Inequality Is Political

Let me end the week by tying a few things together. Bear with me.

First, I have spent some time talking about inequality. I see this as our greatest long term issue, but more in terms of politics than economics. Why? Because the extent of inequality in society is something we choose through our political action or inaction. There will always be some degree of inequality. I see that a a fact of life. Asymmetries abound. Inconsistencies, mistakes, and plain dumb luck all conspire to make the distribution of society’s spoils a very lumpy and uneven affair. This we cannot change. But we can, I believe, expand or contract the difference between top and bottom if we so choose. There is no “natural” level of inequality, it is entirely a function of policy.

With that said, I see our current level as both morally unacceptable and socially disruptive.

I will leave the moral commentary as self explanatory: there is no way our CEO’s can justify their disproportionate share of the spoils. It was not long ago that they were satisfied with much less. Only in the past few decades has it become socially acceptable for them to rake in what they do now.

As for the social impact, I see two vectors through which damage is done.

One is the slow erosion of demand. The demand created by wage incomes and the demand created by capital incomes is not equal. So even though the total remains the same the distribution plays a role. In other words an economy with a 50/50 split between wages and capital incomes experiences different performance than one with a 30/70 split. This is due to the way in which people with power incomes – which tend to be wage driven – save or spend as opposed to people with higher incomes – which tend to have a higher capital component – save or spend. That’s just the way I see it. Others disagree.

Even if this is not true the second vector of damage is, I believe, supported by a more secure argument. It is politically disruptive, over time, for the majority of the spoils from growth to go to a concentrated few. History is replete with societies whose stability was undone by inequality. More often than not this instability was offset by force – authoritarian or autocratic oppression preserved the unequal society. So I ought restrict myself to making the argument that long term and large movements away from relative equality are destabilizing for democratic societies.

And this is where I see we are today.

There has been a consistent and very large shift in the degree of inequality in the US during the past three to four decades. This shift is potentially destabilizing. It fosters a deterioration of allegiance to social programs as they are viewed, even by their beneficiaries, as burdensome. It degrades the level of collective commitment to redistribution of wealth. And, in my view, redistribution is the key to stolid democracy because it prevents the concentration of wealth that can be used to subvert it. Money buys power, it always has, and is not equal to free speech no matter what out right wing Supreme Court says. So the prevention of excessive accumulation of wealth is the surest safeguard of democracy we have.

We can make a kind of converse argument too.

The paraphernalia of capitalism is, I think, a better mechanism for generating wealth than any other. Private property, relatively free exchange, and modest government interference in markets have, by and large, produced wealthier societies than other combinations and other principles. But capitalism also breeds greater inequality because those lucky enough to flourish within it are able, absent social constraints, to accumulate more rapidly than those less lucky. Hence the need for the redistributive urge of democracy.

A wise capitalist is, therefore, one who surrenders substantial wealth in order to preserve democracy, and not one who seeks to undermine it by excessive accumulation. Similarly, a wise democrat is one who tolerates some element of inequality as the price paid for the extra wealth generating power of capitalism.

The two systems clash. The two systems enable each other, but only in moderated form. We can understand the combination as having a feedback loop that prevents either system from careening off into a pure form.

Today’s high[er] level of inequality suggests, to me, that the feedback loop is not working well. We have too little redistribution and too much accumulation. If this continues we risk destroying both systems because neither capitalism nor democracy in a pure form can survive the social instability they engender. With democracy being the more likely loser of the two.

However, as I see it, our current leadership is oblivious to such risks and sees its role as protector of an economic system that comprises of, and only protects, those with capital. Redistribution, the heartbeat of democracy, is looked at askance. This we know because of the almost total agreement that “entitlement programs” throughout the western world are regarded as being unaffordable. Which they may be if society’s goal is to enable excessive accumulation.

We can detect this bias in our leadership in all sorts of ways. The latest being the downgrading of French sovereign debt by Standard and Poor’s. This downgrade comes despite the French having made good progress towards debt control and deficit reduction. Better progress than, for instance, the British whose economy S&P still lauds. Why does S&P express a negative attitude towards the French with their superior record? Because the French didn’t make progress by reducing entitlements or by reducing redistribution, they did it by raising taxes – by reducing excessive accumulation. They defended democracy not capitalism. They tried to protect that feedback loop.

Another example, closer to home, is the almost total emphasis in Washington on debt control and deficit reduction even though the evidence is piling up that such emphasis is causing great long term damage to the economy. By some accounts we have reduced our future wealth production capability by 7% because we decided to protect capital and not jobs/wages. This reduction will then be used to justify, further, the argument that we can no longer afford to redistribute as much as before.

This will make inequality worse. It will undermine our politics further.

One last thing: recent research has shown a remarkable consistency of support amongst voters for redistribution, no matter what their expressed political opinions are. Indeed so-called Tea Party supporters are far more likely to support higher taxes and increased government spending when they discus programs is substance rather than in theory. This is a well known paradox in American politics. The longstanding  tradition of opposing “big” government is an abstract not a concrete notion. It motivates Tea Party supporters when they are confronted only with the abstraction. But when they are asked to comment in detail on actual programs and to comment at a concrete level they express an attachment to redistribution that is, in political terms, to the left of center.

The implication is clear: our leadership, in political terms, sits well to the right of the majority of voters, even those who vote for right wing politicians. There is a disconnect of epic proportions. Why? Because our governments, and our major financial institutions worldwide, are run, or deeply conditioned by, corporate and plutocratic interests. Those interests scorn redistribution. Thus they scorn democracy. And they are armed, by and large, with economic theories that argue inequality is not a problem, but rather is a natural outcome of free markets at work.

Until the influence of those interests is reduced we can expect inequality to increase, and with it the risk of greater social tension and confrontation.

I know many of you disagree with me, but I hope this is a more clear exposition of my point of view.