Unjust Desserts

IF THE conservative era now collapsing around us had a reigning idea, it was best expressed by Margaret Thatcher when she declared with Bourbonesque flair that “there is no such thing as society.” In their new book Unjust Deserts: How the Rich are Taking our Common Inheritance and Why We Should Take it Back, Gar Alperovitz and Lew Daly turn Thatcher’s premise on its head and with it the whole individualistic worldview that ruled our politics for the last three decades. They focus on the role of knowledge in economic growth, arguing that expanding knowledge is a collective source of wealth and, as such, demands a significant social return in the direction of greater equality.

James Lardner: After all the twists and turns of an amazing presidential campaign, the key point of contention in the end was “the redistribution of wealth”—not Barack the Reverend Wright-trained “America-hater” or the San Francisco-style “limousine liberal,” but “Barack the redistributor.” What do you make of this charge?

Lew Daly: Obama used the phrase “spread the wealth around” when Joe the Plumber asked about his tax plan late in the 2008 presidential campaign, and, of course, the McCain team seized on this “socialist” idea and made it their central critical theme in the final days before the election. As in Father Coughlin’s time and Barry Goldwater’s, Joe the Plumber’s charges of “socialism” didn’t carry much weight at the polls. But I actually think this particular plot twist at the end was the most interesting political moment of the entire presidential campaign, because it foreshadows what the Obama years will be about. For the last two decades, the Republican Party ignored distribution while the Democrats changed the subject from distribution to growth, from “dividing the pie” to “enlarging the pie.”

It was arguably the Democrats who worked the hardest to sell middle America on this “win-win” idea of putting growth before equality, and both parties hooked us in by loosening credit and creating “wealthy feelings” with two major asset bubbles. Well, that’s over now, and the politicians no longer have the luxury of avoiding the real problems of declining household earning power and growing inequality. But what Obama should have done more clearly on the campaign trail, to start this debate off on the right foot, was fire back a very simple point, easily illustrated: he’s not trying to “spread the wealth around” so much as put a stop to the massive redistribution that’s already going on in America from the middle to the top.

JL: What is this “upward redistribution?”

Gar Alperovitz: The economic facts plainly show this. In the decades after the Second World War, productivity and wages rose together, almost on a one-to-one basis. Beginning in the 1980s, productivity and wages began to diverge, a divergence that sharpened to record levels under George W. Bush. Since 2000, productivity has increased about 20 percent, but the median hourly wage went up only 3 percent. So the question is: Where is the wealth that used to go to wage-earners going today?  Scott Lilly of the Center for American Progress gives us a snapshot of where it’s going by looking at the Bush “recovery” of 2002-2006. Although this was a particularly extreme period, the relative magnitudes are roughly in line with trends emerging over the last thirty years. Household income increased a total of $863 billion over the period. $626 billion of the total gain went to the top 1 percent of households. The bottom 90 percent got only $41 billion, less than 5 percent of the total gain. Unless Joe the Plumber thinks 90 percent of the people create only 5 percent of the output—this can only be described as upward redistribution. Or as Theodore Roosevelt put it, taking from those “who earn more than they possess” and giving to those “who possess more than they earn.”

LD: From this kind of evidence on distribution, we probe deeper to look at the societal and historical contributions that make all of us “social debtors” by Teddy Roosevelt’s moral standard (or immoral standard, as it were) of possessing more than we individually earned. The rich are simply more indebted because they necessarily received more from society, and so, logically, they owe more back. Or put another way, the problem with Joe the Plumber’s critique of “spreading the wealth around” is that it doesn’t take into account the fact that wealth is already highly socialized before we even start talking about taxation. It has already been “spread around” by many kinds of social contributions that add far more value to our labor and investments than what anyone pays in taxes.

JL: You quote Warren Buffett posing this question:  “How much money would I have if I were born in Bangladesh, or born here in 1700”? What’s his point? Isn’t it obvious?

LD: Yes, it is obvious. The problem is we don’t take it seriously. He’s saying—in fact, these are also his words—that “society is responsible for a very significant percentage of what I’ve earned.”

JR: Wait a minute…society? But Margaret Thatcher didn’t believe there was such a thing.

LD: Yes, it became an unfashionable concept for a while in a few other countries besides our own. By “society” Buffett means everything that individuals depend on and benefit from which they themselves did not create and do not maintain. From good roads, to public schooling, to national defense, to food and drug regulation, to social insurance programs like Social Security and Medicare—there are many institutions and systems that all or most of us commonly use in our daily lives. These are often funded by taxes, of course, but for pennies on the dollar compared to the value they add to our lives

GA: But Buffett’s deeper point is that his wealth is not strictly a product of his unique talents or effort. For all his gifts, he’s telling us that his billions are largely an accident of when and where he was born—that if he were the same person he is today (with the same amount of effort and intelligence) but was born in a poor country or transported back to early America, he would not have the wealth he has today or even a tiny fraction of it. So why then should we think of the wealth he “owns” as entirely, or even largely, his and, therefore, as being immune from other kinds of claims such as social need?

JL: So you’re making a new argument for the old idea of sharing the wealth?

LD: In the first place, we’re talking about where wealth comes from, and who really “owns” it in the first place. But the time horizon has to be larger. We’re also talking about what the living owe the dead, about how society has preserved the advances created by previous generations, and what this cumulative “inheritance” of human learning, if you will, contributes to our current economic activities and well-being. Now, to understand the impact of this inheritance, we need to grasp some basic facts about economic growth and how we accumulated our wealth. We need to know what the growth record has been and how our growth has changed in the modern era.

JL: And how has growth changed?

GA: Basically the story is that we have moved from a labor-intensive, small-scale farming economy to a knowledge-based information economy. In the process, the sources of growth have changed, but it’s important to understand that individuals have not really changed. We work no harder today than our ancestors did in 1800 or in the ancient past, and just the same, we are no more intelligent, in terms of basic brain capacity and reasoning ability. The cave paintings of earliest human culture are works of roughly the same basic intelligence as the theory of relativity. Let’s hold that thought: Essentially, we work no harder and are no more intelligent than our ancestors from the near or even the ancient past.

And yet our economy is more than 1,000 times larger than it was in 1800, and the best measure of prosperity, per capita Gross Domestic Product (GDP)—the amount of output the economy generates for every person—is twenty times higher today than it was in the early nineteenth century (it was $42,000 in 2006, the equivalent of almost $170,000 for a family of four). The key to this growth, experts agree, is rising productivity, usually measured in terms of the amount of output per hour of work, which rose more than fifteen-fold since 1870.

JL: Wasn’t economic growth always based on some combination of knowledge, capital, and labor?

GA: Yes, but the recipe—the balance of ingredients—is very different from what it used to be. After the Second World War, economists began to formally study economic growth, and a method known as growth accounting was developed to measure the sources of growth—the idea being that if we understand the “how” of economic growth, where it’s coming from, then we can develop better policies to improve the economy and raise living standards. The pioneer in this work was MIT economist Robert Solow, who, in a brief but now-famous paper published in 1957, made a startling discovery (he later won a Nobel Prize for this work). In contrast with the then-dominant assumption that increases in the supply of capital (factories, machines, etc.) were the main engine of economic growth, Solow found that less than 13 percent of growth in the first half of the twentieth century could be attributed to capital accumulation or increases in labor supply (in fact, labor supply per person had been diminishing as the forty-hour week became the norm).

Most of the growth, that is, was not coming from the conventional inputs of labor and capital, what workers and employers supply. The nearly 88 percent of growth that remained unaccounted for—which became known as the Solow Residual—could only be attributed, Solow concluded, to something broader and deeper than the everyday economic activity embodied in labor effort and capital accumulation. Solow defined this as “technical progress in the broadest sense,” or, in other words, the cumulative knowledge and technological capacity of our society. This did not make any sense in terms of our traditional individualistic way of thinking about economic activity or economic rewards.

JL: But in a technological society, isn’t individual brainpower more important than ever?

GA: Maybe not. An engineer working today might have the same human capital as an engineer working 100 years ago. Yet, as the Stanford economist Paul Romer points out, the contemporary engineer is typically far more productive. The reason is self-evident: “He or she can take advantage of all the additional knowledge accumulated as design problems were solved during the last 100 years.” The value is in the knowledge, not the individual.

JL: What does it mean to say that the value is in the knowledge?

LD: Romer’s example suggests something deeper about the cumulative impact of expanding knowledge: As knowledge grows and improves against a relatively fixed baseline of human effort and intelligence, the importance of individual contributions shrinks proportionally. In other words, the locus of value or value-generation is shifting from the individual to society. And this, in turn, means that our conventional individualistic basis for judging economic differences no longer holds. How do we measure “who deserves what” in an era of knowledge-based growth, where the cumulative knowledge of society is increasingly more important than individual effort or intelligence? Clearly, the way we talk and think about inequality doesn’t account for the enormous “free lunch” of inherited knowledge at the heart of both our annual GDP and our total wealth.

JL: The people who figure out the Forbes 400 Richest say we shouldn’t be especially troubled by the degree of inequality in modern America because, compared to their nineteenth and twentieth century forbears, so many more of today’s millionaires and billionaires are “self-made.”

GA: They’ve got it backwards. But, in fairness to Forbes, so do a lot of other people. Popular culture and much of our education promotes a “heroic” view of progress that obscures how most technologies really develop. The heroic view sees progress simply as a sequence of great achievements by extraordinary individuals. It is the view that Albert Einstein rejected when he famously said “many times a day I realize how much my inner and outer life is built upon the labors of my fellow men, both living and dead.” The reality is much closer to Einstein’s view of building on others’ labor over a long duration. From transportation, to medicine, to computers, technological progress is much less about isolated “eureka” moments than about recombining existing knowledge in new ways. An individual may hit upon something new that adds to existing knowledge and makes it more effective, but really the key is how the existing knowledge predisposes the individual to look for certain things within a narrow range of possibilities—a condition that makes discovery almost an automatic process over time.

This is plainly illustrated in the very common phenomenon of “simultaneous invention,” where two or more people working independently invent or discover the same thing at roughly the same time. So, Charles Darwin and Alfred Russel Wallace both discovered the theory of evolution by natural selection at the same time. Or take the telephone. The very day Alexander Graham Bell’s lawyer filed for his patent on the telephone in 1876, so did Elisha Gray, and it’s possible that the only reason another inventor, Antonio Meucci, didn’t beat them both is that he didn’t have enough money to file for the patent several years earlier. None of these individuals “invented” the telephone in any strict individualistic sense. Bell’s “heroic” contribution was simply that he won the race to obtain legal title to an invention that was about to happen anyway.

JL: OK, but just because single individuals aren’t the engines of progress that doesn’t mean everyone plays an equal part. Isn’t innovation still limited to fairly small circles of people who have a certain kind of special claim on the rewards?

LD: No, because, even if the number of people applying themselves to a problem is frequently very small, none of them are essential to the process. What is essential is the knowledge they all have at their disposal. Take Bill Gates: If Bill Gates had to learn for himself all the knowledge he had at his disposal in the late 1970s when he started Microsoft, he wouldn’t have gotten very far, probably not much further than his stone-age ancestor who may have invented a new kind of weapon for hunting animals or something like that. That’s how you have to judge what Bill Gates morally deserves: How far would he have gotten without the knowledge he inherited for free from previous generations? Whatever your answer to that question is—that’s the extent of his personal contribution and his deserving-ness. And if Bill Gates hadn’t been born at all, by the way, we still would have had the kind of software he built his fortune on, as his many outmaneuvered competitors would happily have proved.

So, take away Gates, and we still have the personal computing revolution, but take away the knowledge Gates and others built upon in developing effective computer software, from earlier computer languages such as Fortran and Basic (most of which were developed with government support, by the way) all the way back to basic arithmetic, and not only would we have no computers of any kind, we’d still be counting on our fingers or moving pebbles around just to have any grasp at all of the important data in our lives, like too many days without rain. When the very wealthy, like Gates, are reflexively defended in the press and in public life generally, it’s often on the assumption that they made a unique contribution and in doing so greatly helped society in a way that no one else could have. But the facts demonstrate that this isn’t true.

JL: We haven’t used the word “incentive.” Justice aside, don’t we need a high degree of inequality to keep our inventors and entrepreneurs properly motivated?

GA: Yes, of course, a monetary reward helps; we do not oppose reasonable incentives. But in today’s economy, many people get rewarded far out of proportion to what they actually contribute. At the same time, many also get far more than they need to “incentivize” their effort.

But our main focus is on the broader problem of inequality, not on undeserved fortunes per se. The problem we see is a society whose wealth is commonly created, by and large, but very unequally distributed and enjoyed. The largely collective way we produce our wealth is morally out of sync with the individualistic way we distribute the wealth and also justify the resulting vast inequalities. So we’re not saying to the Bill Gateses of the world: you don’t deserve anything and we’re going to tax it all away. What we’re saying is that our society should be more equal than it is if we truly believe, first, that people should be rewarded according to what they contribute, and second, that society should be repaid for the large contributions it makes, which enable everything else. These are common beliefs or, at least, reasonable ideas, so that is not the problem. The problem is a mistaken view of wealth-creation, which distorts how these common ideas are applied.

JL: You often use the term “inheritance” in the book. How should we view the concept of “inheritance” as a moral proposition? How is inherited knowledge like and unlike inherited wealth or property?

LD: Most people do not consider inherited wealth or property to be something people really and fully “deserve” to enjoy, even if they are legally entitled to it. We never think the rich heir really “deserves” to be rich. At the same time, we tend see the wealth and income people get from the market as something that’s “deserved”—because the market, we assume, usually rewards people in rough proportion to their contributions. The problem with this is that a significant portion of what people get from the market has nothing to do with what they individually contribute. Take away the inherited knowledge we use in our work and daily life, and productivity will go way down along with income. So in accounting for the knowledge we inherit we have to ask ourselves if we are so much more deserving than the rich heir lolling about on daddy’s estate. Obviously what we add is important and has something to do with the differing economic benefits people enjoy, yet the difference between what the high-tech CEO contributes and what the janitor who cleans out his waste basket contributes is ultimately very small compared to the share of everyone’s gains that comes from inherited knowledge.

JL: There used to be a pretty clear distinction between “earned” and “unearned income.” What happened to those terms?

LD: A famous American president named Roosevelt once suggested that the survival of civilization depended on eliminating unearned wealth. Progressive taxation was the remedy he proposed, and he was the first American president to truly advance that cause. Poor John McCain might be surprised to learn that the Roosevelt in question was his Republican hero Teddy, not Barack the Distributor’s oft-slandered “communist” role model, Franklin. The truth is, progressive taxation is a conservative idea; it’s based on reciprocity. People who have more income and wealth, T. R. assumed, necessarily got more help from society to begin with, and therefore they owe more back to society, as a share of their income, than those who get less from the market. Or, in other words, the rich “earn” less of their income than the poor earn because they benefit so much more from the contributions of society. Such unearned income is the natural moral target for taxation, because no one deserves it.

JL: High taxes vs. high growth—don’t we have to choose?

GA: No. In fact, when our productivity growth rates were the highest, in the 1950s and early 1960s, the top marginal income tax rate stood at about 90 percent across that period. Today the top marginal rate is 35 percent. Ironically, in the more recent era of dramatic tax-cutting for the rich, productivity often stagnated. So, in fact, by historical standards, higher taxes have often been correlated with strong growth, while cutting taxes has been correlated with stagnation and decline.

JL: Do people in fact work harder when they know they’ll get to keep more of what they earn? Don’t higher taxes at some point reduce effort?

GA: Perhaps “at some point.” But there’s little evidence that it works this way at the top, which is the target of our argument. As I suggested earlier on the issue of incentives, very, very large fortunes simply aren’t needed to generate productive contributions. If Bill Gates was told by the government in 1980 that he’d only end up with $25 billion in his bank account when his company peaked (instead of the $50-something billion he actually held), do you think he would have stopped trying to build Microsoft? What if the limit was only $1 billion, or a generous executive salary?  Even then he would have continued, no doubt. Clearly, there is a huge gap between what the richest earn and what it takes to “incentivize” their contributions. These economic “rents,” as they’re technically termed, are pervasive in our economy, especially at the top.

JL: Are you simply arguing for a higher tax rate on the very wealthy? Or for a whole different way of viewing – and using – the taxes they pay?

GA: Both. A higher tax is appropriate because the very top groups have been able to capture such high percentages of society’s core wealth—which in turn derives so overwhelmingly from inherited knowledge. One approach might include enacting an annual wealth tax of 2 percent on the richest 5 percent of households in America. This money could be used to finance federal education grants, with the goal of replacing the student loan system with a pure grant system. This could require national service in return, in a flexible way, with forgiveness after perhaps two years of service. The principle here is giving more people access to our technological and knowledge inheritance through higher education. It’s a way of equalizing (or somewhat equalizing) the benefits of something—knowledge—we all inherit in common. Much more progressive taxation on inheritance, on income at the top, and on windfall profits like those recently “earned” in the oil industry, would also be important steps forward.

JL: So you’re in favor of redistribution? Is that where it all leads?

LD: We’d like to retire that word from the political vocabulary because you can’t redistribute something that is already highly socialized, and wealth and income in the “era of knowledge-based growth” (whoever ends up “owning” it) is indeed highly socialized. Most importantly (and more to the point), individual productivity is increasingly dependent on what can only be described as a collective good, a common inheritance of knowledge. No one deserves to benefit from this common inheritance more than anyone else, by moral definition, because it’s not created by any individual. So, to the extent that inherited knowledge (“technical progress in the broadest sense,” as Solow termed it) is increasingly driving economic growth, the fruits of knowledge—the wealth being generated by knowledge—should be more equally shared. Wealth that is commonly created should be equally, or at least more equally, shared.

James Lardner is co-author of Up to Our Eyeballs: How Shady Lenders and Failed Economic Policies are Drowning Americans in Debt, editor of Inequality.org, and a senior fellow at Dēmos. Gar Alperovitz is the Lionel R. Bauman Professor of Political Economy at the University of Maryland and Lew Daly is Senior Fellow and Director of the Fellows Program at Dēmos. Their new book, Unjust Deserts, came out this November from The New Press

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