The biggest issue facing our country right now is inequality. The only way to fix that is by creating good, well-paying jobs, with benefits to once again start building up the ranks of the middle class. Then, and only then, will the economy start growing enough so that the debt can be paid down.
There’s only one catch. The political will in our country is not there for such a solution. Joe Sitglitz does a great job of explaining in this Vanity Fair piece, The 1 Percent’s Problem, that the wealthy in this country have to be willing to make “selfish desicisions” like they did 80 years ago to fix our economy.
The Consumption Problem
When one interest group holds too much power, it succeeds in getting policies that help itself in the short term rather than help society as a whole over the long term. This is what has happened in America when it comes to tax policy, regulatory policy, and public investment. The consequence of channeling gains in income and wealth in one direction only is easy to see when it comes to ordinary household spending, which is one of the engines of the American economy.
It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest. It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop. Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do.
In our imaginations, it doesn’t always seem as if this is the case, because spending by the wealthy is so conspicuous. Just look at the color photographs in the back pages of the weekend Wall Street Journal of houses for sale. But the phenomenon makes sense when you do the math. Consider someone like Mitt Romney, whose income in 2010 was $21.7 million. Even if Romney chose to live a much more indulgent lifestyle, he would spend only a fraction of that sum in a typical year to support himself and his wife in their several homes. But take the same amount of money and divide it among 500 people—say, in the form of jobs paying $43,400 apiece—and you’ll find that almost all of the money gets spent.
The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first decade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb.
The “Be Selfish” Solution
Many, if not most, Americans possess a limited understanding of the nature of the inequality in our society. They know that something has gone wrong, but they underestimate the harm that inequality does even as they overestimate the cost of taking action. These mistaken beliefs, which have been reinforced by ideological rhetoric, are having a catastrophic effect on politics and economic policy.
There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound. Henry Ford, not remembered as one of history’s softies, understood that the best thing he could do for himself and his company was to pay his workers a decent wage, because he wanted them to work hard and he wanted them to be able to buy his cars. Franklin D. Roosevelt, a purebred patrician, understood that the only way to save an essentially capitalist America was not only to spread the wealth, through taxation and social programs, but to put restraints on capitalism itself, through regulation. Roosevelt and the economist John Maynard Keynes, while reviled by the capitalists, succeeded in saving capitalism from the capitalists. Richard Nixon, known to this day as a manipulative cynic, concluded that social peace and economic stability could best be secured by investment—and invest he did, heavily, in Medicare, Head Start, Social Security, and efforts to clean up the environment. Nixon even floated the idea of a guaranteed annual income.
So, the advice I’d give to the 1 percent today is: Harden your hearts. When invited to consider proposals to reduce inequality—by raising taxes and investing in education, public works, health care, and science—put any latent notions of altruism aside and reduce the idea to one of unadulterated self-interest. Don’t embrace it because it helps other people. Just do it for yourself. [Emphasis added]
The sad reality is that no one with any political power is even thinking about doing what needs to be done to fix our economy. What will fix our economy is what the GOP ran on in 2010 and has since forgotten – jobs, jobs, jobs. It’s a great article and should be read in its entirety. Especially the section on “The Mistrust Problem”, which describes very well how inequality breeds mistrust in our political and economic systems.
Of course it’s the money in our political system that’s breeding much of the mistrust. As this recent item shows, Wall Street owns our political system now, Political Dividends.
Four years after the 2008 collapse, the finance industry has regained its dominant position in American politics. Perhaps the development of deepest significance is an absence: the failure of a powerful anti-Wall Street faction to emerge in either the House or the Senate. This is in contrast to the response to previous financial crises, when Congress enacted tough legislation — after the Savings and Loan implosion of the 1980s, for example, and more recently after the bankruptcy of Enron and WorldCom in the early 2000s.
Look at the current political environment this way: if Mitt Romney’s campaign and the Romney-supporting super PAC Restore Our Future were a public company, the financial services industry would have a controlling interest.
President Obama, in turn, has been noticeably cautious in his critique of Wall Street, trying instead to focus on Romney’s former company, Bain Capital. Obama’s ambivalence about speaking out is a tacit victory for the industry.
It can be hard to see that the government must be the job creator right now, which will cause more short term deficit spending. But once those who are out of work have jobs, and can start spending again, the economy will start growing – more tax revenue to pay down the deficit. The massive deficit spending of World War II finally ended the Great Depression. But the economic growth it brought, along with higher taxes on the wealthy, insured the deficit got paid down once the economy improved.
And that’s what we need today. The government to create jobs, fixing our crumbling infrastructure and putting teachers and other public employees back to work. Once those jobs are back, then the private sector will start hiring again, and the economy will grow and the deficit will shrink. All that’s missing is the will to get it done.
[UPDATE]: Or you can just watch Krugman destroy these British wingnuts. Via Crooks and Liars, Paul Krugman Demolishes a Couple of Pro-Austerity Tories on British Television.