Barack Obama is right — wealth inequality is a threat to capitalism

NationalPost.com – FullComment
Jan 25, 2012.   Jonathan Kay

In his State of the Union speech, Barack Obama warned that America is becoming “a country where a shrinking number of people do really well, while a growing number of Americans barely get by.” Predictably, Republicans accused him of perpetrating “class warfare” or stoking “the politics of envy.” Even the (allegedly liberal) mainstream media accused Obama of striking a “populist” tone. But Obama is correct to identify income- and wealth-inequality as the number one problem facing the United States, and perhaps even the global economy as well.

Income inequality in the United States now stands at its highest rate since the Great Depression. At Occupy protests and in activist circles, this fact usually is cast as a social justice issue, which is why too many conservatives snidely dismiss it. In fact, free market capitalists are the ones who should be most concerned about inequality. A mass market consumer economy cannot function when earners cluster at the poles: Poor people buy very little, and wealthy people spend only a small fraction of their income on retail goods and services. The income of America’s middle class — the people who fuel the retail economy — has been stagnant, in real terms, for three decades.

The big question isn’t whether this is a massive problem. It is. The big question is why so many American conservatives are in denial about it. The Republicans, in particular, are promoting many policies that would actually make the income and wealth gaps worse — such as “flat taxes,” and other schemes that effectively amount to permanent tax cuts for the ultra-wealthy. Mitt Romney’s opponents have made a big deal about his background in “vulture capitalism,” and the 13.9% tax rate he paid on his 2010 income. Yet Newt Gingrich has proposed lowering America’s capital gains tax rate to … zero. Whom, exactly, is that supposed to benefit?

Behind these schemes is a species of magical thinking: Just lower taxes on rich people and they will invest in the economy, thereby creating millions of new jobs, and lifting America’s unemployed masses out of poverty. One hears endless variations on this from the GOP and from conservative pundits. But it’s bunk. In December, when Republicans were busy protesting a 1.9% tax increase on the top 500th of income earners, Republican Senator John Thune told the media: “It’s just intuitive that, you know, if you’re somebody who’s in business and you get hit with a tax increase, it’s going to be that much harder, I think, to make investments that are going to lead to job creation.” But when NPR askedThune and his Republican congressional colleagues to find a single, real-life millionaire job creator who could back up this claim, they couldn’t find any. Which isn’t surprising: Journalists who went out and talked to the nation’s business owners heard exactly the opposite message: “It’s not in the top 20 things what we think about when we’re making a business hire,” said one business owner. It “didn’t even make it on the agenda.”

Why are Republicans and their supporters so out of touch with economic reality? The conventional explanation is class mobility: Americans, including poor Americans, refuse to soak the rich because they believe they’ll be rich one day, too. And there likely is some truth to this, despite the fact that economic mobility is now lower in the United States than it is in Canada and many European nations.

But I’d say an even better explanation is Americans’ pure, undiluted ignorance about how unequal their society has become.

In recent years, a Harvard business professor named Michael Norton has beensurveying Americans about wealth distribution in America, comparing their perceptions with fact. The reality in the United States is that the richest fifth of the population controls about 85% of the country’s wealth (while the poorest fifth controls about 0%). But when Norton’s survey respondents were asked to state the share of wealth that they believed was controlled by the richest fifth of Americans, the number they came up with was closer to 60%. Even more tellingly, when Norton asked survey respondents what would be the ideal percentage of wealth that should be controlled by the richest fifth, the average figure reported was only 35% — a full fifty points below the 85% reality.

“The closer countries to what our respondents wanted [America to look like] are countries that are amusingly dissimilar to us, such as countries like Sweden,” Nortontold an interviewer. “And I should say, the other thing that we found is not just that people think things should be fairer in some sense than they are, but that there’s wide agreement about that. So if we look at very rich people and very poor people, or if we look at Republicans and Democrats, all of these groups think that wealth should be more equally distributed when we asked them these questions than it actually is.”

Conservatives who blithely dismiss Obama’s oratory as class warfare may want to take a closer look not only at the alarming gap between between rich and poor, but also between the more equal nation Americans say they want, and the unsustainably polarized one they actually have.

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