The Gardens of Democracy: A New American Story of Citizenship, the Economy, and the Role of Government (10 page)
Authors: Eric Liu,Nick Hanauer
Tags: #Political Science, #Political Ideologies, #Democracy, #History & Theory, #General
BOOK: The Gardens of Democracy: A New American Story of Citizenship, the Economy, and the Role of Government
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Wealth creation is maximized
only
by maximizing the number of robust diverse competitors in the market. The more potentially “fit” players you can field, the more likely your team is to succeed. Equality of opportunity, then, isn’t just a moral imperative. It’s an economic imperative. Making sure everyone gets a fair shot isn’t being nice; it’s bowing to necessity. Unfortunately, the politics of the last three decades has led to a concentration of wealth without modern precedent that has undermined equality of opportunity and thus limited our overall economic potential.
Inequality and Economic Crisisonly
by maximizing the number of robust diverse competitors in the market. The more potentially “fit” players you can field, the more likely your team is to succeed. Equality of opportunity, then, isn’t just a moral imperative. It’s an economic imperative. Making sure everyone gets a fair shot isn’t being nice; it’s bowing to necessity. Unfortunately, the politics of the last three decades has led to a concentration of wealth without modern precedent that has undermined equality of opportunity and thus limited our overall economic potential.
The election of Ronald Reagan in 1980, under the banner of “limited government” and “trickle-down economics,” marked the start of a Thirty Years War against the middle class. Since then, the share of income the richest 1 percent earn has gone from 8.5 percent to 24 percent while the bottom 50 percent of Americans have seen their share drop from 18 percent to just 12.5 percent. If this trend continues, by 2040, the top 1 percent will garner 37 percent of the income and the bottom 50 percent just 6 percent of total income! At that point or well before it, our economy will have collapsed. In the meantime, we are at a level of wealth concentration not seen since just before the Depression, while tax rates on the top earners are at their lowest in decades.
What have been the costs of this imbalance? In November 2010, IMF economists Michael Kumhof and Romain Rancière published a seminal paper arguing that the economic crises of 2007–08 and 1929 were caused by the same phenomenon: radical income inequality.
In their paper, Kumhof and Rancière demonstrated that inequality and financial leverage create an unholy and fatal feedback loop. As the wealthy accumulate ever more money they generate price bubbles in real estate and other assets, which force all other participants in the economy to borrow more just to keep up. As the wealthy accumulate capital, their need to find return for these assets grows. The rich come to financialize their assets in the form of loans to—whom else?—the poor and middle class. Easy credit is the natural result of enormous pools of money seeking returns. As the poor and middle class borrow more in order to maintain lifestyles increasingly beyond their means, unsustainable leverage follows. In both 1929 and 2008, collapse was the inevitable consequence.
This crisis of income and wealth concentration is the most serious threat America faces today. The problem, to be clear, isn’t inherently that the wealthiest among us make so much more than the poorest: inequality (of talent, effort, outcome) will always exist, and a wide spread from top to bottom is not necessarily malignant so long as there is a robust middle.
The problem is
concentration
and the hollowing out of the middle. Since 1980 an overwhelming proportion of the nation’s wealth has concentrated at the very top. Today, the top 1 percent account for more wealth than the bottom 90 percent. That is not American. The middle has shrunk, the ranks of the poor have grown, and the United States now has the wealth distribution of a Third World nation. And whereas wages used to track productivity, they no longer do: American workers are ever more productive, but the wealthy are capturing those gains. Our aggregate national GDP may be higher today than it was in 1980, but when most of the additional wealth is in the hands of a few, most of us cannot be robust participants in the economy.
concentration
and the hollowing out of the middle. Since 1980 an overwhelming proportion of the nation’s wealth has concentrated at the very top. Today, the top 1 percent account for more wealth than the bottom 90 percent. That is not American. The middle has shrunk, the ranks of the poor have grown, and the United States now has the wealth distribution of a Third World nation. And whereas wages used to track productivity, they no longer do: American workers are ever more productive, but the wealthy are capturing those gains. Our aggregate national GDP may be higher today than it was in 1980, but when most of the additional wealth is in the hands of a few, most of us cannot be robust participants in the economy.
This is not just unfair; it’s unhealthy. The researchers Richard Wilkinson and Kate Pickett, in their much-discussed book
The Spirit Level
, reveal that across the fifty states and then across nations as well, a pattern of correlation emerges so strongly as to assert causation: the higher the level of inequality, the higher the level of social pathology. This is true of obesity, depression, violent crime, infant mortality, incarceration, pollution, and on and on. Concentration of wealth makes the entire society sick, and America is Exhibit A of this phenomenon.
The Spirit Level
, reveal that across the fifty states and then across nations as well, a pattern of correlation emerges so strongly as to assert causation: the higher the level of inequality, the higher the level of social pathology. This is true of obesity, depression, violent crime, infant mortality, incarceration, pollution, and on and on. Concentration of wealth makes the entire society sick, and America is Exhibit A of this phenomenon.
This situation did not arise by accident. It is not something beyond our control, like today’s weather. It is the direct and wholly predictable result of a 30-year experiment in trickle-down economics and market-fundamentalist politics—an experiment concocted by Republicans but never dismantled and often sustained by Democrats.
In this section, we identify the intellectual and political components of the right-wing economic theory of action, and aim to replace them with a new approach we call “middle-out economics.”
Trickle-down EconomicsTraditional economics, if taken literally, not only implies but necessitates market fundamentalism. If you believe the economy is a self-regulating machine, then you must believe that government intervention in the market is inherently bad.
The right’s theory of action is thus to “limit” government. In management of the state, this translates into deregulation of business activity so that corporations, once unfettered, can lower costs, make more money, and (theoretically) create more jobs. In management of the economy, it means using tax policy to put more wealth in the hands of the wealthiest so that they can invest it in job-creating businesses. The Reaganites who pushed this agenda called it “supply-side economics,” but it came to be known more enduringly as “trickle-down economics”—the idea being that money will trickle its way down from wealthy capitalists to everyday Americans.
That’s the theory. Politically it has been a great success. The rhetoric of shrinking government and not punishing “job-creators” is dominant in American public life. The policies that support the rhetoric—personal income tax cuts for the wealthiest, cuts in capital gains taxes, cuts in the corporate income tax, rollbacks of the estate tax—have been left unchanged, plus or minus, by presidents of both parties since Reagan. The theory begat a political and policy consensus that even the Great Recession has barely nudged.
Unfortunately, there is one way trickle-down economic theory has failed: empirically. Average household income looks like it’s 50 percent higher today than when Reagan took office—but that average is deceptive. Most of the gains in income during these three decades have gone straight to the top, particularly the top 1 percent. And the modest income gains of the middle between 2010 and 1980 look even less impressive when we consider that the average household now has more people working many more hours just to keep up. In practice, this has meant wage stagnation for the middle class, who’ve taken on ever more debt to keep up with the Joneses.
In their groundbreaking book on the policy choices behind inequality,
Winner-Take-All Politics
, Jacob Hacker and Paul Pierson meticulously explore the real dollar impact of rising inequality. One example sticks out: If the income distribution for all Americans had remained constant since 1980, the average American family would be earning $64,395, which is $12,295 and 24 percent more than they do today. If Americans had this much more to spend, and the nation this much more in its tax base, the economy would not be struggling as much as it is in 2011.
Winner-Take-All Politics
, Jacob Hacker and Paul Pierson meticulously explore the real dollar impact of rising inequality. One example sticks out: If the income distribution for all Americans had remained constant since 1980, the average American family would be earning $64,395, which is $12,295 and 24 percent more than they do today. If Americans had this much more to spend, and the nation this much more in its tax base, the economy would not be struggling as much as it is in 2011.
To understand why the low-wage, high-consumption, high-debt implementation of trickle-down economics has been such a failure—for everyone but the top 1 percent, that is—it’s necessary to examine one of its core intellectual foundations: the notion that redistribution of wealth is inherently illegitimate and ineffective.
Redistribution, Spending, and RecirculationThis claim is sometimes offered up in cartoonish accusations of socialism. But in its more serious form, it is that redistribution kills the profit motive, is less efficient than market forces, and thus works to decrease overall wealth. By contrast, goes the claim, incentivizing those with capital to accumulate even more—even if it results in great and inherited inequality—is more consistent with American principles of liberty and free enterprise.
Let’s take each piece of the claim in turn. To begin with, increases in income tax rates generally do not make already wealthy capitalists less likely to pursue profit or to engage in job-creating economic activity, whether starting a business or buying a car. It is absurd to claim that hedge fund managers would work less hard if the taxes they currently pay on carried interest were to increase from 15 percent to 50. In fact, a persuasive case could be made that a person who kept only 50 percent of his billion dollars in annual income, rather than 85 percent, would work close to 33 percent harder. Yes, there is a point of diminishing returns past which workers keep too little of the value their work creates, their incentive to work hard diminishes, and overall growth slows. We are nowhere near that. After the tax increases under the first President Bush and President Clinton, income tax rates were much higher than today—and yet this country enjoyed in the 1990s an unprecedented economic expansion and period of job creation. (And while we don’t advocate the 90 percent marginal rate of the 1960s, we would note that America’s growth rates were never higher than during that period of supposedly job-killing high taxes).
Next, the trickle-down economics crowd posits a false choice between government-mandated redistribution on the one hand and free markets on the other. But of course, this agenda—as exemplified by the Reagan rewrite of the tax code and the Bush perpetuation of it—is itself government-mandated redistribution of wealth: to the already wealthy. The “state of nature” does not dictate preferential treatment of capital over work, or regressivity of taxation, or the tax-free inheritance of unearned wealth and power: these are all consequences of man-made rules. The question, then, is not whether redistribution but in which direction.
Where we will agree, in small part, with trickle-down proponents is that the word “redistribution” is not an optimal word. Redistribution—whether uttered by its fans or foes—implies a one-time transaction, in which money is moved from point A to point B, where it then remains inert. That is clearly wrong.
But there is an even deeper misconception at work here. Conventional Machinebrain wisdom conceives of and describes government activity as “spending.” The following dictionary definition reveals why such a conception is misleading and damaging:
spent
|spent|past and past participle of
spend.
(adj.) having been used and unable to be used again: a spent matchstick. • having no power or energy left: the movement has become a spent force
The association we have with the word spending is that when government does it,
our money is gone.
The unconscious assumption is that our tax dollars are swept into piles and burned or poured down a drain. The unconscious assumption of course is rooted in a Machinebrain metaphor. The government, like a car engine, uses up money like fuel. Of course, this ignores the fundamental reality of the role of money in an economic ecosystem as essential lifeblood that circulates throughout it again and again.
our money is gone.
The unconscious assumption is that our tax dollars are swept into piles and burned or poured down a drain. The unconscious assumption of course is rooted in a Machinebrain metaphor. The government, like a car engine, uses up money like fuel. Of course, this ignores the fundamental reality of the role of money in an economic ecosystem as essential lifeblood that circulates throughout it again and again.
In this Gardenbrain sense, government does not
spend
money; it
circulates
it. It does not
redistribute
money; it
recirculates
it. Social Security is the largest line item of government “spending” in the budget. But Social Security is simply a collateralized savings account. Understood as circulation, Social Security’s main benefit isn’t to keep the elderly from living in cardboard boxes, although that is a fine thing, but to ensure that they continue as dynamic consumers in our economy. Social Security circulates money back to the citizens who contributed to it in the first place,
and is then circulated again by them
, generating increased economic activity that allows others to be paid, to contribute to Social Security and then to receive those benefits in the future, in an endless and essential positive feedback loop that sustains and expands our economy. If Social Security truly were “spending,” then our economy would be getting smaller and our nation’s net worth would be shrinking as a consequence of its growth.
spend
money; it
circulates
it. It does not
redistribute
money; it
recirculates
it. Social Security is the largest line item of government “spending” in the budget. But Social Security is simply a collateralized savings account. Understood as circulation, Social Security’s main benefit isn’t to keep the elderly from living in cardboard boxes, although that is a fine thing, but to ensure that they continue as dynamic consumers in our economy. Social Security circulates money back to the citizens who contributed to it in the first place,
and is then circulated again by them
, generating increased economic activity that allows others to be paid, to contribute to Social Security and then to receive those benefits in the future, in an endless and essential positive feedback loop that sustains and expands our economy. If Social Security truly were “spending,” then our economy would be getting smaller and our nation’s net worth would be shrinking as a consequence of its growth.
To varying degrees, all government economic activity is some form of circulation. Medicare is a system that allows retired workers to continue to participate in the economy by preventing them from being impoverished by medical costs. Military spending to a great degree circulates money back into the communities where our defense industry provides high-paying jobs. Even the lowly, lazy, useless bureaucrat is some small business’s best customer.
Government doesn’t spend money like it’s a perishable or a consumable good. Government circulates money, and the flow, direction, and pace of that circulation are determined by policies our elected leaders choose. And this brings us to a pivotal point: for over three decades, as Hacker and Pierson detail in
Winner-Take-All Politics
, our leaders have chosen an economic program that chokes off circulation and allows a tiny minority to hoard blood.
Winner-Take-All Politics
, our leaders have chosen an economic program that chokes off circulation and allows a tiny minority to hoard blood.
The market, of course, is the prime circulator of wealth in an economy. But the public policies of this age of greed have created—by design—historic distortions in the private economy. Today the richest 1 percent of Americans has more wealth than the bottom 90 percent. The richest 1 percent collects twice as much annual income as the lower 50 percent. That is not circulation; it is clumping and clotting. When a single big toe is as big as a watermelon and contains twice as much blood as the entire head and torso—the body has fallen grotesquely out of balance. Left untreated, it will die. But when you have good circulation, the entire body grows stronger. Recirculation of wealth is as necessary to the economy as recirculation of blood is to the body, and that principle is at the heart of the program we propose.
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