The inequality debate: Conservatives, liberals debate what rise of rich means
Demonstrators from the Occupy Seattle movement outside the Sheraton Hotel in Seattle where JP Morgan Chase Chief Executive Officer Jamie Dimon was due to speak at the "Business Leadership Celebration" on Nov. 2.
Protesters take part in a Tax Day rally on April 15, 2009, on Fountain Square in Cincinnati. Protesters gathered at state capitols and in neighborhoods and town squares across the country that day to kick off a series of tax-day protests designed to echo the rebellion of the Boston Tea Party.
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Seven months ago, the Pittsburgh Post-Gazette set out to discover what was happening to America's middle class. It has been an enlightening and complicated journey.
We started with the fact that there is no standard definition of what the middle class is. It could be the middle 60 percent of all earners, which in Pennsylvania would include households earning between $25,000 and $100,000 a year. In polls, though, a majority of Americans say they are middle class, from people who make $20,000 a year to those who earn more than $200,000 a year.
The White House and politicians in both parties say they want to strengthen the middle class, but they have sharply different ideas about how to do that. And economists, it turns out, are almost as deeply divided as Congress.
Still, after dozens of interviews around the country and reams of books and research papers, it seems that the struggles of the middle class revolve around two key questions: Over the past 30 years, why have the rich become so much richer than everyone else, and what has that done to the lives and futures of middle-income Americans?
In many ways, this issue first came into focus with research done since 2000 by Emmanuel Saez, an economist at the University of California at Berkeley, and his colleague, Thomas Piketty.
Using IRS records, they found that the top 1 percent of earners in the United States were pulling in 18.3 percent of the nation's income in 2007 -- the year the most recent recession began -- the highest level it had been since 1928, the year before the Great Depression.
The Saez-Piketty work also showed that the top 1 percent's share was about half that size from the 1950s through the mid-1980s, ranging from 7.7 percent to 9.8 percent.
Conservative economists were quick to point out that the Saez-Piketty figures used pre-tax income and thus didn't show the impact of progressive taxation on the rich, or redistribution of money by the federal government in the form of such transfers as Social Security and the Earned Income Tax Credit.
Richard Burkhauser, a Cornell University economist, co-wrote a paper this year saying that if you look at income figures after taxes are taken out and government transfers are included, the earnings of the middle 20 percent of Americans went up by nearly 30 percent between 1979 and 2007, compared with 49 percent for the top fifth of earners.
Still, the issue has not gone away, and last month, the non-partisan Congressional Budget Office issued a study that showed that in the same three decades studied by Mr. Burkhauser, the real after-tax income of the top 1 percent had climbed 275 percent, compared with about 40 percent for the three-fifths of the population in the middle.
In the process, the study said, the top 1 percent increased their slice of the national income pie from 10 percent to more than 20 percent, while the slice going to the middle three-fifths declined.
Of course, there has always been inequality in the United States. But liberal economists emphasize that in the postwar period of 1949 to 1979 -- what Clinton administration labor secretary Robert B. Reich calls "the Great Prosperity" -- the annual income of each group rose at about the same rate. Only after that did the rich start pulling away from everyone else.
Even if both sides could agree on how much inequality there is, they would disagree on whether it's a bad thing.
Conservative economist Finis Welch has argued for years that growing wage inequality is good, because it allows people with higher education to take advantage of a fast-growing, more specialized economy. He also noted in a 1999 paper that between the late 1960s and late 1990s, the wage gap decreased between men and women and between whites and blacks, a sign the economy was correcting some historic inequities.
Daniel Heil, a research associate at the conservative Hoover Institution at Stanford University, made a more nuanced argument during an interview there earlier this year.
If inequality is occurring because brilliant entrepreneurs such as Steve Jobs are creating valuable products and employment for thousands of people, that is a good thing, he said. If it is happening because our school systems are failing to educate children, then that is what needs to be corrected.
Liberal economists see the matter differently.
To many of them, the economy is indeed a large pie, and if the rich keep being served a bigger slice, there's less and less available for everyone else.
In the 30-year period after World War II, middle-class wages kept pace with the growth in productivity -- the amount of goods and services that could be produced by a typical worker -- said Sylvia Allegretto, an economist at the Institute for Research on Labor and Employment at the University of California at Berkeley. Since then, middle-class incomes have lagged behind productivity.
One sign of that? In the 1970s, she said, corporate CEOs made about 24 times the wages of an average worker. Today, they can make 300 times as much.
Conservatives often call protests against inequality "class warfare" and say that as long as people have the opportunity to increase their pay throughout their lives and do better than their parents, the system is working.
Thomas Sowell, a leading Hoover Institution author, argues in his book "Economic Facts and Fallacies" that most Americans are still able to end up at a much higher pay scale than where they started out.
But Ms. Allegretto noted that this masks the fact that many Americans wind up in the same relative spot on the income scale that their parents occupied. If a person earns more than his father did but is still at the 50th percentile of the income range, he hasn't made any real progress, she said.
Mr. Reich, who is a public policy professor at the University of California at Berkeley, said that when income inequality began to increase in the late 1800s and again in the 1920s, the federal government stepped in to reduce the disparities. President Theodore Roosevelt worked to break up the industrial trusts, and his cousin, President Franklin Roosevelt, instituted many of the social welfare policies that reduced the gap between the rich and the poor as the nation moved through the Great Depression and World War II.
In recent decades, he said, the pendulum has swung back in favor of the rich, driven by deregulation of industries and banks that began under President Jimmy Carter and picked up steam under President Ronald Reagan.
When the Reagan administration cut personal income tax rates by 23 percent in 1981, the president's budget director, David Stockman, said it was a form of "trickle-down economics," meaning that lower taxes on the wealthy would lead to investment that would create economic growth benefiting everyone.
But the persistence of high unemployment today -- at the same time corporate profits have rebounded from the recession and CEO pay in many cases has gone up -- shows this theory is "bunk," Mr. Reich contended.
Conservative thinkers counter that no respected economist has ever subscribed to "trickle-down economics" and that it suggests the opposite of what really happens in the economy.
Hoover's Mr. Sowell has written that companies have to pay workers and suppliers, sometimes for years, before they ever see a dime of profit, so that the money given to CEOs and top shareholders actually trickles upward.
What can be demonstrated, Mr. Sowell argued, is that lowering tax rates for wealthy people has often resulted in higher tax revenues for the federal government, because a growing economy makes up for the lower rates. That happened after tax cuts instituted by presidents as different as John F. Kennedy and Reagan, he said.
A recent study by the International Monetary Fund, however, concluded that the more inequality there is within a nation, the slower its economy will grow.
IMF researchers Andrew Berg and Jonathan Ostry found that when inequality increased in countries, it predicted the end of "growth spells" for those nations' economies.
While the debate continues on whether greater riches for the wealthy spur investment and jobs, one economist says there is another form of "trickle-down" that is very real.
Robert Frank, a professor at Cornell University and author of "The Darwin Economy: Liberty, Competition, and the Common Good," said spending by the wealthy has an impact on spending by middle-class Americans.
When someone such as Microsoft co-founder Paul Allen builds a 10,000-square-foot mansion outside Seattle with an NBA-sized gym, it doesn't directly influence the size of a middle-class family's house. But it does influence the size of the houses of those who are just below Mr. Allen's wealth class, and their homes influence those of the next group down, and so on.
That helps explain why the size of the average single-family home in the United States has increased by almost half over the past 40 years, from 1,660 square feet in 1973 to nearly 2,400 square feet today, he said.
When the Supreme Court ruled 5-4 last year that federal law could not restrict how much corporations spend on political campaigns, conservatives applauded the decision as a basic protection of First Amendment free-speech rights.
And besides, some argued, there was no evidence it would cause unbridled political spending.
Sean Parnell, president of the Center for Competitive Politics in Alexandria, Va., said after the ruling that corporations were spending only a tiny fraction of their resources on campaigns and lobbying. In 2008, for instance, Exxon Mobil earned $45 billion in profits but spent less than a tenth of a percent of that -- $29 million -- on lobbying.
Jacob Hacker, a Yale University political science professor and co-author of the 2010 book "Winner-Take-All Politics: How Washington Made the Rich Richer -- And Turned Its Back on the Middle Class," has a sharply different viewpoint.
In an interview at Yale this year, he said that starting in the 1970s, corporations began to steadily increase their spending on political candidates and lobbying, a trend that coincided with a decline in political influence by labor unions.
The net effect, Mr. Hacker says, is that the center of both the Republican and Democratic parties has shifted to the right, as corporate influence on everything from deregulation to taxes to foreign investments has increased.
It is misleading for conservatives to say that most wealth in America is created or destroyed by a free market economy, Mr. Hacker says. The influence of corporate lobbyists on everything from loosening the regulation of the financial industry to keeping the capital gains tax rate at 15 percent has produced policies that have made the rich richer, and that in turn has led to even more spending by corporate interests on lobbying, creating a synergistic loop of benefits for the wealthy.
While he doesn't focus on inequality per se, Massachusetts Institute of Technology economist David Autor has done research showing how the middle of the American job market has been "hollowed out" by such forces as computerization and outsourcing to lower-cost overseas workers.
And most of that impact has been on male workers in the United States, he said.
In a study last year, Mr. Autor showed that most of the job growth in America over the last 30 years has been in highly-skilled work requiring college degrees and in such lower-skilled work as truck driving, carpet installation and home health care.
The "middle" jobs -- clerical workers, sales representatives and manufacturing employees, for instance -- have not kept pace with the general growth of the economy, he said, largely because they were the easiest to replace with computers or cheaper foreign workers.
Conservative economists don't dispute those findings, but they say the best solution to those long-term trends is not higher taxes on the wealthy or government redistribution of income but better education so that more Americans can take advantage of higher-paid work.
Jeffrey Jones, assistant director of the Hoover Institution, said in an interview there that the "biggest travesty" in American education has been the inability to get rid of subpar teachers and that the powerful teachers' unions have played a major role in protecting incompetent instructors.
But Mr. Hacker argued that the soaring incomes of the super-wealthy cannot be attributed primarily to flaws in the educational system, because there is not that much difference between the educational backgrounds of many of the top 1 percent of earners and their middle-class counterparts.
Some trace the start of the conservative tea party movement to an on-air diatribe in February 2009 by CNBC editor Rick Santelli.
Speaking from the Chicago Board of Trade floor, Mr. Santelli criticized the Obama administration's initial plans to refinance home mortgages, and he got nearby traders cheering when he asked whether people wanted the government "promoting bad behavior" by "subsidizing losers' mortgages."
The subtext: The recession was largely caused by people taking on risky home loans that they could not afford to repay.
Dave Ramsey, a popular financial advisor, said in an email that there is plenty of blame to go around for the financial meltdown but that citizens who lived beyond their means were a major part of the problem.
The low-debt, controlled-spending lifestyle that he advocates may not be able to prevent economic downturns, but he said those who follow his principles have been able to weather the current recession.
Cornell's Mr. Frank believes that much of the problem in the housing market was not caused by irresponsible greed but by Americans' natural desires to own a decent home in a good school district.
Over the past couple of decades, as home prices rose steadily and soared in some areas, the "admission ticket" to a good school district kept going up, he said. For many young families, it seemed logical to stretch themselves to buy such homes, even if it meant not being able to save for retirement.
The additional borrowing many families did, based on their rising home equity, also masked the fact that their incomes weren't keeping pace with economic growth, added Berkeley's Mr. Reich.
Kevin Leicht, director of the Social Science Research Institute at the University of Iowa and author of the 2006 book "Postindustrial Peasants: The Illusion of Middle-Class Prosperity," said the housing crisis has now made it nearly impossible for many families to sell their homes and move to someplace that might have better jobs.
The debt hanging over their heads, he said, ties people down to "jobs they might otherwise not want to have and to places they might otherwise not want to stay."
First Published November 14, 2011 12:00 am