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What Reagan wrought

Inequality’s Crusaders
The Rich Are Different From You And Me

“Now in all states,” Aristotle said, “there are three elements: one class is very rich, another very poor, and a third in a mean.” A city, Aristotle said, ought to be composed as far as possible “of equals and similars; and these are generally the middle classes,” which prevent the rich, the strong and the lucky from dominating the rest, or the envious poor from plotting against the rich. “Great then is the good fortune of a state in which the citizens have a moderate and sufficient property; for where some possess much, and the others nothing, there may arise an extreme—either out of the most rampant democracy, or out of an oligarchy.”

Rampant democracy in the United States ? Not quite. Oligarchy is more like it. The weekend papers produced a spate of articles on inequality, a subject that intellectuals and journalists pay attention to from time to time, for good Aristotelian reasons, but that has yet to catch the interest of ordinary voters because of the Whats-The-Matter-With-Kansas syndrome: the desire to be on the profitable end of inequality is still stronger than the desire to see the country return to the “Great Moderation” of the 1950s. Whenever a presidential candidate like Al Gore in 2000 or John Edwards in 2004 brings up the idea of two Americas , he’s accused of waging class warfare. But there are classes in America , and there is warfare. It happens to be the Clausewitzian kind: by means other than the obvious.

From a piece by Roger Lowenstein in the New York Times Magazine:

Across the spectrum of American society, the higher your income category, the more your income continued to grow. And for a quarter-century, albeit with zigs and zags along the way, that rich-get-richer pattern has held. The figures are striking. In 2004, according to the Congressional Budget Office’s latest official analysis, households in the lowest quintile of the country were making only 2 percent more (adjusted for inflation) than they were in 1979. Those in the next quintile managed only an 11 percent rise. And the middle group was up 15 percent. Do you sense a pattern? The income of families in the fourth quintile — upper-middle-class folks with an average yearly income of $82,000 — rose by 23 percent. Only when you get to the top quintile were the gains truly big — 63 percent. […] Writing in The Boston Globe, the columnist James Carroll said the current economic system is “eroding democracy” by awarding a larger share of the economic pie to the very rich and “impoverishing more and more human beings.”

Of course, leave it to the New York Times, whose readership is overwhelmingly in that top 2 percent (have you looked at Times ads lately? At the point of view of Times articles?) to immediately cozy up to inequality and qualify any suggestions by the likes of James Carroll with sentences like this: “The evidence for the last point is rather scant.” Really? Lowenstein hasn’t looked at voter turnout lately. He hasn’t looked at the erosion of democracy by machinations a-la-Ohio and Florida. He hasn’t heard, because he doesn’t seem to get out much inland, the utter indifference to politics of enormous swaths of young America. The 18-to-34rs may be watching hot television dramas. They’re not watching their country self-destruct. Lowenstein again, from that Timesian point of view:

Why isn’t prosperity spreading more equally? The leading theory has been that a global, high-tech economy creates big winners and losers. That is surely part of it. But Europe has computers, too, so where are all of its billionaires? Countries like Sweden are more equal, but to some economists, they are probably too equal. There is a rough trade-off between equality and growth: if you try too hard to make everyone equal, you get fewer entrepreneurs, fewer Silicon Valleys and a lower standard of living.

According to whom? The greatest rise of Middle Class America took place between World War II and 1980, when the top marginal tax rate reached 90 percent (in the 1950s) and stayed as high as 70 percent before Ronald Reagan brought his slashers and burners. That period, from 1945 to 1970, remains a golden age of equality and the fastest-paced rise in American standards of living on record, as well as the fastest paced reduction in poverty, the fastest-paced rise in productivity. What on earth is Lowenstein talking about? Still, Lowenstein goes on:

You can boil down most economic policy debates — starting with Hamilton versus Jefferson and moving to Bush versus the Democrats — to this tension: how can you promote equality without killing off the genie of American prosperity? The trade-off is clear at the extremes but fuzzier in the middle. A little redistribution, cleverly designed, doesn’t hurt. One example might have occurred during the late ’90s. The stock market was crowning multimillionaires, but the poor also did a little better. Among households with children, cash earnings of the poorest quintile doubled (though their earnings, at $13,000, remained meager and have tapered off more recently). Most of the improvement at the bottom was because of people working more hours rather than for higher wages: a red-hot economy provided more jobs. The retooled federal welfare program, however, as well as the expansion of the earned-income tax credit (E.I.T.C.), gave people an added financial incentive to work. […] The extreme divergence of American incomes we see today, however, is actually rather new.

Again, what is Lowenstein talking about? Here’s James MacGregor Burns, the historian, writing in “The Worshop of Democracy”: “Americans in the late nineteenth century could boast of a burgeoning middle class, but they could not deny gross disparities between the rich and the poor. Jacob Riis and others who wrote of these extremes did not exaggerate; sophisticated economic analysis many years later would demonstrated that the 1860s and early 1870s constituted one of the ‘highest income inequalities in American history,’ comparable only to the 1913-1916 period and to the late 1920s, just before the collapse of stock prices.” Lowenstein contradicts himself again and again, as defenders of inequalities’ alleged creative necessities and free-market wonders will. Remember that bit about inequality tamping down innovation and standards of living? “For most of the 20th century,” Lowenstein writes, “ America was becoming more egalitarian.” But wasn’t America becoming richer, too, for most of the 290 th century? He leaves that question unanswered. He can’t deny facts, however:

By the ’70s, the share of income earned by those at the top was far lower than when Woodrow Wilson was president. […] This might explain why inequality grew in the United States but not in Europe. In the United States, the marginal tax rate was sharply reduced (during the Reagan years, from 70 percent to 28 percent) and unions gradually lost their clout. Also, beginning in 1979, the minimum wage (in real terms) began to decline.

But he can qualify fact with fat-cat spin: “Before you get too misty-eyed over the ’70s, remember that while the decade may have been a high-water mark for American egalitarianism, the country was also in its worst economic funk since the Great Depression.” Because things have been better since, for most? Relatively speaking, yes. Relative to the 20 th century’s trends, not at all. As we reach the bottom quintile of the article, we get to the meat of the inequalities:

Even in the United States, the rich pay a disproportionate share of the federal income tax, which mildly reduces inequality. Other taxes, however, like Social Security, are regressive: the rich pay a lesser share. Thus, the upper tenth of households pay 70 percent of the income tax, but only 52 percent of all federal taxes. State sales taxes make the system even more regressive, because poorer people spend a higher share of their total income on them. Kevin Hassett, of the American Enterprise Institute, estimates that a family of four earning $50,000 pays exactly the same share of its income (30 percent) on taxes as one earning $150,000.

This is where this article ties into another in the same Sunday Times, this one by Daniel Gross, which takes a less defensive view of inequalities based on the findings of two professors, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley. They “have found that the share of gross personal income of the top 1 percent of American earners rose to 17.4 percent in 2005 from 8.2 percent in 1980.” Some of that may be explained by more sophisticated means of measuring performance at work, which enables more targeted merit pay. But much of it is sheer rich-getting-richer grasping, proving that “the rise of income isn’t simply a byproduct of the free market working its wonders.”

Professor Levy and Professor Temin divide the second half of the 20th century into two periods. In the first, 1955 to 1980, a grand bargain between labor and corporate America involving New Deal-era protections for workers and high marginal tax rates (the top rate was 90 percent in the 1950s) led to what economists have called the Great Moderation. The middle class grew dramatically, income inequality decreased, and corporations generally enjoyed labor peace. Since 1980, they argue, it’s been a different story, thanks in part to a shifting political environment. Unions have weakened, the minimum wage hasn’t come close to keeping up with inflation, and marginal income tax rates have been cut — the top marginal rate is now 36 percent, down from 70 percent in 1980. A result has been declining bargaining power for workers and the rise of a winner-take-all environment. […] What are the political — and policy — implications of this rethinking of the roots of income inequality? Too often, economists have argued that the government can’t — and shouldn’t — do much to reverse the growth of income inequality, beyond exhorting workers to get more skills and education. But given the institutional factors at work, that may be a cop-out. “The historical evidence suggests that institutions do have some power to modify some of these outcomes,” Professor Levy said. It is commonplace to hear that the current set of arrangements and policies is the only possible way the economy can work, given trends like the rise of China and global economic integration. As Professor Levy said, “That’s a very convenient argument for people to make if they’re doing very well.”

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