25 March 2011

Income inequality and the Great Recession

Back in December when congress was debating whether to extend the Bush tax cuts for the wealthiest 10%, Bernie Sanders (I) of Vermont gave what ought to be remembered as an historic speech on the floor.  He argued for eight hours that extending the tax cuts made no sense what so ever.  He wasn't alone in his criticisms.

The Joint Economic Committee had issued a report analyzing income inequality, the poverty gap, in the time of the Great Recession.  Here is an excerpt of their findings (italics indicate my comments):

  • Income inequality has skyrocketed.  Economists concur that income inequality has risen dramatically over the past three decades.  (In fact, according to the U.S. Census Bureau statistics, the average yearly income after taxes for the top five percent has risen over 75% since 1970.  In contrast, the average yearly income for the bottom 50% has risen about 10.5% since 1970, cf chart below).
  • Middle-class incomes stagnated under President Bush.  During the recovery of the 1990s under President Clinton, middle-class incomes grew at a healthy pace.  However, during the jobless recovery of the 2000s under President Bush, that trend reversed course.  Middle-class incomes continued to fall well into the recovery, and never regained their 2001 high.  The first year of the Great Recession dealt a sharp blow to middle-class families, who had not yet recovered from the pain of the last recession.
  • High levels of income inequality may precipitate economic crises.  Peaks in income preceded both thee Great Depression and the Great Recession, suggesting that high levels of income inequality may destabilize the economy as a whole.
  • Income inequality may be part of the root cause of the Great Recession.  Stagnant incomes for all but the wealthiest Americans meant an increased demand for credit, fueling the growth of an unsustainable credit bubble.  Bank deregulation allowed financial institutions to create new exotic products in which the ever-richer rich could invest.  The result was a bubble-based economy that came crashing down in late 2007.
  • Policymakers have a great deal of leverage in mitigating income inequality in order to stabilize the macro‐economy. In the decades following the Great Depression, policy decisions helped keep income inequality low while allowing for continued economic growth. In contrast, policy decisions made during the economic expansion during the Bush administration failed to keep income inequality in check, and may have exacerbated the problem. Policymakers working to rebuild the economy in the wake of the Great Recession should heed these lessons and pay particular attention to policy options that mitigate economic inequality. 

What the report detailed was that while the rich have continued to grow richer, the middle-class have lost ground previously regained during the Clinton years.  The lower-class have not gained.  The lower-class remain the invisible members of society.

Are these numbers indicative of an obstinate allegiance or belief in supply-side, trickle down, economics?  George H.W. Bush referred to supply-side economics as voodoo economics when running against Reagan in 1980 for the republican nomination.  Yet George W. Bush in January of 2006 declared, "by cutting the taxes on the American people, this economy is strong, and the overall tax revenues have hit at record levels."

This promise has not been borne out.  The result of the decrease in tax revenue has been the ever widening poverty gap.

In order to make up for the loss of revenue, congress and states are facing staggering cuts to programs that help the most needy in the country.  Wisconsin is facing record cuts in Education, public assistance, and public transit.  Wisconsin also forfeited the opportunity to create an inter-city high speed rail line.  Compare this lack of forethought to the recent construction of the Beijing–Shanghai High-Speed Railway that allows a traveler who begins in Beijing to reach Shanghai (~800 miles) in about 3 and a half hours.  Chicago to New York City is about 700 miles, so think about traveling from Chicago to NYC in about 3 hours.

Governor Walker and the rest of the republican legislature seem as unwilling to budge as Dick Cheney, who seemingly still believes in voodoo economics, "I became a believer (in voodoo economics). If you fast-forward, in 2003, where we cut the capital gains rate, the rate on interest, did the across-the-board cuts in the income tax, and passed by a single vote. My vote."

Scott Walker's vision for Wisconsin is that the state will be a bastion for supply-side economics.  "We're going to start sending a message, a slow but steady message, that we're lowering the tax burden."  As his 2011-2013 biennial budget reveals, the first step is cutting social programs that aid the needy.  The formation of the WEDC has also been praised in the Journal Sentinel and bipartisan observers.  All it really boils down to is another attempt at patronage.  The appointed advisers of the WEDC are not state employees but have access to state health insurance and the state retirement plan.   

But supply-side economics has been tried and nearly proven to be a failed economic theory.  In an article in The New Yorker (2007), The Tax Evasion: The Great Lie of Supply-Side Economics, economist James Surowiecki argued, "The supply-side argument that, in the United States, tax-rate cuts pay for themselves ... has little or no support within the mainstream economic profession, and no hard empirical data to back it up. Myriad studies have demonstrated that both the Reagan tax cuts of the nineteen-eighties and the tax cuts put through under the current Administration shrank government revenues and led to bigger budget deficits."

In the absence of true empirical data to support supply-side economics, what is the motivating force for the ostensibly ubiquitous notion of applying it across the country in an attempt to create more jobs and guide us to recovery?

It may come down to a simple concept as old as human society.  As a local prominent attorney recently explained, "It comes down to this, greed.  And not just greed for money, most of the people (making the decisions) don't need it, it's greed for power."

In meetings around the country, wealthy power mongers approach cuts to capital gains taxes, estate taxes, and income taxes as beneficial to society, while blind to the society all around them that struggles and withers.  The lower-class are invisible because the wealthy refuse to see them. As Ralph Ellison wrote, "When they approach me they see only my surroundings, themselves, or figments of their imagination--indeed, everything and anything except me."

In every great society there comes a time when Spartacus and the slaves form an uprising, when the populace can no longer stand more pain and despair.

Is that time nigh in America?

Over and out.

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