Ignore the Conservative Sideshow

Once again, America’s political debate is out of focus.

Politicians from both parties — but Republicans most relentlessly — continue to focus inordinately on reducing deficits, even at the price of making the economy unstable and the government dysfunctional.

As the slight decline in economic output in December and the rise of the unemployment rate in January indicate, the economy is still shaky. With that in mind, Congress and the administration should focus on the job and income growth needed for a full recovery from the Great Recession.

Yet most Americans — and certainly progressives — will remain unsatisfied if recovery means simply returning to how things worked before the financial crisis, when the country was at the height of a long trend of rising social and economic inequality.

What economist Paul Krugman has labeled the Great Divergence, lasting from the late 1970s to the present, saw corporate profits shoot up while workers’ wages flatlined. Over the three decades after 1976, the richest 1 percent captured 60 percent of the nation’s income growth, according to two economists who have led academic research on the super-rich, Thomas Piketty of the University of Paris and Emmanuel Saez of the University of California at Berkeley. By 2007, just before the Great Recession, the top 1 percent were earning 24 percent of all income, up from under 10 percent before the divergence.

Nor did the recession derail that trend. Although the rich took a hit as financial markets crashed in 2008, they’re back in full force — and so is the underlying divergence. After the recession officially bottomed out, real annual earnings of the bottom 90 percent of Americans shrank by 1.2 percent by 2011 while those of the richest 1 percent grew by 8.2 percent, the Economic Policy Institute calculates.

Now, a growing proportion of that bottom 90 percent has finally recognized that the economy long ago stopped working for anyone except a powerful elite. November’s election results and recent polls suggest strong public support for more egalitarian policies, from a higher minimum wage to taxing the rich.

Of course, conservatives have long fought such policies by blaming growing inequality on the laziness of low-income workers. But the truth is that, throughout the Great Divergence, working people tried to shore up family finances by putting in more hours. From 1979 to 2011, a new EPI study found, the average worker put in 10.7 percent more hours at work (20 percent more for women, and 22 percent more for the poorest fifth, but only 7.6 percent for the top 5 percent).

In a slightly more sophisticated version of this argument, mainstream economists — and some progressive critics of inequality — claim the Great Divergence as an unavoidable result of ​“blind” market dictates. For example, many say inequality developed because technology has changed and too many workers lack skills the market demands.

However, over the past decade, according to the Economic Policy Institute’s latest State of Working America report, compensation for workers of all types — high school or college graduates — remained flat as productivity rose. Also, if employers need more educated workers, why has business spent so little on job training and supported politicians who cut aid to education and let costs soar?

Moreover, many countries have encountered similar changes in technology — along with globalization and other parallel market forces — without undergoing the same growth in inequality as the U.S. In a recent paper, Piketty and Saez note that since ​“countries with similar technological and productivity evolutions have gone through such different patterns of income inequality” — especially at the top, the main causes of inequality are likely ​“institutional and policy differences.”

Nobel Prize-winning economist Joseph Stiglitz builds a compelling case that inequality is policy-driven in his provocative 2012 book, The Price of Inequality. He argues that the fundamental problem has been the wealthy elite’s exercise of political power to shape markets, write rules, influence regulators, dictate intellectual property law and trade agreements, create tax loopholes in the tax code, and establish an ideological hegemony stretching across parties. Elites engage in financial dealings that strip value out of other businesses rather than building them. In other words, these elite powers rig the game to extract what economists call ​“rents” (or super-profits, beyond what they could make in a competitive market) and to redistribute wealth upwards. Then they promote regressive taxes and seek to avoid responsibility for the well-being of the society from which they profit. All of this, Stiglitz writes, results in not only inequality, but also inefficiency and injustice.

If history is a guide, the task of making a more equal America will be long and difficult — but not impossible. History shows that ​“the rich don’t always win,” argues journalist Sam Pizzigati in a new book of the same title—even if they win too often. The popular and intellectual struggles against plutocracy left a legacy. They helped to shape President Roosevelt’s New Deal and to rejuvenate the labor movement. Together, government policy and labor power created what many economists call the Great Compression: From the early 1930s through the 1970s, the income of the richest 1 percent of households shrank as low as 9 percent of national income, and the earnings of everyone else grew. Despite the severe inequities of race and gender, the lives of most Americans were much more secure, prosperous and egalitarian than that of their parents — and in many ways more than the lives of their grandchildren would be.

But the rich rebounded in the 1970s. They mobilized corporate power to roll back capitalism’s critics, hewing to the advice of a famous 1971 memo to the Chamber of Commerce from soon-to-be Supreme Court Justice Lewis Powell, who argued for an ​“aggressive,” long-term and coordinated business defense of ​‘the free enterprise system.” In the worlds of politics and public opinion, especially on television and colleges campuses, conservatives set out to convince the American people they would have to make do with less so that business would have more, as Business Week once advised. Correctly identifying labor unions and progressive taxation as the keys to the Great Compression, corporations and the wealthy attacked them with vengeance, Pizzigati writes, and with success. Corporate America may not have managed to sell Business Week​’s message to the majority of Americans, but it did help shift power to politicians who shared that belief.

If politics has created the mess we’re in, then politics of a different sort can get us out. But despite President Obama’s reported desire to tackle inequality in his second term, he got off to a weak start: The compromise income tax hike on couples making over $450,000 means that many high-earners will face less of a tax hike than a median worker will with her large Social Security tax increase. And with less new tax revenue, Republicans have added leverage to demand that Obama accept cuts in Medicare, Medicaid and Social Security. They will claim they want to balance budgets, but what they really want is more anti-government class war, and any concessions Democrats make will only boost inequality.

Any long-term movement against inequality and its causes will have to start outside of the White House and Congress. As such a movement develops, organizers should keep in mind a few broad guidelines that emerge from recent progressive writing on inequality:

1. Policies need to hold down top incomes and raise lower incomes. One way to do both at once is to set maximum salaries as multiples of the minimum. Other tactics include strengthening collective bargaining, raising the minimum wage, and regulating executive pay.
2. Reducing inequality requires action on both the pre-tax and post-tax incomes of the elite. Pre-tax actions include regulating, breaking up, simplifying and shrinking the financial sector, as well as eliminating ​“rigged game” rules that permit monopolistic or rent-seeking behavior such as excessive intellectual property protection. Post-tax reforms include progressive income, estate and wealth taxes.
3. Public investment is as important as progressive taxes. One major component must be expansion of universal, free or low-cost education (from child care through higher education and mid-career retraining) and medical care.
4. Even though the movement should emphasize the pragmatic appeal of policies, from progressive taxes or a Medicare-for-all insurance program, it will also have to fight an ideological battle. Progressives must be prepared to make and remake the case for democracy, including expanding it to the workplace and economy while shining a bright light on the failures of markets.

When Lewis Powell wrote his memo to the rich, business saw itself as even more beleaguered than progressives are today. Now, we must turn the tables and push American politics on a new course — back to a second Great Compression and beyond.

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Some recent recommended books on inequality:

Chuck Collins, 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It, Berrett-Koehler, San Francisco.

Lawrence Mishel et al, The State of Working America, 12^th edition, ILR Press, Cornell, Ithaca.

Timothy Noah, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, Bloomsbury Press, New York.

Linda Pinkow, Sam Pizzigati, and the Dollars and Sense Collective, The Wealth Inequality Reader, Dollars and Sense, Boston.

Sam Pizzigati, The Rich Don’t Always Win, Seven Stories Press, New York.

Robert Reich, Beyond Outrage, Vintage, New York.

Joseph Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future, Norton, New York.