly supports making them permanent, thus locking in the deficits. It is also the same Alan Greenspan who favors turning over the trust funds to Wall Street investment bankers—so they can get even more amazingly rich than normal people. And yes, this is the same Alan Greenspan who designed the current Social Security financing system in the first place.

In short, twenty years of the high payroll taxes Greenspan recommended to finance Social Security have been blown away by a binge of upper-class tax cuts, which Greenspan also advocated. So now your benefits will have to be cut to make up the difference. You trusted the government with your payroll tax surplus, and were proved a sucker. The fees Greenspan and the administration would like to take from the trust funds for their friends on Wall Street are just another bonus.

It would be hard to imagine a more naked case of aggression by the wealthiest on the interests of the rest of the citizenry. There is only one word for it—it is a crime.

 


Related: The Rich Get Richer, by the Editors

Published in the 2004-08-13 issue: 
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Charles R. Morris’s most recent book is The Rabble of Dead Money, a history of the Great Depression (PublicAffairs).

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