A Little Inequality is Good … Too Much Destroys the Economy
Preface: Don’t stop reading when you see tme criticizing your “team” … I will demolish the other “side” further down in the post.
I have written as much as anyone on inequality. For example, I have noted that:
- Inequality in America is worse than in Egypt (or Tunisia, Yemen or most Latin American banana republics)
- Extreme inequality helped cause both the Great Depression and the current economic crisis
- The economy cannot recover as long as inequality continues to skyrocket … but government policy is increasing inequality
- We’ve known for 1,900 years that “An imbalance between rich and poor is the oldest and most fatal ailment of all republics“
- Tax cuts for the middle class and poor stimulate the economy, but tax cuts for the wealthy hurt the economy
As such, one of the reasons I have supported the Occupy protests is that it has brought attention to inequality in America.
Why the Left Is Wrong About Inequality
Some liberals want to redistribute wealth by raising taxes on the wealthy. And some even wish to do away with capitalism altogether.
But as the New York Times’ Nicholas Kristof noted last month:
Lawrence Katz, a Harvard economist, adds that some inequality is necessary to create incentives in a capitalist economy but that “too much inequality can harm the efficient operation of the economy.” In particular, he says, excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.
“These factors mean that high inequality can generate further high inequality and eventually poor economic growth,” Professor Katz said.
In other words, while too much inequality will kill the economy, too little creates a “post office worker mentality” where people aren’t motivated to work hard or innovate. Communism is not the answer.
I pointed out in October that capitalism is not the problem:
While Michael Moore says that capitalism itself is the problem, Mr. Moore is wrong. Indeed, one of the main organizers of the protests told me that Moore’s statement is very counter-productive.
As I’ve previously noted:
When Mahatma Gandhi was asked what he thought about Western civilization, he answered:
I think it would be a good idea.
I feel the same way about free market capitalism.
It would be a good idea, but it is not what we have now. Instead, we have either socialism, fascism or a type of looting.
If people want to criticize capitalism and propose an alternative, that is fine . . . but only if they understand what free market capitalism is and acknowledge that America has not practiced free market capitalism for some time.
People pointing to the Western economies and saying that capitalism doesn’t work is as incorrect as pointing to Stalin’s murder of millions of innocent people and blaming it on socialism. Without the government’s creation of the too big to fail banks, Fed’s intervention in interest rates and the markets, government-created moral hazard emboldening casino-style speculation, corruption of government officials, creation of a system of government-sponsored rating agencies which had at its core a model of bribery, and other government-induced distortions of the free market, things wouldn’t have gotten nearly as bad.
As Justice Louis Brandeis said:
In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy.
If there has been lawlessness and corruption among Wall Street players, it was partially simply modeling the lawlessness and corruption of the Executive Branch and Congress members. I’ve written elsewhere about how the government lied by saying Saddam had weapons of mass destruction and was behind 9/11 (when he didn’t and wasn’t), that we don’t torture (when we did), that we don’t spy on Americans (when we did), etc. Just like kids model what their parents do as well as what they say, Wall Street modeled the unlawful and corrupt actions of our government employees.
Being against capitalism because of the mess we’ve gotten in would be like Gandhi saying that he is against Western civilization because of the way the British behaved towards India.
Why the Right Is Wrong About Inequality
The Republican leadership pretends that making the rich richer will help “job creators” to reduce unemployment. But they are out of touch with their base.
As I noted in September:
While the stereotype is that liberals care about inequality and conservatives don’t, that is actually a myth.
According to the voice of Canada’s business establishment: “High inequality can diminish economic growth if it means that the country is not fully using the skills and capabilities of all its citizens or if it undermines social cohesion, leading to increased social tensions.
History has shown us, time and again: When too much is controlled by too few, something has to give. Continuously rising inequality is unsustainable.
Everyone has a stake in fixing this. And the fix has no political colour.
(The Post is correct about the potential for social unrest.)
Moreover, IMF economists have demonstrated that inequality increases a nation’s debt. Because conservatives are passionate about reducing debt, reducing inequality is a conservative value.
And as I noted in February:
Renowned behavioral economist Dan Ariely (Duke University) and Michael I. Norton (Harvard Business School) recently demonstrated that everyone – including conservatives – thinks there should be more equality.
Their study found:
Respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo.
Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.
How could the media portrayal regarding this issue be so wrong?
Well, for one thing, as a study the Pew Research Center found, the corporate media tends to take Wall Street’s view on economics. Indeed, the media is largely set up to spout propaganda which supports the view of the powers-that-be. The financial sector has been by far the biggest beneficiary of government policies over the past 10 years or so. So the media tends to defer to Wall Street’s own arguments against equality.
Everyone agrees that a system which uses the power of the state to reward the fraud and gambling of the largest banks and biggest corporations through socialism for the rich and capitalism for everyone else is not free market capitalism, and is downright anti-American.
As I pointed out in December:
Conservatives hate big unfettered government and liberals hate big unchecked corporations, so both hate legislation which encourages the federal government to reward big corporations at the expense of small businesses.
As an example, both liberals and conservatives are angry that the feds are propping up the giant banks – while letting small banks fail by the hundreds – even though that is horrible for the economy and Main Street.
The Dodd-Frank financial legislation … enshrines big government propping up the big banks … more ore less permanently.
Many liberals and conservatives look at the government’s approach to the financial crisis as socialism for the rich and free market capitalism for the little guy. No wonder both liberals and conservatives hate it.
They are furious that there is no separation between government and a handful of favored giant corporations. In other words, Americans are angry that we’ve gone from capitalism to oligarchy.
So if both liberals and conservatives hate something, it doesn’t necessarily mean it’s a compromise. It may mean that they feel disenfranchised from a government that is of the powerful and for the powerful.
In other words, while many conservatives are against raising taxes on the wealthy, they are overwhelmingly for stopping the use of the power of the state to increase inequality. See this, this and this.
This is an area of agreement between people of good faith on the left and on the right. As Robert Shiller said in 2009:
And it’s not like we want to level income. I’m not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.
If we stop bailing out the fraudsters and financial gamblers, the big banks would focus more on traditional lending and less on speculative plays which only make the rich richer and the poor poorer, and which guarantee future economic crises (which hurt the poor more than the rich).
Indeed, if we break up the big banks, it will increase the ability of smaller banks to make loans to Main Street, which will level the playing field.
Moreover, both conservatives and liberals agree that we need to prosecute financial fraud. As I’ve previously noted, fraud disproportionally benefits the big players, makes boom-bust cycles more severe, and otherwise harms the economy – all of which increase inequality and warp the market. [No wonder leading free market economists urge the prosecution of financial fraud.]
And as I noted last April, prosecutors could claw back ill-gotten gains from the criminals and use that money to help the economy:
For an economic system to be a system, money must flow freely at all levels and in all corners. When those in charge of the system decide to so order the mechanisms of the financial sector to drive the money into a single huge pile, the system cease to be a system and a crash becomes inevitable. One might as well force all the blood in your body to stay in the brain. The end result is the same; death for the body.
The father of free market capitalism – Adam Smith – was wary of too much inequality:
Smith was sometimes tolerant of government intervention, ”especially when the object is to reduce poverty.” Smith passionately argued, ”When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.” He saw a tacit conspiracy on the part of employers ”always and everywhere” to keep wages as low as possible.
And Warren Buffet – one of America’s most successful capitalists and staunchest defenders of capitalism – points out: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war ….”
The Economist noted in January:
Hu Jintao, David Cameron, Warren Buffett and Dominique Strauss-Kahn … have all worried, loudly and publicly, about the dangers of a rising gap between the rich and the rest.
A new survey by the World Economic Forum, whose annual gathering of bigwigs in Davos begins on January 26th, says its members see widening economic disparities as one of the two main global risks over the next decade (alongside failings in global governance).
Add Alan Greenspan to the list, who says:
Our problem basically is that we have a very distorted economy, in the sense that there has been a significant recovery in our limited area of the economy amongst high-income individuals…
Large banks, who are doing much better and large corporations, whom you point out and everyone is pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labour force, which is in tragic unemployment, long-term unemployment – that is pulling the economy apart. The average of those two is what we are looking at – that they are fundamentally two separate types of economies.
As I pointed out in July:
For those who still claim that tax cuts for the rich help the economy, the proof is in the pudding. The rich have gotten richer than ever before, and yet we have Depression-level housing declines, unemployment and other economic problems.
No wonder Ronald Reagan’s budget director David Stockman called the Bush tax cuts the “worst fiscal mistake in history”, and said that extending them will not boost the economy.
I explained in August:
A “jobless recovery” is basically a redistribution of wealth from the little guy to the big boys.
Economist Steve Keen says:
“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.
And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.
The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …
… and ending up in the pockets of the top .1% richest people.
The Bottom Line
A little inequality is good, but too much kills the economy. Right now, inequality is out of control.
So the bottom line is – as Shiller says – we must “focus on restraining any possible further increases in inequality” through bailouts of big banks, policies which enable Wall Street fraud, etc.
It is not the small businesses, the innovators and entrepreneurs, the hard-workers and the best Americans who have been rewarded. The financialization of the economy – the capture of the economy and the political system by the giant banks – means that the looters are rewarded with huge bonuses, while real capitalists are penalized.
So we have to break up the big banks to restore capitalism, and end the socialism, fascism, crony capitalism, looting, kleptocracy, oligarchy or banana republic behavior – depending on your preference of wording – which we currently have … which is the core source of raging inequality today.
(And as Steve Keen has shown – if anyone is going to receive a bailout – giving money to the little guy would stimulate the economy much more than throwing money at the banks.)
And we should sure as heck claw back the ill-gotten gains from those who have committed financial fraud.
And because raging inequality may cause unrest and violence in America and the rest of the western world (update), the top .01% would be wise – like the white leaders of South Africa – to share power rather than face a tidal wave of rage from a population that feels like the political system can never work for them.