[Vision2020] Income Inequality: The Root of America's Problems

[nickgier at roadrunner.com]

Good Morning Visionaries:

This is my radio commentary/column for the week.  The full version is attached and all my columns on "The Third Way" between unfettered capitalism and communism can be read at www.home.roadrunner.com/~nickgier/ThirdWay.htm

Prof. Raghuram Rajan (Indians now dominate the professions more and more)has had a long-running debate with liberal Paul Krugman.  Rajan thinks that Krugman is wrong to push for more stimulus, but Krugman believes that austerity measures will undermine the weak economic recovery. 

There are already indications that Krugman is right, not only about the U.S. but Europe as well.  The UK, for example, is just about to dip into another recession because of the severe austerity measures taken by the conservative government.

Yours for the Third Way,

Nick

INCOME INEQUALITY: THE ROOT OF AMERICA’S PROBLEMS

If you want to know why one country does better or worse than another, 
the first thing to look at is the extent of economic inequality.

—Richard Wilkinson and Kate Pickett, The Spirit Level

At least one conservative economist is now joining liberals in identifying income inequality as the number one problem in America. His name is Raghuram Rajan, professor of finance at the University of Chicago, which is the home of the Milton Friedman school of free market economics.  

European countries and post-war America bridged the income gap with progressive taxation. In 1945 U.S. top rates were 66 percent, dropping to 48 percent under Reagan, and then to 32 percent under Bush 43.  

A standard measure of income equality is the Gini Scale, where 0 is the most equal and 100 is the least equal.  The 27 members of the European Union have an average score of 31, but the U.S. figure has risen from 40 in 1967 to 47 in 2005.  

Writing for The New Republic (8/27/10) Professor Rajan states: “Growing income inequality in the United States and the policy responses it has spawned have done tremendous damage to our economy.”  Rajan blames both Democrats and Republicans for making the same basic mistake. 

Presidents Clinton and Bush 43 pushed home ownership as the means for lower class Americans to increase their wealth.  After buying their homes at subprime rates, these new owners joined millions of others in taking out equity loans (a whopping $5 trillion from 2001-2005) for new cars, boats, etc. 

While consumption equality went up with easy credit, income inequality is now worse than ever. Instead of creating wealth, a free-wheeling financial industry and an enabling Bush administration were responsible for the loss of 10 million jobs and a loss of $10 trillion to the American economy.  

Social mobility in egalitarian countries is also much higher than unequal countries. While only 25 percent of Americans born in the lowest economic 20 percent move out of the bottom, a full 40 percent of Danes do.  There are fewer and fewer Andrew Carnegies: only 7 percent of Americans now make it from the bottom to the top 20 percent.

As a major study The Spirit Level has shown, income disparity strongly correlates with more mental illness, lower life expectancy, higher infant mortality, lower educational achievement, more teen births and abortions, more homicides, poor child well being, and higher incarceration rates.  

Prof. Rajan believes that better education and job training are the keys to turning the economy around and putting more wealth in the hands of average Americans.  Rajan praises the Europeans for their worker training and retention programs, but he does not appear willing to raise the revenues to fund them.

In the early 1990s a Social Democratic government in Denmark established an employee training program that has kept the unemployment rate steady at 3-4 percent for 20 years even through the Great Recession.  

A German program, also started by Social Democrats 10 years ago, retrains workers and pays businesses to keep workers on the job (sometimes at reduced hours). This program allowed Germany to increase employment during the down-turn of 2007-2008 and economic growth has now exploded.

U.S. investment in human capital at the state and national level is falling dramatically, so the job training and better education that we require to become more equal citizens will simply not happen. 

Even before the Great Recession the number of American high school and post-secondary graduates was falling, and now 25-30 year-olds in 9 countries hold more college degrees than their American counterparts. 

Asian and European graduates will have better jobs and earn more money. American companies will be inclined to hire them on visas or outsource these good jobs to their own countries. The result will be even greater income inequality in the U.S.

Rajan observes that “inequality will likely also cause U.S. politics to become even more fractured and polarized than it already is, making it harder for our politicians to make the right kinds of legislative decisions.”  Rajan explains that inequality “not just because it upsets our sense of fairness, but because it creates dangerous political dynamics.”  

The typical profile of a Third World country is high infant mortality rates, high incarceration rates, low tax rates but high tax evasion (legal or otherwise), and high  military expenditures. In a list of 136 countries compiled by the CIA, we find 38 very unequal nations at the top. The U.S. stands between Jamaica (38th) and Cameron (40th), while Portugal is 70th and Sweden is at the bottom.  This is a national disgrace and an international embarrassment. 

Nick Gier taught philosophy at the University of Idaho for 31 years.
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