On Inequality

There is a lot of discussion in the newspapers, social media, TV and in the coffee shops about the fact that inequality is on the rise. Essentially the idea is that rich people are getting richer, poor people are getting poorer and the so-called “middle class” is disappearing.

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There are a lot of ways to measure inequality. It could mean how much income individuals get in a year.  The measure of income used by the Congressional Budget Office, a non partisan government sponsored research institution, revealed in a 2011 study that between 1979 and 2005 the top 1% of the population enjoyed income increases of over 275% while the bottom 20% saw their pay go up only 10%. At present, average household income of the top1% is $350,000. But the bottom 10% makes only $10,000. This is the greatest gap between rich and poor since the 1920s. But even these figures understate the problem. These numbers are based on income tax returns. Wealthy people get much if not most of their income from capital gains (roughly the increase in the dollar value of their stocks, bonds and other paper assets) that don’t show up in these data.

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However we measure inequality, it is clear that since 1979 income and wealth distribution have become more unequal. And this is not only true in the U.S. but in many other countries around the world. It is worth noting that among industrialized nations, the U.S. is among the most unequal. Also noteworthy is the fact that inequality between nations has also been increasing over this period.People struggling to make ends meet don’t need these statistics to realize that inequality is huge and growing.

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People struggling to make ends meet while working in fast food joints know that the top executives of the chains they work for are getting huge salaries and profits.  The fact that bankers and the people who buy and sell debt  are extremely wealthy is well known to those who are deeply in debt and face the loss of  their homes, cars and other things that they need to live a decent life.

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The 2013 film, “Inequality for All” that was narrated by economist and former Secretary of Labor, Robert Reich and the popular writings of economist Paul Krugman among others who address inequality have had such a strong following because they speak to the anger and frustration of a huge number of people in the U.S. and around the world. The recent enormous (650 page) book by once-obscure French economist Thomas Piketty, Capitalism in the 21st Century, has taken the book selling world by storm. It sold nearly 90,000 copies in just a few months. When I last checked the entire first edition was gone. Piketty’s book is all about income and wealth inequality both within the U.S. and around the world. He has developed the best data set on the subject that exists.

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The most important things about the film and the books is that they speak to the anger of so many people.  That is why the voices of the wealthy such as the Financial Times are so intent to find fault with the numbers used by Piketty or to deny that there is a problem. They have a tremendous stake in keeping the system going.

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There are some issues with the way Piketty and the others measure various things as they study inequality. (An excellent review of Piketty’s book along these lines is by Paul Mattick (www.brooklynrail.org/2014/06/fieldnotes/editors-note-much-ado-about-something). But by and large they all have it right. Not only are the rich getting richer as the poor sink deeper into poverty and the so-called “middle class” disappears, but this has been going on for the past 35 years! And a lot of people are really angry about it because they are living  it.

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Yet all of these analyses have a very serious limitation.  They fail to recognize that today’s distribution of income and wealth is a measure of the success of a strategy to save global capitalism that evolved during the 1970s and was consolidated in the 1980s. In no way does this limitation invalidate the conclusion that inequality has been growing for the past 35 years. But it is important to understand why this is so if we are to find a path forward for all of us who would like to live in a society that is fair; and where equality prevails.

I develop this theme in detail in my recently released book, New World Disorder: The Decline of U.S. Power. Here I will briefly summarize my argument.

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Beginning in the late 1960s and well into the 1980s the entire global capitalist system experienced what I call a “crisis of value.” In the book and in a forthcoming essay I will explain exactly what I mean by that term. But briefly it means that the system was unable to continue to grow and survive in its present form. The crisis, far more serious than a simple recession, took the initial form of falling profit rates that were followed by periods of high unemployment and inflation.

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The leaders of industry, finance, government and other social elites in the U.S. and around the world understood the seriousness of the crisis. And they began to try to get at what was causing it. Conferences and papers by a variety of government agencies, global financial and research  institutions like the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) and private “think tanks” like the Trilateral Commission addressed the crisis and what to do about it. Ultimately they arrived at a  common view. It was bluntly expressed in 1984 by the Chairman of the International Monetary Fund, Jacques de Larosiere at a talk to the United Nations. He stated that labor was getting too great a share of profits. A decade later this view was reaffirmed in a paper by the Organization for Economic Cooperation and Development. They concluded that a lack of “flexibility in labor markets” was causing poverty and unemployment and that a key to a solution was to lower “real wages” of labor (real meaning what the wages will buy).

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Over time a strategy to save global capitalism evolved that was aimed at lowering labor’s share of profits. The first President Bush (H.W.) termed this strategy a “new world order.”  A key component of the strategy was to disperse higher wage jobs in the U.S. and other industrial nations to areas of the world where wages were low and workers unorganized. This was made possible by innovations in manufacturing and transportation technology that would enable different parts of the production process to occur in different locations. In the case of an automobile, for example, the motor could be produced in one country and other parts in other places, and the entire automobile could be assembled someplace completely different.  So called “trade agreements” like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) were used to open up economies to foreign corporations. And conditions placed on loans from the International Monetary Fund, World Bank, and industrialized nations also contributed to the dispersal of jobs to low wage areas and to the ability of large corporations and governments to keep wages and other costs low.

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But built into this strategy was a contradiction. Industrialized nations like the U.S. who were exporting high wage jobs still needed their workers to spend money. Two-thirds of the U.S. Gross Domestic Product (GDP), a measure of the size of the economy, is consumer expenditures. Yet for many workers wages were stagnating or declining. The temporary resolution of this contradiction was to use debt to make up for lost income. As a result, household debt soared. But how was it possible to get banks to lend money to people with reduced incomes who may not be able to pay off all the loans? The solution was to transform loans into phantom products that could be bought and sold as if they were real. A great expansion of the finance industry thus occurred that involved the creation of special bonds made up of peoples’ debts. A lender could then make a bad loan and turn around and sell it to a financier who would package it with other debts and make money off of it – lots and lots of money. This not only added to the upward distribution of income and wealth, it led to the financial crash that we experienced about a decade ago.

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The “new world order,” which began as a strategy to save global capitalism in the 1970s, is now the way global capitalism operates. Income inequality is a vital part of the system. Those at the top of the food chain will fight very hard to keep the present system going.  So attempting to solve inequality with tax policies will face very powerful and fierce opposition. More importantly, fixing inequality in the way suggested by Thomas Piketty and others would require a dismantling of the entire global capitalist system. And all of those advocating tax reform as the solution to the inequality problem, fail to see either the class interests at stake or the fact that inequality is systemic.

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I think (and hope) the global system will ultimately be radically altered . The new world order has become a new world disorder.  But it can’t be fixed as is.In the next decade we are likely to see either a very radically changed global capitalist system or a departure from capitalism altogether. There are difficult times ahead as any path out of the new world disorder is bound to make for a very bumpy ride. I talk about some possibilities in my book. My point here is simply that trying to patch up a system in crisis with tax policies or other reforms is not politically or economically possible.  And even if some sort of reform goes ahead, it won’t ultimately resolve the contradictions of the new world order. Most importantly, I believe we can do better than what anyone has proposed to date.

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David Ranney June, 2014