Is Reducing Income Inequality Really “Class Warfare”?

An essay in last Sunday’s Washington Post carried the title “Obama Shouldn’t Be Afraid of  Little Class Warfare” by Sally Kohn.

The piece opened with these points:

“On Monday, defending his plan to raise taxes on the rich to pay for job creation, President Obama said: ‘This is not class warfare, it’s math.’”

“No, Mr. President, this is class warfare — and it’s a war you’d better win. Corporate interests and the rich started it. Right now, they’re winning. Progressives and the middle class must fight back, and the president should be clear whose side he’s on.”

The article went on to make its case with some history and some very interesting data about increasing income inequality in the U.S.  The statement that I found to be most provocative was this:

“After all, according to the CIA, income inequality in the United States is greater than in Yemen.”

The link above took me to the CIA Factbook which publishes an index that measures income equality or inequality among all families in each country.  A country with perfect equality would have a score of 0 and a country with perfect inequality would have a score of 100.   (Note – perfect equality according to this measure does not mean that everyone earns the same amount, but rather that all discrete income levels, from richest to poorest, contain about the same number of families.)

It’s good to be able to see so graphically how the U.S compares to other countries.  The U.S. is indeed much closer in terms of inequality to some of the most unstable countries in the world.

Here are some of the CIA Factbook Entries comparing the U.S. to other countries:

US:     45 (2007)   (40.8 in 1997)

Sweden:  23

Norway: 25

Germany:  27 (with one of the most robust economies in the world)

Spain:  32

Switzerland:  33.7

United Kingdom:  34

India:  36.8

Indonesia:  37

Yemen: 37.7

Israel:  39

China:  41.5

Russia:  42

Rawanda:  46.8

Mexico:  48.2

Zimbabwe 50.1

Zambia:  50.8

Columbia:  58.5

Bolivia:  58.2

Haiti:  59.2

Sierra Leone:  62.9

To illustrate the inequality in the U.S. Kohn’s article also gave these facts among others:

“Between 1979 and 2007, the income gap between the richest 1 percent of Americans and the poorest 40 percent more than tripled. Today, the richest 10 percent of Americans control two-thirds of the nation’s wealth, while, according to recently released census data, average Americans saw their real incomes decline by 2.3 percent in 2010. Though our economy grew in 2009 and 2010, 88 percent of the increase in real national income went to corporate profits, one study found. Only 1 percent went to wages and salaries for working people.”

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Inequality of Wealth and the Story of the Two Bubbles

Sometimes you come across a set of ideas and a mental framework that makes things that are difficult to comprehend suddenly extremely clear.  And one thinks, “Wow, anybody should be able to understand this!”

Yesterday I listened to a downloaded 20 minute interview with Robert Reich speaking about the causes of our current “Great Recession.”  Reich is an economist, Professor of Public Policy, and former Labor Secretary.

I was interested in this interview because I saw that he was making this premise:

Too much concentration of wealth at the top is not just bad for people in the middle and bottom, but it’s also bad for the economy.

This is a message that is easily understood and that can help explain why our economic system is in such terrible shape, and that making the system more fair is also the way to fix it.

There are links to the podcast and also a complete transcript of the interview at the bottom of this post.

Here is a summary:

Reich:  “And then I looked at the research and was amazed to discover there were two years in the 20th century in which income concentrated to such an extent it actually centralized a great deal of the nation’s income right at the top.

“One year was 2007, when the richest [1% of] Americans took home, or got, I should say, about 23 and a half of total income. The other year was 1928.”

————————————-

Year % of wealth owned by the richest 1%

1928     23%

1979       9%

2007    28%

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Industrialization was the force that led to huge side-by-side bubbles of wealth and debt just before the Depression.

Globalization, automation, and information technology are what have led to the same side-by-side bubbles of huge wealth and debt that now exist.

Too much wealth in the hands of the rich and super rich means:

a) The middle and lower classes have to go deeper and deeper into debt in order to keep paying at least partially for their modest lifestyles.

b) The wealthy have so much money that they can only spend a small amount, which means that they:

i) speculate in securities, creating an expanding bubble there,

and that

ii) too much of the burden of spending to keep the economy going is financed by too-much debt taken on by the middle class, thus creating another big bubble of debt for the economy to rest on.

When these two bubbles became too large they collapse, and the market and the whole economy collapses with them.

After the Great Depression, it was by pumping money back into the hands of the middle and lower classes that the debt bubble decreased enough and the economy got restarted, but only after many years of slow recovery.   As all economists know and often tell us, the middle and lower classes spend much greater proportions of their income than the wealthy.  World War Two also helped unleash radical levels of government spending to “fight the war” and put people back to work.

Among the wealth-re-balancing changes put into place by Roosevelt:  Legalization of labor unions and collective bargaining – illegal before 1935 – Social Security, a minimum wage, and a 40 hour workweek – all of which were bitterly fought by industrialists and others who favored the status-quo.

You can download the 20 minute podcast and a complete transcript here:

Fresh Air, 9/29/2010