Policy Wonk: Income inequality risks our economic future

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The gap between the rich and poor in Maine and the nation is large, long-standing, and growing.

It is not a temporary phenomena borne of the recent recession that will self-correct as a slow-moving recovery unfolds. On the contrary, this gap goes back 150 years.

It is rooted in the Horatio Alger (“rags to riches”) myth that would reward the hard work, industry, and entrepreneurial skills of a few, while penalizing the idle, those less fortuitously situated, less educated, less imaginative, less willing to take risks.

The myth would have us believe that the door to success is open to all.

Of course, it isn’t. Historically, opportunities for women were few and low paying; use of child labor was rampant. Blue-collar workers in factories and mines were unorganized, and toiled long hours (often in dangerous conditions) for minimum wages.

At the same time, the “robber barons” (the 1 percent) of that day – the Carnegies, Flaglers, Goulds, Mellons, Morgans, Rockefellers, etc. – enjoyed levels of income as widely separated from the income of the poor as today’s income inequality. These “captains of industry” and their associates held economic and political power tightly, often ruthlessly. Upward mobility was the exception, not the rule.

But this early period (1865-1900) of widening corporate and trust power, and wide income and wealth inequality did not produce economic stability. Nine separate recessions were recorded in this 35-year period. Four more were recorded prior to World War I.

These historical inequities and turmoils gave rise to 19th- and 20th-century journalistic “muckrakers” like Bierce, Lloyd, Tarbell, Steffens, and to the political breaking of trusts and corporate entities; the 1890 Sherman Act (curbing monopolistic powers); and the Clayton Antitrust Act in 1914. These (and other) social reforms of the Roosevelt era were both needed and popular at the turn of the 20th century.

But “myth” and income inequality die hard. By the late 1920s the income-wealth gap between the top 1 percent and lower-income groups was as wide as it ever was, and as wide as it is today. The depression of the 1930s followed, then World War II, and then recovery from the war, which allowed the gap between the very rich and the poor to narrow somewhat.

In the 1950s and ’60s, however, a new generation of economic, corporate, literary and political myth builders came to the fore. Adam Smith’s “invisible hand” was touted by economic luminaries like Milton Friedman, Friedrich von Hayek, etc. Unfettered and unregulated markets were said to be the key to economic growth.

Corporate leaders such as Charlie Wilson asserted that what was “good for General Motors was good for America.” Novelists such as Ayn Rand (“The Fountainhead,” “Atlas Shrugged”) touted laissez-faire capitalism. The morality of individual (and corporate) self-interest – some would say “greed” – was said to be key to the nation’s wealth and economic growth.

These lines of reasoning (myths) were embraced at the highest level of political power when President Ronald Reagan in his 1981 inaugural address asserted “government is the problem.” He saw individual (and corporate) freedom as key to achieving a larger common good. This justified unprecedented tax cuts for the wealthy, and gave rise to the theory of “trickle-down economics.”

President George H.W. Bush doubled down on these tax-cutting theories. But the “larger common good” – the well-being of the many – has not emerged. Instead we had a recession in 1981-82, brief recessionary periods in 1990-91, and again in 2001, and a severe recession in 2007 from which we have not yet fully emerged. Today, income inequality has never been greater.

The lessons of history seem clear: income/wealth inequality, and the cult of individual and corporate freedom in unregulated markets, does not produce sustained economic growth. Tax cuts do not produce economic growth. There is no “invisible hand” operating for the benefit of the larger society. There is no “trickle down” of wealth, income, jobs, opportunity, hope.

The poor and middle class have simply been left behind.

Given these realities, the myths and reasoning of the past, echoed by today’s tea party voices, must be put aside. There is no one step that will assure a more shared (a more stable) economic future, but useful steps can and should be taken, immediately:

• Raise the minimum wage and adjust it for inflation (ideally at the federal level). This will increase and stabilize consumer spending, a key factor in sustaining economic growth.

• Replace “too big to fail” with the view, that if you’re that big, you put the economy at risk. A scaling down, the spinning off of stand-alone components of huge corporate entities, is necessary to sustain economic growth.

• In Maine and the nation, ending or reducing tax expenditures and loopholes that favor wealthy corporations and individuals is long overdue. A more fair tax system would reduce income inequality and facilitate economic growth.

• Raising the federal gas tax (last raised in 1993) and adjusting it for inflation would enable a critical (but crumbling) infrastructure component of economic growth to be maintained.

To have economic growth, these steps seem minimally essential. Whether they will be enacted remains to be seen.

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Orlando Delogu of Portland is emeritus professor of law at the University of Maine School of Law and a longtime public policy consultant to federal, state, and local government agencies and officials. He can be reached at orlando.delogu@maine.edu.