The American mainstream media regularly laments the incontrovertible reality of rising inequality yet rarely provides historical perspective or detailed analysis. Rather, the typical article provides statistical facts of inequality coupled with theoretical claims linking capitalism, incentives, economic growth and inequality.
While few doubt that capitalism is the preferred economic system for a country—despite its inevitable resulting inequality—the fundamental issue is whether the American model of capitalism should be preferred to versions of capitalism in, say, Europe or Japan. A misleading assumption of the US mainstream media is to equate capitalism with America’s “free-market” version. The alternative thus becomes the authoritarian, centrally planned system of the defunct Soviet Union.
The following quiz is intended to bring more depth to the issue of capitalism and inequality by providing historical context and international comparison. The conclusion is heartening: the US can be made both more just and more productive—indeed, it once was.
The US Inequality Quiz
1. True or False: Rising income inequality is simply the result of impersonal economic forces that have affected the US and the rest of the advanced world.
-False. “The sharp rightward shift in U.S. politics is unique among advanced countries; Thatcherite Britain, the closest comparison, was at most a pale reflection. The [impersonal] forces of technological change and globalization, by contrast, affect everyone. If the rise in inequality has political roots, the United States should stand out; if it’s mainly due to impersonal market forces, trends in equality should have been similar across the advanced world. And the fact is that the increase in U.S. inequality has no counterpoint anywhere else in the advanced world. During the Thatcher years Britain experienced a sharp rise in income disparities, but not nearly as large as the rise [in the U.S.]…, and inequality has risen modestly if at all in continental Europe and Japan.”
“[T]he forces of technological change and globalization have affected every advanced country: Europe has applied information technology almost as rapidly as we have, cheap clothing in Europe is just as likely to be made in China as is cheap clothing in America….In terms of institutions and norms, however, things are very different among advanced nations: In Europe, for example, unions remain strong, and old norms condemning very high pay and emphasizing the entitlements of workers haven’t faded away….There is…a…case for believing that institutions and norms, rather than technology or globalization, are the big sources of rising inequality in the United States.” (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; pp. 9, 137, and 140-1.)
-“[W]hen economists, startled by rising inequality [in the early 2000s], began looking back at the origins of middle-class America, they discovered…that the transition from the inequality of the Gilded Age [1870s to the beginning of the 20th century] to the relative equality of the…[post WWII] era wasn’t a gradual evolution. Instead, America’s postwar middle-class society was created, in just the space of a few years, by the policies of the Roosevelt administration…” (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; pp. 7-8.)
2. What percentage of total income (excluding capital gains) was held by the top 10% of Americans in 2005? 1920s?
-2005: 44.3%; Average for 1920s: 43.6%. (The top 1% held 17.4% and 17.3% in 2005 and the 1920s, respectively.) The US today is back to levels of inequality not seen since the days before the New Deal. (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; p. 16.)
-In 2005, [US] households in the bottom 20 percent had an average income of $10,655, while the top 20% made $159,583—a disparity of 1,500 percent, the highest gap ever recorded.” Arianna Huffington; Third World America; Crown Publishers; New York: 2010; p. 18.)
-In 1979 the top 0.1% of Americans (approximately 300,000 people) received 2.2% of all income. In 2005 the top 0.1% received more than 7% of all income. (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; p. 259.)
-“The 90 percent of Japanese at the bottom of their nation’s wealth distribution own 60.7 percent of their nation’s wealth. In the United States…[t]he bottom 90 percent of Americans own…30.2 percent of U.S. household wealth…Japan’s wealth spreads throughout Japanese society.” (http://www.fpif.org/articles/deeply_unequal_world)
-“Even when upward income redistribution creates more wealth…there is no guarantee that the poor will benefit…[T]he trouble is that trickle down usually does not happen very much if left to the market. For example…the top 10 per cent of the US population appropriated 91 per cent of income growth between 1989 and 2006, while the top 1 per cent took 59 per cent. In contrast, in countries with a strong welfare state it is a lot easier to spread the benefits of extra growth that follows upward income redistribution…through taxes and transfers. Indeed, before taxes and transfers, income distribution is actually more unequal in…Germany than in the US, while in Sweden and the Netherlands it is more or less the same as in the US.” (Ha-Joon Chang; 23 Things They Don’t Tell You about Capitalism; Bloomsbury Press; New York: 2010; pp. 145-6.)
3. Why have advocates of a smaller welfare state and regressive tax policies been able to win elections in the US, even as growing income inequality should have made the welfare state more popular?
-“[S]omething has allowed movement conservatism to win elections despite policies that should have been unpopular with a majority of the voters.…[That something] can be summed up in just five words: Southern whites started voting Republican.” “After the passage of the Civil Rights Act [of 1964], [President] Johnson told…a presidential aide, ‘I think we’ve just delivered the South to the Republican Party for the rest of my life, and yours.” He was right…The changing politics of race made it possible for a revived conservative movement, whose ultimate goal was to reverse the achievements of the New Deal, to win national elections—even though it supported policies that favored the interests of a narrow elite over those of middle- and lower-income Americans.”
Running for governor of California in 1966, Ronald Reagan said: “If an individual wants to discriminate against Negroes or others in selling or renting his house he has a right to do so.” (Movement conservatives have since learned to be more circumspect in their public statements.) “Ronald Reagan began his 1980 [presidential] campaign with a states’ rights speech outside Philadelphia, Mississippi, the town where three civil rights workers were murdered; Newt Gingrich was able to take over Congress entirely because of…the switch of Southern whites from overwhelming support for Democrats to overwhelming support for Republicans.”
“[M]ovement conservatism’s pandering to a subset of white voters by catering to their fear of blacks (and other non-whites such as Hispanics)…has less electoral impact as the US becomes less white and as many whites become less racist. [In 1980, Hispanics constituted 6.4% of the US population; in 2000, 12.5%.]…The importance of the shifting politics of race is almost impossible to overstate. Movement conservatism as a powerful political force is unique to the United States. The principal reason movement conservatives have been able to flourish here, while people with comparable ideas are relegated to the political fringe in Canada and Europe, is the racial tension that is the legacy of slavery. Ease some of that tension, or more accurately increase the political price Republicans pay for trying to exploit it, and America becomes less distinctive, more like other Western democracies where support for the welfare state and policies to limit inequality is much stronger.” (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; pp. 12, 86, 99-100, 178-9 and 211.)
4. Which Republican leader wrote the following? “Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt…, a few other Texas oil millionaires…Their number is negligible and they are stupid.”
-By the time US President Eisenhower wrote those words in 1954, Republican leaders had, as a matter of political necessity, accepted the institutions created by the New Deal. (In fact, taxes on corporations and the rich were even higher during the Eisenhower presidency than they had been under FDR.) As the great majority of Americans are assisted by programs such as social security, it should not be surprising, that when facts are understood, progressive government is popular. The moderate Republican trend of domestic governance continued under President Richard Nixon. While Nixon exploited the race issue to get elected in 1968, he “governed as a liberal in many ways: He indexed Social Security for inflation, created Supplemental Security Income…,[raised taxes,] expanded government regulation of workplace safety and the environment, and even tried to introduce universal health insurance.”
By the mid-1970s movement conservatism had the organization in place to achieve power. What facilitated the acquisition of power was “a double crisis, both foreign and domestic. In foreign affairs the fall of Vietnam was followed by what looked at the time like a wave of Communist victories in Southeast Asia and in Africa, then by the Soviet invasion of Afghanistan and—unrelated, but feeding the sense of anxiety—the Islamic revolution in Iran and the humiliation of the hostage crisis. On the domestic front a combination of bad policy and the energy crisis created the nightmare of stagflation, of high unemployment combined with double-digit inflation.…[T]he dire mood of the 1970s made it possible for movement conservatives to claim that liberal policies had been discredited. And the newly empowered movement soon achieved a remarkable reversal of the New Deal’s achievements.” (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; pp. 58-9, 62, 81 and 122-3.)
-“The story of rising political polarization isn’t a matter of both parties moving to the extremes. It’s hard to make the case that Democrats have moved significantly to the left: On economic issues from welfare to taxes, Bill Clinton arguably governed not just to the right of Jimmy Carter, but to the right of Richard Nixon. On the other side it’s obvious that Republicans have moved to the right: Just compare the hard-line conservatism of George W. Bush with the moderation of Gerald Ford.” (Paul Krugman; The Conscience Of A Liberal; W. W. Norton; New York: 2007; p. 5.)
5. Which country’s law mandates that the employees of large corporations elect one-half of the board of directors? (I.e. Shareholders do not elect all of the board.)
-Germany has had a very successful economy and a strong welfare state. The unemployment rate is 7.5 percent (well below the US’s). During most of the last decade, Germany, a nation of 82 million people, was either the world’s top exporter or essentially tied for the top spot with China. Germans work less than Americans with six weeks of vacation time. Poverty rates for children and the elderly are less than half that of the US. Unlike most Americans, the average German isn’t perpetually indebted because basic public goods (such as healthcare, education and childcare) are paid for by the state. This last point is crucial for understanding how Germans can pay much higher taxes and still be able to save.
The three building blocks of German social democracy are the worker council, the co-determined board and regional wage bargaining. With respect to the last block, “unions bargain for wages and pensions just like in America, except instead of negotiating with one employer at a time, they do so with as many employers in the same industry as possible….[T]his system [for example] would allow clerks at…all bookstores to be paid the same wage. Same work, same pay, so that companies aren’t competing based on wages and the ‘race to the bottom’ is stopped in its tracks. The system is powerful: Unions negotiate the wages of 60 percent of Germany’s private sector workforce, more than eight times the percentage of U.S. workers covered by bargaining agreements. But things get much more interesting with the other big blocks. Works councils, comprised of elected workers, actually help to manage companies. That means the councils help determine core issues, like when to open and close the store or office, who gets what shift, and who gets laid-off or fired….[W]orkers and bosses make decisions together. More interesting are the co-determined boards….In any German company with more than 2,000 employees, workers get to elect half the firm’s board of directors — the same amount that shareholders get to elect. Although the board chairman, chosen by shareholders, gets to break ties, this arrangement gives [regular non-supervisory] workers…a modicum of control over the firm. They can try to block factory shutdowns and protect good manufacturing jobs and block capital flight and outsourcing….After World War II, US Army leaders, overseeing Germany’s reconstruction and steeped in the New Deal, advocated for works councils and co-determined boards in order to bring real democracy (not just better wages) to post-Nazi Germany.” (http://tomgeoghegan.com/2010/07/in-these-times/)