Economic Inequality: Still A Political Hot Potato (Full Article)

Economic Inequality:   Still A Political Hot Potato

A Fair Economy Position Paper
October 30, 2008

When the news first spread that Congress was seriously considering giving a $700 billion bailout to Wall Street, the congressional switchboards and web server were flooded with so many messages from irate constituents that they became overwhelmed and completely jammed.   A spontaneous firestorm of populist rage swept the country, uniting people economically across racial and cultural divisions for the first time in decades.   Demonstrations took place in protest of the planned bailout, with demands for greater accountability and more aid to hapless homeowners saddled with mortgage foreclosures.

Virtually overnight, Americans woke up to the rude facts of unequal income distribution as they learned precisely how much financial executives are paid.   They discovered that CEO salaries aren't arrived at as a result of supply and demand in a free market, but because boards of directors simply set the compensation at astronomical levels, as if they were lavish gifts.   What they learned offended their innate sense of fairness, a much-vaunted American quality, often paid lip service to by the very politicians who were about to pass the bailout.   A crisis atmosphere took over Washington.

Popular Outrage and The Great Bailout Swindle of 2008

All of a sudden, economic inequality became a hot topic.   But what did the major party presidential candidates have to say about this issue?

Both Senators McCain and Obama used the opportunity to inveigh against Wall Street greed and excess.   In doing so, they were trying to ride the wave of popular outrage.   But maybe they were also trying to contain it so that it would not get out of control.   In any case, when the dust settled and the bailout was passed, both Sens. McCain and Obama signed onto a form of bailout that didn't address economic inequality.   In fact, the version of the bill that passed insulated those who caused the problem from having to pay for it.  

It needn't have been so.   Both candidates could have put their money where their mouths were and not bought into the Bush administration's pressure for a quick fix.   Sen. Obama in particular could have reiterated what he said earlier in the campaign, when he criticized "rising corporate profits but flat-lining or even declining wages and incomes for the average family."   Obama was not the only Democratic candidate to point out inequality (Sen. John Edwards had made it a central concern), but he ventured into uncharted populist territory when he argued that some government intervention was needed to alter this trend: "It's going to be important for us to pay attention to not only growing the pie...but how it is sliced. I do not believe that those two things - fair distribution and robust economic growth ¬- are mutually exclusive."

That is a remarkable statement.

The notion that government should promote both economic growth and a fairer distribution of income at the same time represents a significant challenge to corporate culture in America.   The bailout debate would have been a most opportune time to advance this argument robustly.   However, when it came down to voting for the bill, both Sens. Obama and McCain skirted the issue.   For the most part, they ignored popular discontent, lest they be seen as supporting the notion of class warfare, a touchy subject for politicians dependent upon corporate campaign donations for much of their financial backing.   Ralph Nader, by contrast, has not shied away from proposing penalties for those who profited from the mess they made, going so far as to support jail terms for CEOs to prevent future transgressions.   (Nader would be the first to point out that if welfare cheats were expected to do time, then why not CEOs.)

At the very least, the Great Bailout Swindle of 2008 represents a frank admission of failure from all who worship at the altar of laissez-faire capitalism.     People have seen that the notion of a free market, long sanctified by Milton Friedman, Ayn Rand, and Ronald Reagan devotees as the most perfect system possible, doesn't even exist.

The bailout also provides us with a textbook example of what investigative journalist Naomi Klein has called "disaster capitalism," in which unpopular programs that mainly benefit the wealthy are hurried to fruition in response to a presumed crisis.   One need only recall the way Congress was pressured into granting President Bush power to wage the Iraq war, with virtually no debate, to be wary of such an approach.   In contrast, Ralph Nader has questioned why it was necessary to act so swiftly on the bailout, pointing out that systemic problems that are years in the making deserve more thoughtful analysis and longer-term solutions.

The result of the bailout, including the more recent partial nationalization of major banks, is this: wealth has, once again, been transferred up the asset ladder to those at the top.   Ironically, the bailout is similar to what conservatives often criticize so-called "tax-and-spend" liberals for:   throwing money at a problem.   While conservatives do not see anything wrong with transferring money to the wealthy, often justifying their efforts by invoking the trickle-down theory of economic growth, when legislation is attempted on behalf of the general population, they worry about creating dependency and avoiding personal responsibility.   But the bailout certainly does just that.   It socializes ("spreads around") the losses while it privatizes the gains - gains based on reckless behavior akin to casino gambling.

The Subprime Scandal and the Racial Wealth Divide

Conservative legislators often blame the victim when they try to address a social problem.   For example, when it comes to domestic gun accidents or deaths from lung cancer, conservatives argue against government intervention in the form of restrictions on handgun ownership or taxing cigarettes companies to pay for health care.   The subprime scandal, which was an underlying cause of the financial meltdown on Wall Street, gave conservatives a chance to invoke this argument once again.   It is no surprise that they took it.

For example, earlier this year, Sen. McCain was only too willing to criticize small home buyers - many of whom were people of color and/or of very modest means - for being ignorant of the terms of their adjustable rate mortgages, thus precipitating financial ruin for themselves, their families, and ultimately their communities.   (And in the bitterest of ironies, it is the fate of these lower-income people upon which the fate of the entire financial world now rests - a poetic reversal, as it were, of Rand's Atlas Shrugged.)   Only recently, as it became clear that a full-scale economic catastrophe could not be avoided without preventing a complete collapse of the housing market, has Sen. McCain begun to speak differently, offering some relief to those he deems worthy of a break.   Sen. Obama has also proposed some relief.   But both have ignored the racial divide that has been a part of the subprime problem.  

The fact is that many mortgage brokers went door-knocking in poor communities of color and sold what amounted to bait-and-switch packages to people who could ill afford them.   When you are peddling the American dream of owning your own home to people who never thought they could afford to do so, and your sales manager is pressuring you to write up more and more mortgages each month, you throw ethical concerns to the wind.   After all, why should these brokers have cared about the little guy, when they could simply bundle these mortgages and sell them up the chain of larger and larger investors, ultimately to Wall Street investment firms like Lehman Brothers?

Sen. Obama has at least got it right that deregulation was a major contributor to the subprime scandal, allowing more and more complicated, unsound mortgage loans to flourish.   Sen. McCain cannot escape his history of support for deregulation as a card-carrying Republican conservative.   However, both candidates would do well to accept what some analysts are saying ought to lie at the heart of any solution:   mortgage debt forgiveness.  

During the housing bubble, the paper values of homes continued to inflate to levels that were unsustainable.   In essence, people were sold a faulty product.   If it were a car that blew up, we would know whom to blame. In this case, who should be held accountable for the subsequent - and inevitable -- downturn?     Should the government sympathize mainly with the lenders and cover their losses?   How much help should it provide to the debtors, who were deceived into believing that they were on the road to owning their own home?  

Activists such as Bruce Marks of the Neighborhood Assistance Corporation of America have argued that loan restructuring is vital, along with a moratorium on foreclosures.   Others have proposed a shift in bankruptcy laws so that bankruptcy judges can intervene to help homeowners.   Whatever the answer, both Sens. McCain and Obama should be willing to admit that the subprime crisis created wealth for investors on the backs of poor people who should not be made further victims.   They are the ones who need immediate relief.  

Taxes:   For the Common Good?

Although both candidates say they want to cut taxes for the middle class, the actual impact of their plans is very different.

McCain's tax cuts aid the wealthiest sector, what he lauds as the entrepreneurs who will spur the engine of economic growth that is supposed to benefit everybody.   Obama's tax cuts benefit lower- and middle-income people, who have been squeezed by rising costs and declining real wages.   Obama also wants higher taxes on the wealthiest individuals earning over $250,000 -- the top 5% in income.  

According to the non-partisan Tax Policy Center (TPC), the difference in overall tax plans is stark for the 147,000 families in the top 0.1% of income - those who make over $3 million per year.   While McCain offers a $296,364 tax cut to them, Obama would raise their taxes by $701,885.   For families earning $37,600 to $66,350, McCain cuts taxes $319, and Obama cuts taxes by $1,042.   The distribution of taxes proposed by Obama would be more progressive, with a greater increase in taxes paid by the wealthiest people.   As a result, the Obama tax plan would do more to reduce economic inequality. [For more info, see: Evaluating Candidates on Taxes.]

Is it fair that unearned income from investments is taxed at a much lower rate than income from work?   McCain says yes -- he'll keep the capital gains rate at 15%. The rationale for lowering this rate, first under Clinton and again under Bush, was to encourage capital investment, which would trickle down to workers.   Instead, this giant giveaway to the investor class was followed by flat wages for most of us and massive net worth and income increases for the very wealthy.

Obama does a bit better.   He would raise the capital gains rate to 20% for single taxpayers with income over $200,000, or married couples who earn more than $250,000. UFE believes that all forms of income should be treated the same; this would help reduce economic inequality.

The US has one tax on accumulated wealth: the estate tax.   Both candidates propose cutting it too much.   According to TPC, McCain wants to cut the estate tax so sharply that over five years, it would produce 88% less revenue than under current law.   Obama's plan would cut the revenue over five years by only 48%.   But our country needs a stronger tax on inherited wealth than either candidate supports.  

John McCain is enthusiastic about extending the Bush tax cuts of 2001 and 2003, which increased the national debt during Bush's tenure by 80%.   In other respects as well McCain hews to Republican orthodoxy, as he has repeatedly voted to decrease taxes on corporations and to repeal the estate tax.   Perhaps most disturbing, he seeks a new law that would mandate a three-fifths majority vote in Congress for any tax proposals, making it much more difficult to change the tax code, which currently benefits the wealthy and corporations.

But the elephant in the room that neither candidate mentioned during all the debates was the corporate tax system.   Theoretically, corporations are supposed to be taxed at a 35% rate.   Sen. McCain has complained loudly about that rate, saying it is the second-highest among major economies and that it adversely affects our competitiveness.   He proposes to reduce it to 25%.

Obama says he would close corporate tax loopholes but would not lower the rate.   He has proposed eliminating tax breaks for companies that move jobs and production overseas, and wants to provide incentives for companies that create jobs in the U.S.   These proposals would mean dramatic increases on corporate taxpayers, but some would say not enough.

In reality, as a July 2008 report by the Government Accountability Office revealed, between 1998 and 2005 about two-thirds of all corporations doing business in our country paid no taxes.   That's right: none.   Why didn't either candidate bring up this salient fact?   Furthermore, for the corporations that do pay taxes, the effective rate (the rate they actually pay after all the loopholes and exemptions) is 24% not 35%.   And the fact is that total US corporate income taxes are a smaller share of our GDP than for the other G7 countries.

In contrast to the major party candidates, Ralph Nader has pointed out that corporate tax rates have declined drastically since the 1950's and 1960's as a percent of the federal budget and has argued for ending all loopholes.   Cynthia McKinney of the Green Party has argued along the same lines.   Both candidates are willing to take the rhetorical gloves off and call our economic system corporate welfare.

Neither major party candidate speaks about the need for a wholesale overhaul of the tax system to create a much more equitable economy.   Both Sens. McCain and Obama offer only modifications to a code that has contributed to economic inequality at a level not seen since before the Great Depression.

Challenging Corporate Dominance

Wealth inequality has grown to the point where today the top 1/10th of 1% of wealth holders in our country have more than the bottom 50%.   Last year, CEOs were compensated to the tune of 344 times the pay of the average worker in large corporations. At the same time, real wages (adjusted for inflation) of most working people have declined.     The result is that we are at an almost unprecedented level of inequality.   As the popular response to the bailout showed, the sense is growing that these gaps cannot be sustained without serious strains to the social fabric of the country.

Both Obama and McCain know this problem exists.   But, while they do have their differences, they both seem to accept the notion that “the business of America is business.” That it is right and proper for corporations to exercise dominance over government, the economy, and society at large.   It’s true that Sen. Obama railed against the excesses of the AIG executives who splurged on a company retreat, complete with hot tubs and massages even as their business collapsed.   He argued that we should have the authority to fire the CEOs responsible and get back the money they spent.   But his rhetoric was not backed up by specific proposals for doing so.   And despite occasional critical comments from the candidates about certain companies (the oil industry is a favorite election-year target), the general idea that corporations should be held mainly accountable for social problems is unutterable, let alone debatable.   Yet a mountain of evidence exists that supports this view.

It all comes down to choices: how we allocate resources, and what we value as a society.   Do we value individual freedom to the point that rampant greed is allowed to undermine our economic system, or do we value mitigating the effects of markets, so that more people have a chance to build wealth?   Lack of affordable health care, crumbling infrastructure, and lack of an alternative energy program are only a few of the many problems facing the next president that will not lend themselves to any solution without a change in the rules, i.e., a re-allocation of resources.

Both candidates would do well to recall President Eisenhower’s farewell address to the nation, which introduced the term “military-industrial complex” to our public discourse.   We need a new appreciation of what Eisenhower was saying.   We need to see how many schools, hospitals, roads, and bridges haven’t been built because the resources for building them have been diverted to the Iraq War.   We need to see the connections between our war effort and the profit margins of disaster capitalists like the Blackwater company, whose interests are powerfully represented in Congress and who have a stake in an open-ended engagement in Iraq.   Which candidate will make that point clearly?   Neither McCain nor Obama have done so.   Obama has even said he would maintain the arrangements with Blackwater if he becomes commander-in-chief.

Whether the candidates want to admit it openly or not, our country is in the midst of a lopsided class war.   Anti-government and anti-tax proponents have engaged in a generations-long effort to roll back every vestige of the Great Society and the New Deal, to return us to a day when capital could reign free and unfettered, when the government’s tax policies did nothing to mitigate rising inequality, and when the phrase from the Constitution that it is the government’s responsibility to “promote the general welfare” was so narrowly interpreted as to be meaningless.   Conservatives gained ascendancy during the Reagan and Bush administrations and have, until now, been successful.     They may yet find a way to use the current crisis on Wall Street to their advantage, as its negative effects trickle down through the economy.  

The potential power of ordinary people to demand that their concerns be addressed was shown clearly during the bailout debate, when so many wrote to Congress and spoke out.   As the journalist David Cay Johnston has written, “while the wealthy have, and always will have, disproportionate influence over politics, their power can only be held in check by the great mass of voters recognizing and pursuing their own self-interest.”

Simple fairness is missing from our economic system.   What you didn’t – and won’t – hear from either major party candidate is a profound alternative to this ingrained inequality, an inequality that will become unsustainable the more sand it throws into the social gears.

The answer?   People learning how the rules of the economy work and then using their knowledge to organize for changes in those rules.   UFE’s mission is to help people do exactly that.