Social Policy in Ontario

Tax the Rich, Save the Economy

Posted on September 23, 2013 in Equality Debates

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TheTyee.ca – Or else, warns ex-US labour secretary Robert Reich, we’re on track for another Great Depression.
20 Sep 2013.   By Charles Campbell

It’s one of the central issues of our time. It spawned both the Tea Party and the Occupy movements. It has the potential to deeply sabotage our economy. And, argues former U.S. secretary of labor Robert Reich, the problem is much worse than we think.

Reich, who stands a little less than five foot nothing but was named one of the 10 best United States cabinet ministers of the 20th century by Time magazine, says income inequality isn’t just a threat to the economic future of North American society.

“Losers in rigged games can become very angry,” he says in the documentary Inequality for All, which will be released in the U.S. on Sept. 27. “We’re seeing an entire society that is starting to pull apart.”

Reich, who will speak at Vancouver’s Orpheum theatre Oct. 3 at a free event moderated by Anna Maria Tremonti as part of SFU’s 2013 Community Summit, argues in the film that income disparity spiked dramatically in the years before the economic crash of 2007, just as it crashed before the Great Depression.

The documentary layers this and other economic and troubling social indicators together in a graph that looks like the profile of a suspension bridge. We are now near the second peak, and without big changes the North American economy will face serious decline.

On the phone to The Tyee from Los Angeles, along with Inequality director Jacob Kornbluth, Reich says we have not learned enough from the economic calamity we’ve recently experienced. “Unlike the 1930s, we haven’t had the kind of reforms we need to change direction.” In fact, he says, since 2007 economic gains have gone to the rich and inequality has increased.

Reich and Kornbluth also point to other trends — the dramatic rise in the cost of advanced education, the decline of organized labour, the erosion of minimum wage rules, the increase in child poverty, the move of capital into speculative instruments like gold and real estate that don’t actually generate much social wealth — as issues that need to be addressed.

However, they argue it’s not actually specific reforms that we need to champion. First, partly because consumer debt and women in the workplace have masked the decline in middle-class family incomes, we need to have a more constructive, informed conversation about the nature and the extent of the underlying problem.

Top tax rate was once 91 per cent

“I want to test your assumptions,” Reich says in the film, to a class at University of California, Berkeley, where he is a professor of public policy. “If possible I want to shake your assumptions.”

He starts with something a little oblique, and asks the class where they think the $178 cost of making a 3G iPhone was spent. Students naively believe the majority of the money stayed in the United States. But the real surprise is how little went to China, where the phones are assembled. The breakdown? Japan was tops with 34 per cent, followed by Germany (17 per cent) and South Korea (13 per cent). The U.S. came in at six per cent and China at just three.

This is part of Reich’s argument that a highly educated workforce — not cheap manufacturing — is what delivers respectable incomes, and the example is just the beginning of his litany of things we do not know, or are unable to properly discuss.

Reich points to another issue that has escaped rational public debate and bedeviled U.S. legislators over the last year: disparity in taxation.

Before the crash of 1929, the tax rate charged against the biggest incomes was 25 per cent. Today, it’s 35 per cent, although that’s brought way down by compensation built around stock options and capital gains, which are taxed in the United States at a rate of 15 per cent. The surprise, though, is that under former Republican president Dwight D. Eisenhower in the 1950s, the top income tax rate was 91 per cent.

Kinder, gentler Canada isn’t quite in that league, but it is not doing well. According to the World Bank’s Gini index, Canada sits at number 31, right after Bangladesh (by that measure, the U.S. sits at an astonishing 112th). Of course, the Canadian economy, Canadian incomes and the pressure to lower Canadian taxes reflect the trends of our southern neighbour.

“The cultures are different,” Reich told The Tyee, “but those differences don’t protect Canada.”

Reich’s central concern is that the enormous disparity in wealth and income cripples our ability to protect the values and behaviors that made America so wealthy in the first place.

In 1978, the documentary asserts, the average middle class male made $48,302. Today (and all these numbers are adjusted for inflation) the same person makes $33,751. Meanwhile, top earners have gone from an average of $390,682 to $1,101,089. There are more shocking numbers — an increase of 350 times in executive pay here, seven hedge fund managers making more than a billion dollars each over there — but the broad decline in middle class incomes is at the centre of Reich’s argument.

Polarizing argument gets buried

To make the point, Inequality for All introduces us to several families struggling to get by. And it introduces us to Nick Hanauer, CEO of Seattle’s Pacific Coast Feather Company, a bedding manufacturer, and one of the first investors in Amazon. Hanauer says he makes between $10 million and $30 million a year, and he wonders why he pays a tax rate not of 17 per cent (Warren Buffet’s rate) or 13.9 per cent (Mitt Romney’s), but of 10 or 11 per cent.

He argues the economy doesn’t need to leave so much money in the hands of the super-rich. “Even the richest people sleep on only one or two pillows. I have the nicest Audi, but it’s still only one Audi. It’s actually our customers who are the job creators. They are the centre of the economic universe.”

Almost everybody understands that the health of the American economy depends mainly on consumer spending. Yet the debate over taxation and its place in the country’s economic health has paralyzed American democracy.

Arguing in favour of higher taxes on the wealthy in the U.S. is a bit like arguing that there is no god at a Baptist revival. That was evident in 2012 when Hanauer delivered a TEDtalk on the subject — to a standing ovation — and then saw it temporarily buried. It’s a story that shows how difficult it is, even in liberal circles, to shake people’s assumptions.

Hanauer’s TEDtalk begins with this: “It is astounding how significantly one idea can shape a society and its policies,” he said of the notion that taxing the rich hurts the economy. “This idea is an article of faith for Republicans and is seldom challenged by Democrats.” Sure, Hanauer got just a little nasty, when, over a picture of Donald Trump, he said: “When business people take credit for creating jobs, it’s a little like squirrels taking credit for evolution. It’s actually the other way around.” And he did make the mistake of invoking religion: “It’s a small jump from job creator, to the Creator.”

But who could blame him? And his thesis remains compelling. “Since 1980, the share of income of the top one per cent has more than tripled while our effective tax rate has gone down by more than 50 per cent. If it was true that lower taxes on the rich and more wealth for the wealthy led to job creation, today we would be drowning in jobs.”

So it was a surprise to some when TEDx refused to post the video. Curator Chris Anderson initially said it was “too political” and insinuated that TEDx avoids talks that get “mediocre audience ratings.” He later emailed Hanauer with the following message: “We’re in the middle of an election year in the U.S. Your argument comes down firmly on the side of one party. And you even reference that at the start of the talk. TED is nonpartisan and is fighting a constant battle with TEDx organizers to respect that principle.”

Asked about that controversy, Kornbluth was deferential, saying Hanauer had accepted that the talk didn’t jibe with TEDx’s program. Of course the controversy brought the video, posted on YouTube, to wider attention. And the video brought Kornbluth together with Hanauer, who helped to fund the Inequality film.

Whatever your take on the Hanauer talk controversy, it points to the difficulty of challenging home truths in a deeply fractious political environment. Yet Reich and Kornbluth are committed to that, and they feel public opinion will turn in their favour.

Americans ignorant of disparity’s extent

Although the material didn’t make it into the film, both are familiar with the work of Harvard associate business professor Michael Norton, and the resulting viral video that makes the case that most Americans — Democrats and Republicans alike — are utterly ignorant of the extent of wealth disparity, and that a surprising 92 per cent of them actually want to see wealth spread more equitably. (Just don’t call it socialism.)

Reich and Kornbluth say better understanding the disparity, and the threat it poses to the future wealth of both the rich and the poor, is the reason they made the film. “I don’t know if fixing it is the hard part,” says Kornbluth, when asked why the film is a little light in its focus on solutions.

Adds Reich, noting that people bridle at being told what to do, “If you describe the problem, the solutions follow from that. The problem is not the lack of policy. The problem is the lack of political will.”

For Reich, resisting partisanship is a key issue. “I think that people are fed up with the partisanship and rot at the top — in government, big business and media,” he says.

However, accusations of partisanship will certainly persist. Reich has served as an economic advisor to President Obama and worked closely with former president Clinton (a seasick Reich met young Bill when he brought some chicken soup to Reich’s ship’s cabin, as the two headed across the Atlantic as Rhodes scholars). Reich’s defence of the role of unions in the film, along with his position that American political deity Ronald Reagan sowed the seeds of the problem, won’t help.

But Reich is personable, funny, and his crusade comes from an honest place. When he was the short, bullied kid in school — his height is a consequence of Fairbanks syndrome — he sought the protection of older kids. One was a guy named Michael Shwerner. When Shwerner was murdered in Mississippi for trying to register black voters, the die was cast in Reich’s lifelong fight for the little guy.

Reich remains remarkably optimistic about the potential for reform, pointing to changes in attitudes regarding gay marriage and the election of a black president as examples. “A lot of us don’t know our own history,” Reich says. “This country, when it has to, saves capitalism from its own excesses.” On Jon Stewart’s show on the day of our interview, Reich quoted Winston Churchill: “Americans always do the right thing eventually, after they’ve exhausted all the other alternatives.”

Let’s just hope we don’t need another Depression to shake American politicians out of their opportunistic complacency. 

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Tags: economy, featured, globalization, ideology, participation, poverty, privatization, standard of living, tax

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