Income inequality threatens our society

Posted on September 15, 2013 in Equality Debates – business – Berkeley professor Robert Reich kicks offa provincewide conversation concerning B.C.’s economic future with some dire warnings
September 14, 2013.   By Stephen Hume, Vancouver Sun

The Great Recession of 2008 erased $50 trillion in wealth and threw more than 50 million people out of work. The world watched nervously as entire national financial systems teetered at the brink of collapse caused by their own failures of due diligence.

Governments responded to an imminent liquidity crisis with immense publicly-funded bailouts for banks and other financial institutions on a scale unprecedented except for times of war threatening national survival.

Financial institutions responded to this largesse by rewarding their top executives, among the highest earning and most privileged of economic classes, with bonuses while a wave of corporate and government layoffs, personal bankruptcies and household foreclosures commenced. This triggered an eruption of grassroots protest over what was perceived as a symbol of arrogant entitlement among greedy, wealthy elites when $11.2 trillion in household wealth had just evaporated in the U.S., the steepest decline in net worth since records began more than 50 years earlier.

NBC News reported in 2011 that five million homes had been lost, with another three million foreclosures in the offing. Bankruptcy was visiting the middle class to a degree equivalent to the Great Depression that followed the stock market crash of 1929.

Coping strategies Officially, the recession ended in June of 2009. But as Robert Reich points out, much of the jobless and financially struggling working middle class in North America and Europe doesn’t feel as though it has ended – because for many, it hasn’t.

Furthermore, he says, it won’t – unless some dramatic amendments in economic and social policy are made by governments. Continuing with old ways of thinking will only condemn us to a continuing series of similar calamities and, ultimately, social conflict and political instability.

Reich is professor of public policy at the University of California, Berkeley, a former secretary of labour with the Clinton administration and one of the genuinely challenging progressive economic thinkers of the current era.

He will be in Vancouver Oct. 3 for Simon Fraser University’s Community Summit, a provincewide conversation about B.C.’s economic future. His keynote at the Orpheum Theatre, sponsored by Vancity, wraps up months of community consultations and conversations and addresses income inequality and the perils it poses both for the economy and for society.

The public will participate in the dialogue – both in person and via the Internet – moderated by the CBC’s Anna Maria Tremonti, host of the national public affairs radio show The Current.

Reich makes the case that much of the West has entered a new “Gilded Age” – reminiscent of the era of “robber baron” capitalism – in which the rich amass most of the national wealth while the middle class shrinks and ordinary folk struggle.

Evidence of income inequality would have been a lot worse a lot sooner, he suggests, had not the middle class employed three financial coping strategies to maintain living standards: First, women moved into the workforce in vast numbers so that virtually every household became a two-income family.

Second, everyone began working longer hours – even before the recession, the average American family was working 500 hours a year more than it had in 1979.

Third, householders drew down savings and borrowed against the equity in their homes to maintain their living standards until, on average, they owed 138 per cent of their after-tax income to the financial institutions that are mostly owned and operated by the wealthiest 20 per cent of the population. In Canada, there’s been recent concern over older citizens accessing home equity and a Bank of Montreal survey found last August that on average we now owe 165 per cent of after-tax income and that one in four of us lives paycheque to paycheque, with nothing to put aside for future emergencies after paying the bills. Of those who do have a rainy-day fund, two-thirds had to dip into it last year.

New solution needed An independent Associated Press poll last summer reported that as the North American economy globalizes, wealth continues to concentrate among the richest while the ranks of the poor increase and fall deeper into poverty. It discovered four out of five Americans – just about everybody outside the wealthiest 20 per cent – has by now experienced joblessness, near poverty or reliance on welfare at some point in their lives.

At the end of August, more than 11 million Americans were still out of work and looking for a job – officially it’s 7.9 million jobless but that number conveniently (for politicians) doesn’t include the millions of discouraged unemployed who haven’t sought work in the last four weeks.

In Canada, more than a million people were jobless. Employment gains at the end of August were mostly among people over 55. Presumably the recently retired are still returning to marginal jobs to eke out pensions and retirement wealth that withered after 2008.

For Canadian workers aged 25-54, employment gains have been minimal. For Canadian youth, our future middle class, the picture is bleak, with job prospects more or less stagnant and unemployment rates that are double those for mature workers.

Reich doesn’t think it has to be this way. He argues that the solution is to grow the purchasing power of the middle class again since it’s the real engine of economic growth and vitality.

How to do it? Pay higher not lower wages, distribute income more equitably across the board instead of concentrating it at the top, invest heavily in opportunities for the higher education that will drive the 21st-century economy and grow productivity rather than excluding poorer students or burdening all but the wealthy with grinding debt loads on graduation that generate economic drag.

Reich is a favourite bête noir for those who think the answer lies in greater austerity (on the part of everyone but themselves, of course); who argue for balanced budgets through draconian slashing of public services; who demand lower wages and fewer benefits for workers; and, of course, who advocate tax cuts that benefit mostly the rich and yield higher profits for those wealthy enough to own companies and invest in financial instruments.

But Reich argues that it was precisely this kind of self-interest that brought on the calamity of 2008, which he describes in detail in his 2010 book Aftershock: The Next Economy and America’s Future.

More of the same medicine will only make the disease worse, he argues.

“The so-called recovery will be anemic,” he writes. “A large percentage of Americans will remain jobless, or their wages will drop. American consumers will not be able to spend enough to keep the recovery going. Without sufficient customers, businesses will not invest enough to fuel a sustained period of growth. Foreign markets, especially China, will not buy enough American exports to make up for the shortfall because they will be concerned about their own unemployment; they will have to fuel their own economies. And the U.S. government will not be able to run deficits large or long enough, to keep money cheap enough for a sufficient length of time to fill the gap.”

He suggests its symptoms won’t be pleasant: social discontent, labour strife, the increasingly nasty and repressive politics of class warfare and its fallout – all indicators that characterized similar periods of income disparities in the past.

Eventually, even the comfortable rich will come to dislike the consequent social upheaval as much as the beleaguered middle class dislikes its current plight.

So, what to do? Reich has some novel ideas. For example, he advocates a reverse income tax in which middle-class wages would be supplemented by direct payments from the government. He’d pay full-time workers earning $20,000 an additional $15,000 a year, with the supplement declining incrementally up the income scale until it zeroed-out at $50,000.

Wage supplements Those earning $50,000 to $90,000 would have their income tax cut to 10 per cent. Those earning between $90,000 and $160,000 would pay 20 per cent, whatever the income source. He’d offset the costs with higher marginal tax rates on the very wealthy top five per cent of income earners and a universal carbon tax, revenue from which would be directed to wage supplements.

Of course, the wage earners receiving supplements would also pay this carbon tax as prices rose to accommodate it, but he argues that middle-and lower-income Americans would still come out ahead while their increased purchasing power would drive economic growth, create jobs and make it possible for people to live satisfying lives in lower-wage employment.

Reich argues for a radical rethinking of the current system of providing unemployment benefits to tide individuals over during the job loss that accompanies economic downturns. What he advocates is a reemployment system that includes wage insurance coupled to aggressive retraining to increase productivity and to help address industry’s shortages in particular sectors. This would mean, for example, that we’d have a rapid response system in place for response to changing job demands in the nimble economies of the digital era.

He thinks student loans should be directly linked to income levels after graduation so that the debt burden ceases to inhibit students from entering lower-paying professions, purchasing homes or starting families – the foundation of a new middle class. Instead of charging students up front for higher education, Reich argues, tuition at public universities, colleges and technical schools should be free, with every graduating student paying a fixed per cent of their taxable income for a fixed period into a fund that finances public institutions and provides reasonably priced loans to those qualified and wanting to attend private schools.

And he has some ideas about Canada, too.

When I contacted the busy professor by email with some specific questions, he courteously took time to answer. What about Prime Minister Stephen Harper’s plan to drive the federal debt to the lowest level in 40 years? Good idea, Reich says, provided it’s funded by tax increases applied to those who can best afford them and cuts to programs that benefit those who don’t need them. Bad idea if it leads to an “austerity trap” in which government spending is cut so much that total demand for goods and services is compromised, thereby slowing economic growth or even triggering another recession. Is the recession of 2008 really over? Technically, yes, but not for those who still can’t find a job or whose job now pays less than the job they had before, adjusted for inflation. Even when growth is positive, he says, high unemployment and falling wages can reduce the standard of living for a nation’s people.

I tossed one of his own rhetorical questions back at him: “At what point does an economy imperil itself politically, as large numbers conclude the game is rigged against them?” His reply: “I’d say we’re uncomfortably close in the United States. Cynicism about major institutions – government, big business, the media, unions – abounds. Politics has become highly polarized. And the entire society seems to have become angrier than I remember it at any time in the last 50 years.”

Hmm, cynicism, polarization, anger, contempt for politicians and the political process, the justice system, big media – ring any bells? Everyone benefits So, what are the political implications if wealth continues to concentrate at the very top of society and the middle class continues to shrink, while increasing numbers of university graduates find themselves burdened with oppressive debts but earning low incomes? “It’s a recipe for social upheaval. On the bright side,

however, our two countries have distinguished themselves historically by reforming their political and economic systems when necessary, before social upheaval succumbs to rightwing or left-wing populism or violence.”

OK, if Reich had one piece of advice for the richest 20 per cent of the population, what would it be? “I’d remind the rich that they would do better with a smaller piece of a rapidly-growing economy than a larger share of one that’s barely growing at all, and that they gain enormously from investments in the education, health and well-being of others around them that are not as well off.”

And what would be his advice for the poorest 20 per cent? “I’d remind (them) that they have a responsibility to themselves and their families to take advantage of any and every opportunity available to them, and that the game is not yet so rigged that those who are ambitious and hard-working cannot get ahead.”

Is he optimistic or pessimistic? “I’m overwhelmingly optimistic. First, I’m old enough to have seen enormous positive social change. Who would have believed, 40 years ago, that women would have as much economic and political power as they do now, that gays would be able to marry, and that a black man would be elected and re-elected president of the United States? Who would have foreseen the progress we’ve made technologically? Second, I spend much of my time with young people between the ages of 18 and 26, whose energy and idealism are infectious.”

What might Canadians learn from the recent American experience? “That inequality of income, wealth and opportunity on the scale we’re experiencing it in the United States threatens the economy and democracy.”

Canadian lessons How about vice versa for Americans looking to Canada? “It is possible to have a health care system that works reasonably well and covers almost all the population; possible to control the use of firearms without trampling on individual rights; and possible to craft a system of federalism that provides a significant amount of autonomy to individual provinces while maintaining an effective national government.”

And a sobering final word on the income gap between comfortable rich and struggling middle class and where it might lead: “Every country is different, of course, but we know that resignation can turn to rebellion when the resignation festers for many years, with a great deal of anger below the surface. These sorts of circumstances are ripe for demagogues who seek to build up their own power by exploiting frustrations and resentments, and directing the anger toward scapegoats that have little or nothing to do with the underlying problems.”

Sounds like it will be an interesting evening.

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