Saturday, March 12, 2011
The American middle class is rapidly losing ground as the top one percent get richer. John Hamilton says the tea party crowd is angry about the wrong things. The real issue is a growing income inequality which has been fueled by years of free trade policies, corporate offshoring of jobs, tax cuts for the rich and deregulation of the financial industry.
The tea partyers have a right to be angry. They are just focused on the wrong thing.
What they should be mad about — hopping mad — is the growing inequality of income in the United States.
The distribution of our national income has become severely skewed. It is worse than in every single country of the Middle East and approaches Latin America's discord-sowing levels. On the Gini Index, where higher numbers represent higher inequality, the U.S. comes in at 45. For comparison, the numbers in Latin America range from 41 in Venezuela to 59 in Haiti. With a score of 23, Sweden leads all nations in having the most equal distribution of income.
Does this matter? It does. As a U.S. diplomat in Latin America, I saw what severe income inequality does to a society: it generates pervasive grievances that fuel a volatile and often violent politics; it fractures social cohesion; and it throttles economic development. The last point is critical. In the United States, the economic activity of a robust middle class has been an important driver of growth. Until recently, that is. In 1970, when our Gini coefficient was 39.4, the wealthiest 1 percent of Americans took in 9.7 percent of national income. That was a lot, but today the equivalent figure is 23.7 percent. The wealthiest one-tenth of 1 percent receives an astonishing 12.3 percent of national income.
According to former Secretary of Labor Robert Reich, middle-class economic activity is no longer generating new growth and jobs. As the purchasing power of the middle classes declined after 1970, families coped for a time. Women earned a second income; all workers put in longer hours and families drew on the equity in their homes. As those strategies are now exhausted, job growth is anemic. And because the wealthy can spend only a fraction of their income, they are not generating new growth either. (To spend an annual income of $10 million — not uncommon in the corporate world — one has to spend $27,397 every day.) Extreme income inequality benefits no one — not even the wealthy.
The growth of inequality, according to Jacob Hacker and Paul Pierson (authors of Winner-Take-All Politics), was largely caused by public policy. Left alone, robust capitalism tends to produce inequality, as it did by the 1890s and again during the 1920s. It took the reforms of the Progressive Movement and New Deal to restore balance.
The New Deal and such post-war measures as the GI Bill contributed to the "great prosperity" of 1945-1970, when middle income gains actually exceeded upper income increases. After 1970, however, a "drifting" public policy ignored growing income inequality or even abetted it through de-regulation and tax policy. Hedge fund managers, for example, have their fee-derived income taxed at 15 percent. As Warren Buffet famously noted, he pays a lower rate of income tax than his salaried secretary.
A focus on income inequality lends an alternative optic on the tea party and conservative narrative that our economic difficulties have their origin in too much government — too much regulation, too much spending on the poor. Rather, the political class has been lax in its stewardship of societal good health. Remedies call for policies that would not have to be more than mildly redistributive — boosting the Earned Income Tax Credit, for example, imposing higher marginal tax rates on the wealthy and taxing capital gains at the same rate as wages and salaries. Such policies are unlikely to be adopted, however, until the public better understands income inequality in all its pernicious dimensions.
As a diplomat who spent most of his career in Latin America, I came to love the region — its peoples and cultures — and to admire many things about it. But not its inequality of income. We should not go there.
John Hamilton of Shelton, Wash., is a retired U.S. Foreign Service officer. He was U.S. Ambassador to Peru in 1999-2002 and to Guatemala in 2002-2005.