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Reich writes: "The pertinent question is not whether income and wealth inequality is good or bad. It is at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy."

Economist, professor, author and political commentator Robert Reich. (photo: Richard Morgenstein)
Economist, professor, author and political commentator Robert Reich. (photo: Richard Morgenstein)


How to Shrink Inequality

By Robert Reich, The Nation

09 May 14

 

It’s not inevitable. Here are ten practical steps to reverse the growing trend.

ome inequality of income and wealth is inevitable, if not necessary. If an economy is to function well, people need incentives to work hard and innovate. The pertinent question is not whether income and wealth inequality is good or bad. It is at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy.

We are near or have already reached that tipping point. It is incumbent on us to dedicate ourselves to reversing this diabolical trend. It will not happen automatically, because the dysfunctions of our economy and politics are not self-correcting when it comes to inequality. In order to reform the system, we need a political movement for shared prosperity. Herewith, a short summary of what has happened, why it has happened, how it threatens the foundations of our society, and what we must do to reverse it.

The data on widening inequality are remarkably and disturbingly clear. The Congressional Budget Office has found that between 1979 and 2007, the onset of the Great Recession, the gap in income—after federal taxes and transfer payments—more than tripled between the top 1 percent of the population and everyone else. The after-tax, after-transfer income of the top 1 percent increased by 275 percent, while it increased less than 40 percent for the middle three quintiles of the population and only 18 percent for the bottom quintile.

The gap has continued to widen in the recovery. According to the Census Bureau, median family and median household incomes have been falling, adjusted for inflation; while according to the data gathered by my colleague Emmanuel Saez, the income of the wealthiest 1 percent has soared by 31 percent. In fact, Saez has calculated that 95 percent of all economic gains since the recovery began have gone to the top 1 percent.

Wealth has become even more concentrated than income. An April 2013 Pew Research Center report found that from 2009 to 2011, “the mean net worth of households in the upper 7 percent of wealth distribution rose by an estimated 28 percent, while the mean net worth of households in the lower 93 percent dropped by 4 percent.”

This trend is now threatening the three foundation stones of our society: our economy, our ideal of equal opportunity and our democracy.

In the United States, consumer spending accounts for approximately 70 percent of economic activity. If consumers don’t have adequate purchasing power, businesses have no incentive to expand or hire additional workers. Because the rich spend a smaller proportion of their incomes than the middle class and the poor, it stands to reason that as a larger and larger share of the nation’s total income goes to the top, consumer demand is dampened. If the middle class is forced to borrow in order to maintain its standard of living, that dampening may come suddenly—when debt bubbles burst.

Consider that the two peak years of inequality over the past century—when the top 1 percent garnered more than 23 percent of total income—were 1928 and 2007. Each of these periods was preceded by substantial increases in borrowing, which ended notoriously in the Great Crash of 1929 and the near-meltdown of 2008.

The anemic recovery we are now experiencing is directly related to the decline in median household incomes after 2009, coupled with the inability or unwillingness of consumers to take on additional debt and of banks to finance that debt—wisely, given the damage wrought by the bursting debt bubble. We cannot have a growing economy without a growing and buoyant middle class. We cannot have a growing middle class if almost all of the economic gains go to the top 1 percent.

Widening inequality also challenges the nation’s core ideal of equal opportunity, because it hampers upward mobility. High inequality correlates with low upward mobility. Studies are not conclusive because the speed of upward mobility is difficult to measure. But even under the unrealistic assumption that its velocity is no different today than it was thirty years ago—that someone born into a poor or lower-middle-class family today can move upward at the same rate as three decades ago—widening inequality still hampers upward mobility. That’s simply because the ladder is far longer now. The distance between its bottom and top rungs, and between every rung along the way, is far greater. Anyone ascending it at the same speed as before will necessarily make less progress upward.

In addition, when the middle class is in decline and median household incomes are dropping, there are fewer possibilities for upward mobility. A stressed middle class is also less willing to share the ladder of opportunity with those below it. For this reason, the issue of widening inequality cannot be separated from the problems of poverty and diminishing opportunities for those near the bottom. They are one and the same.

The connection between widening inequality and the undermining of democracy has long been understood. As former Supreme Court Justice Louis Brandeis is famously alleged to have said in the early years of the last century, an era when robber barons dumped sacks of money on legislators’ desks, “We may have a democracy, or we may have great wealth concentrated in the hands of a few, but we cannot have both.”

As income and wealth flow upward, political power follows. Money flowing to political campaigns, lobbyists, think tanks, “expert” witnesses and media campaigns buys disproportionate influence. With all that money, no legislative bulwark can be high enough or strong enough to protect the democratic process.

The threat to our democracy also comes from the polarization that accompanies high levels of inequality. Partisanship—measured by some political scientists as the distance between median Republican and Democratic roll-call votes on key economic issues—almost directly tracks with the level of inequality. It reached high levels in the first decades of the twentieth century when inequality soared, and has reached similar levels in recent years.

When large numbers of Americans are working harder than ever but getting nowhere, and see most of the economic gains going to a small group at the top, they suspect the game is rigged. Some of these people can be persuaded that the culprit is big government; others, that the blame falls on the wealthy and big corporations. The result is fierce partisanship, fueled by anti-establishment populism on both the right and the left of the political spectrum.

Between the end of World War II and the early 1970s, the median wage grew in tandem with productivity. Both roughly doubled in those years, adjusted for inflation. But after the 1970s, productivity continued to rise at roughly the same pace as before, while wages began to flatten. In part, this was due to the twin forces of globalization and labor-replacing technologies that began to hit the American workforce like strong winds—accelerating into massive storms in the 1980s and ’90s, and hurricanes since then.

Containers, satellite communication technologies, and cargo ships and planes radically reduced the cost of producing goods anywhere around the globe, thereby eliminating many manufacturing jobs or putting downward pressure on other wages. Automation, followed by computers, software, robotics, computer-controlled machine tools and widespread digitization, further eroded jobs and wages. These forces simultaneously undermined organized labor. Unionized companies faced increasing competitive pressures to outsource, automate or move to nonunion states.

These forces didn’t erode all incomes, however. In fact, they added to the value of complex work done by those who were well educated, well connected and fortunate enough to have chosen the right professions. Those lucky few who were perceived to be the most valuable saw their pay skyrocket.

But that’s only part of the story. Instead of responding to these gale-force winds with policies designed to upgrade the skills of Americans, modernize our infrastructure, strengthen our safety net and adapt the workforce—and pay for much of this with higher taxes on the wealthy—we did the reverse. We began disinvesting in education, job training and infrastructure. We began shredding our safety net. We made it harder for many Americans to join unions. (The decline in unionization directly correlates with the decline of the portion of income going to the middle class.) And we reduced taxes on the wealthy.

We also deregulated. Financial deregulation in particular made finance the most lucrative industry in America, as it had been in the 1920s. Here again, the parallels between the 1920s and recent years are striking, reflecting the same pattern of inequality.

Other advanced economies have faced the same gale-force winds but have not suffered the same inequalities as we have because they have helped their workforces adapt to the new economic realities—leaving the United States the most unequal of all advanced nations by far.

What We Must Do

There is no single solution for reversing widening inequality. French economist Thomas Piketty has shown that rich nations are moving back toward the large wealth disparities that characterized the late nineteenth century, as the return on capital exceeds the rate of economic growth. His monumental book Capital in the Twenty-First Century paints a troubling picture of societies dominated by a comparative few, whose cumulative wealth and unearned income overshadow the majority who rely on jobs and earned income. But our future is not set in stone, and Piketty’s description of past and current trends need not determine our path in the future. Here are ten initiatives that could reverse the trends described above:

1) Make work pay. The fastest-growing categories of work are retail, restaurant (including fast food), hospital (especially orderlies and staff), hotel, childcare and eldercare. But these jobs tend to pay very little. A first step toward making work pay is to raise the federal minimum wage to $15 an hour, pegging it to inflation; abolish the tipped minimum wage; and expand the Earned Income Tax Credit. No American who works full time should be in poverty.

2) Unionize low-wage workers. The rise and fall of the American middle class correlates almost exactly with the rise and fall of private-sector unions, because unions gave the middle class the bargaining power it needed to secure a fair share of the gains from economic growth. We need to reinvigorate unions, beginning with low-wage service occupations that are sheltered from global competition and from labor-replacing technologies. Lower-wage Americans deserve more bargaining power.

3) Invest in education. This investment should extend from early childhood through world-class primary and secondary schools, affordable public higher education, good technical education and lifelong learning. Education should not be thought of as a private investment; it is a public good that helps both individuals and the economy. Yet for too many Americans, high-quality education is unaffordable and unattainable. Every American should have an equal opportunity to make the most of herself or himself. High-quality education should be freely available to all, starting at the age of 3 and extending through four years of university or technical education.

4) Invest in infrastructure. Many working Americans—especially those on the lower rungs of the income ladder—are hobbled by an obsolete infrastructure that generates long commutes to work, excessively high home and rental prices, inadequate Internet access, insufficient power and water sources, and unnecessary environmental degradation. Every American should have access to an infrastructure suitable to the richest nation in the world.

5) Pay for these investments with higher taxes on the wealthy. Between the end of World War II and 1981 (when the wealthiest were getting paid a far lower share of total national income), the highest marginal federal income tax rate never fell below 70 percent, and the effective rate (including tax deductions and credits) hovered around 50 percent. But with Ronald Reagan’s tax cut of 1981, followed by George W. Bush’s tax cuts of 2001 and 2003, the taxes on top incomes were slashed, and tax loopholes favoring the wealthy were widened. The implicit promise—sometimes made explicit—was that the benefits from such cuts would trickle down to the broad middle class and even to the poor. As I’ve shown, however, nothing trickled down. At a time in American history when the after-tax incomes of the wealthy continue to soar, while median household incomes are falling, and when we must invest far more in education and infrastructure, it seems appropriate to raise the top marginal tax rate and close tax loopholes that disproportionately favor the wealthy.

6) Make the payroll tax progressive. Payroll taxes account for 40 percent of government revenues, yet they are not nearly as progressive as income taxes. One way to make the payroll tax more progressive would be to exempt the first $15,000 of wages and make up the difference by removing the cap on the portion of income subject to Social Security payroll taxes.

7) Raise the estate tax and eliminate the “stepped-up basis” for determining capital gains at death. As Piketty warns, the United States, like other rich nations, could be moving toward an oligarchy of inherited wealth and away from a meritocracy based on labor income. The most direct way to reduce the dominance of inherited wealth is to raise the estate tax by triggering it at $1 million of wealth per person rather than its current $5.34 million (and thereafter peg those levels to inflation). We should also eliminate the “stepped-up basis” rule that lets heirs avoid capital gains taxes on the appreciation of assets that occurred before the death of their benefactors.

8) Constrain Wall Street. The financial sector has added to the burdens of the middle class and the poor through excesses that were the proximate cause of an economic crisis in 2008, similar to the crisis of 1929. Even though capital requirements have been tightened and oversight strengthened, the biggest banks are still too big to fail, jail or curtail—and therefore capable of generating another crisis. The Glass-Steagall Act, which separated commercial- and investment-banking functions, should be resurrected in full, and the size of the nation’s biggest banks should be capped.

9) Give all Americans a share in future economic gains. The richest 10 percent of Americans own roughly 80 percent of the value of the nation’s capital stock; the richest 1 percent own about 35 percent. As the returns to capital continue to outpace the returns to labor, this allocation of ownership further aggravates inequality. Ownership should be broadened through a plan that would give every newborn American an “opportunity share” worth, say, $5,000 in a diversified index of stocks and bonds—which, compounded over time, would be worth considerably more. The share could be cashed in gradually starting at the age of 18.

10) Get big money out of politics. Last, but certainly not least, we must limit the political influence of the great accumulations of wealth that are threatening our democracy and drowning out the voices of average Americans. The Supreme Court’s 2010 Citizens United decision must be reversed—either by the Court itself, or by constitutional amendment. In the meantime, we must move toward the public financing of elections—for example, with the federal government giving presidential candidates, as well as House and Senate candidates in general elections, $2 for every $1 raised from small donors.

It’s doubtful that these and other measures designed to reverse widening inequality will be enacted anytime soon. Having served in Washington, I know how difficult it is to get anything done unless the broad public understands what’s at stake and actively pushes for reform.

That’s why we need a movement for shared prosperity—a movement on a scale similar to the Progressive movement at the turn of the last century, which fueled the first progressive income tax and antitrust laws; the suffrage movement, which won women the vote; the labor movement, which helped animate the New Deal and fueled the great prosperity of the first three decades after World War II; the civil rights movement, which achieved the landmark Civil Rights and Voting Rights acts; and the environmental movement, which spawned the National Environmental Policy Act and other critical legislation.

Time and again, when the situation demands it, America has saved capitalism from its own excesses. We put ideology aside and do what’s necessary. No other nation is as fundamentally pragmatic. We will reverse the trend toward widening inequality eventually. We have no choice. But we must organize and mobilize in order that it be done.

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+35 # Rain 2014-05-09 16:44
Thank you Robert Reich for your tireless work, to get us out of this mess. It's shocking to know that not a dime trickled down for 30 years because the top 1% just pocketed it.
We now know, with an unusual clarity, that Trickle-Down Economics doesn't work in the slightest, therefore we must vote out any politician who tries to continue in this path.

For a laugh, here's a video made by Conan O'Brien with Robert Reich.

https://www.youtube.com/watch?v=kWliylnxSrA
 
 
+23 # Eldon J. Bloedorn 2014-05-09 22:17
Good post. Some years ago a book was written which really struck me:"The Hundredth Monkey." The point of the book:"Nothing is more powerful than an idea when its time has come." A friend of mine suggested the book to me. First, when I casually flipped through the pages, I did not feel the impact the book was trying to make. Then, it struck me, "nothing is more powerful than an idea when its time has come." Think with time fracking will be handcuffed. The social injustice of Inequality in time will be tackled and seen for what it is, theft. When I speak to people about the "Great" (infamous) Recession, very few people really understand that they were victumized by the wealthy. Particularly by bankers. Politcians who were too cowardly to punish them with prison time. At some point, when they fully understand they were victumized by the wealthy, "nothing is more powerful than an idea when its time has come." Happeneed in France. Except for senators like Elizabeth Warren, too many of our Democratic "leaders" can be bought out for a price. And the price is very often paid by those who know the senator or congressman like their "position" as a politician, the social prestige, the perks. But when the price is paid by a lobbyist so that the politician gets to keep his or her job, the politician forgets the needs of the public. Yes, the politician does salute the public, but it is a "single finger" salute. Or as Emerson once said, "those whom we admire look upon us with contempt."
 
 
+21 # wantrealdemocracy 2014-05-09 21:48
Mr. Reich's list of ten things we must do did not include the most important thing we must DEMAND to get our government out of the pockets of the top 1%. We must DEMAND that our elected officials vote as directed by their constituents--- not their political party or their major 'donors'. The elected officials should put on their web sites the bills coming up for a vote and seek the advice of the people of their district how they should vote. None of those corrupt bums give any concern for the opinions of their constituents. Give those bums a kick out of Congress. They are not representing the people of the district. Who wants these endless wars and with tax cuts for the rich as our nation is falling in the toilet. We sure as hell don't want more 'free' trade. We want to protect American jobs! And create more with a new version of the W.P.A.
 
 
+2 # brux 2014-05-09 21:54
Easier said, written and whined about than done. :-(
 
 
+9 # brux 2014-05-09 21:59
The 1% or even less spend 50 years undoing the Roosevelt legacy ... do you really think they are going to sit back and allow taxes to go up again ... and pretty soon estate taxes are going to exclude 10 million dollars from being taxes at all.
 
 
+24 # Martha Luehrmann 2014-05-09 23:29
Great article, Robert! And I would add that we require our Senators and Representatives to live by the laws they are enacting -- so they should not be allowed to vote on matters in which they hold an interest; they should not be allowed to capitalize on insider information; they should have their portfolios held in a blind trust during their tenure as Congresspeople; and they should be required to follow every other law that they impose on citizens. It is absolutely shocking to see how much wealth the average congressperson accumulates while in office -- far far more than their salaries. Becoming a congressperson is now a key to flouting all the financial rules that the rest of us must follow.
 
 
+2 # SundownLF 2014-05-11 13:07
And, when their Congressional terms are over, they should NOT be allowed to become lobbyists, either for ten years or FOREVER!
 
 
+1 # bingers 2014-05-12 00:15
Quoting SundownLF:
And, when their Congressional terms are over, they should NOT be allowed to become lobbyists, either for ten years or FOREVER!


Not while anyone who was in congress at the same time as them. Also we need a law that says that doing anything to benefit their contributors should be considered accepting a bribe and should result in 5 years in prison without trial for each offense, served consecutively. It should be in their oath of office.
 
 
+4 # Far Left vanishing point 2014-05-09 23:49
Very good I think. But how much incentive do we really need? No one wants to be a "loser".
 
 
0 # Hey There 2014-05-10 00:30
https://www.youtube.com/watch?v=jh-Loo0lgI8
 
 
+13 # PaineRad 2014-05-10 03:28
re: #1

Great idea but far too timid. Had the min wage of the late 60s kept pace with both productivity nationally and the cost of living, it would be somewhere around $20 today. Remember, we are not talking about retirees, but rather working people who are contributing to the profitability of their employers. Indexing wages to only the cost of living is NOT appropriate. Index it to BOTH cost of living and productivity.

Also, while that will bubble up a little, it is unlikely to bubble up far into the middle class. How about tying the deductibility on corporate taxes of executive comp to the median pay for women? Nothing deductible above, say 10 times median. And a 50% tax surcharge above 20 times.

re: #9

$5000 at birth would be worth, at a rate of 4% compounded annually, $10,000. At a highly unlikely 8%, that would be about $20,000.

That would be a little something to build on. But diminish inequality? Seriously?

If Prof Reich is serious about reducing inequality by raising the prospects for kids born into the lower 60%, I think changing the fundamental jobs picture for their parents ought to be a higher priority.

End our suicidal trade posture. Either withdraw from NAFTA, GATT, WTO, etc. or renegotiate all of them immediately. Bring middle class jobs back home. So long as Americans are buying things, there is no reason why Americans cannot make them.
 
 
+4 # collinsd73 2014-05-10 05:30
Your #9 point could note that Louis and Patricia Kelso were the first exponents of a clear and workable plan that could still make boarder ownership a workable and attainable route to solving this onerous wealth distribution dilemma. Anyone who knows the history of unbridled capitalism, which for example, was foisted on Chile under General Pinochet knows that such an approach concentrates not broadens citizen participation.

The Citizen's Share (just published) authors properly call for more employee benefits, but Kelso’s vision for wider use of employee stock ownership plans (page 219) was hurt when tax incentives were removed for big public companies. Further the widespread cutting off pension contributions by many big companies and their substituting 401 k’s has not helped expand employee ownership

The genius of ESOPs—and its associated entities which constitute Kelso’s vision of “binary economics”–look them up on the Kelso Institute website!!–allow ed substantial numbers of employees to earn their shares and while sometimes imperfect in their establishment, the ESOP concept needs urgent revival with full tax incentives restored.
 
 
+17 # turtleislander 2014-05-10 06:05
Mr. Reich, you and President Obama and many others need to stop using the term "Full time". Already retail and other employers, many owned by billionaires, restrict their employees hours to avoid paying more for benefits. If "full time" wages are raised to $15 these same types of people will slip right through the net, and worse, others will reduce employees hours to achieve the same effect. There needs to be a minimum wage period. One hour a week? $15.00 that's it. 10, 20, 30 , 40 hours a week must be the same minimum wage.
 
 
+4 # ericlipps 2014-05-10 07:31
If you mean the same hourly wage regardless of the number of hours worked, then employers will do heir damnedest to cut total hours.

If you mean the same minimum pay regardless of how many hours are worked, employers will try to make that the MAXIMUM pay as well, except for executive positions.
 
 
+1 # shgo 2014-05-10 10:09
How about the end of capitalism? Not one word that this system is dying and we need to bury it quickly before it totally buries us. READ THE CAPITALIST SYSTEM - by Jerry Mander. Maybe Reich needs to read it before he continues to repeat all his "solutions".
 
 
+6 # fredboy 2014-05-10 12:09
After WWI the US and its allies decided to brutally punish the German people. Their nation and economy and families were pushed to the limit. The result was desperation, all the while suffering international taunting and what felt like hopeless, never-ending despair.

Then the most desperate and dangerous united. At first they were outcasts--hooli gans, criminals, fanatics and the like. Following one seemingly crazed individual. Their approach--bruta lize anyone and everyone who appeared threatening.

And, over time, the remarkably well educated German people--all suffering world economic banishment and persecution--be gin to synchronize with this crazed movement.

And hell erupted.

Keep mocking the poor in the US.

Keep decrying and ignoring the sick.

Keep destroying jobs and careers for the sake of more profit.

And see what happens next.
 
 
-5 # MidwesTom 2014-05-10 14:18
Is it true that they want to change the name of the Statute of Liberty to the Statue of Equality?
 
 
0 # Eldon J. Bloedorn 2014-05-12 08:37
Thg Statute of Liberty is actually a bomber in disguise.
 
 
+4 # Rockster 2014-05-11 00:29
What seems incomprehensibl e is why the super rich are acting so obviously stupidly. When Justice Brandeis , TDR, and enlightened business leaders established the forty hour workweek and other sensible reforms , it was a self interested move for everyone . Has everyone gotten so much stupider and greedy in the last century that we can't see the cliff ?
 
 
+1 # bingers 2014-05-12 00:17
Yes.
 
 
+1 # hmcadoo 2014-05-12 19:33
All excellent points and in a reasonable world would solve the problem. In essence a corrupt Congress is the real cause of the problem with the special laws for the elite.

All of Sec. Reich's ideas will require an understanding and concerned Congress to enact the needed laws

We do not have a Congress that cares about the people. The people will not/can not elect good and honest Congress and I see nothing in any reasonable forecast that would suggest we will ever have a Government for the people again.
 
 
0 # Astreia 2014-05-13 00:44
The amounts quoted for "equality" would not buy a one-bedroom apartment in California. In fact, not even a "studio apartment" - which is basically one tiny room. It is not enough!
 
 
0 # Buddha 2014-05-14 12:24
11) A financial transaction tax on Wall St., which would have the side benefit of reigning in all the automated short-term trading.

12) Treat all methods of income equally, no longer give lower tax rates for income that comes from invested capital versus rates for income that comes from labor.
 
 
0 # sschnapp 2014-05-16 18:56
Reich, as usual does a great job describing what's happening with the economy, although he stops short of an analysis that names the system of neoliberal capitalism as the problem. Nonetheless, the most important part of his piece is that prescription: "...we need a movement for shared prosperity—a movement on a scale similar to the Progressive movement at the turn of the last century, which fueled the first progressive income tax and antitrust laws; the suffrage movement, which won women the vote; the labor movement, which helped animate the New Deal and fueled the great prosperity of the first three decades after World War II; the civil rights movement, which achieved the landmark Civil Rights and Voting Rights acts; and the environmental movement, which spawned the National Environmental Policy Act and other critical legislation." The key question then is: How can we build a democratic, multi-race, multi-class, and sustainable movement? And a host of questions then flow about strategic alliances, organizational forms, leadership, a narrative that explains how we got here, an inspirational vision of "another world," and so on.
 

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