Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.
It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.
The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.
What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.
Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone, at least for a time. But because this situation can’t be sustained, at some point — 1929 and 2008 offer ready examples — the bill comes due.
This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.
THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity.
I think Robert Reich sees part of the problem, but he doesn't see the solution. How do we achieve more widely shared prosperity? By a variation on Alaska's theme. In Alaska, a significant share of the value of the state's natural resources is used to fund state government, and another significant share is placed each year into the Alaska Permanent Fund, which is invested in a broadly diversified portfolio and pays an annual dividend of $1000 to $2000 to every permanent resident of Alaska, of all ages. [See http://www.nytimes.com/2010/09/04/us/politics/04alaska.html for an article mentioning this, and the Alaska Permanent Fund link, at the left of this page.] Alaska has it half right: they collect a decent share of the value of the natural resources, but they don't tax their land value much.
How do we share the prosperity beyond the top 10%? By shifting our incentives so that those who currently grow wealthy in their sleep by collecting economic rent find themselves sharing that rent with the rest of us. Untax wages, starting with incomes under the median. Untax sales. Untax buildings. Tax land value. Tax the value of those things which the classical economists would have recognized as land -- water rights, "rights" to pollute, airport landing rights at congested airports, geosynchronous orbits (which prevent satellites from bumping into each other), electromagnetic spectrum (those airwaves which most people would say "belong to the American people" but which we have permitted corporations -- public and private -- to privatize), natural resources such as oil, natural gas, copper, coal, lithium, etc.. All these things are going into corporate portfolios (here and abroad -- and some of those corporations are families in power, despite attempts at nation-building), week in and week out, and their value accrues to the shareholders of the corporations. Stock ownership is quite concentrated, and these benefits flow into the pockets of a relative few, who, as Reich rightly points out, may or may not spend or invest in America's products. When they do invest, they often acquire our best land and resources, buying thereby the labor of thousands of Americans. When an acre in Manhattan can be worth $400 million, the seller of that land didn't make it valuable. WE did! So why should an individual, or a corporation, or a trust, or a university, or a pension fund -- or any private entity -- get to pocket that value as if they did? (The kindest thing I can say is that we have a bad habit! Something like chattel slavery -- and look at how long it took us to end that.)
Pocketing that value has two sorts of effects: when they sell, they pocket that so-called "capital" gain. It isn't capital! It is land value! Capital depreciates; what rises in value is land, and it rises for reasons which have nothing at all to do with the "fellow" who owns it.
But even when they buy and hold, there are important effects of permitting that privatization. The rich don't need to put the land to its highest and best use, because they can get by with something less while they wait for the community to cause it to grow. (See The Taxpayer at 72nd and Madison. Notice all the surface parking lots in Manhattan, Philadelphia, Hartford and many other cities. See the 4.3 acre "hole in the ground" in Stamford, CT, right near the city's 100% location, vacant since the early 1980s.) They're patient! They can afford to be. The top 10% of us hold 71.5% of the chips, according to the 2007 Survey of Consumer Finances.) Not using the land well reduces the supply of housing close to the center of things (adding to sprawl) and/or of jobs (which we say we want) and contributes to a wide range of our most serious social, economic, environmental and justice problems.
If we collected more of the annual rental value of our urban land, the holders of that land would turn into active users or sell it to someone who would put it to good use. Good use creates jobs, and homes and other things that the market wants. But when the market can't afford them, it does without. People are priced out of housing in the places they'd prefer to live. They lack jobs or are underemployed, and the rich keep getting richer.
Reich advocates extending the EITC, exempting the first $20,000 of wages from payroll taxes, improving and extending early childhood education, making public universities free in return for 10% of the first 10 years of full-time earnings, creating "earnings insurance." He concludes,
Policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth — and that’s good for everyone. The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession.
Well, 130 years ago, Henry George spoke to some of the kinds of measures that have been proposed over the years for reducing poverty and promoting widely shared prosperity. See "Part VI -- The Remedy" and particularly "Ineffective Remedies" and "The True Remedy"
"Ineffective Remedies" begins,
OUR CONCLUSIONS point to a solution. It is so radical that it will not be considered if we believe less drastic measures might work. Yet it is so simple that its effectiveness will be discounted until more elaborate measures are evaluated. Let us review current proposals to relieve social distress. For convenience, we may group them into six categories:
1. More efficient government
2. Better education and work habits
3. Unions or associations
5. Government regulation
6. Redistribution of land
That 10% of us who hold 71.5% of the net worth also received 41.3% of the current income. [Note that these percentages are understated, since the SCF purposely omits the Fortune 400 families. They hold about 1% of the nation's net worth.]
Picketty & Saez provide annual updates on income concentration. For 2008, they report that the top 10% of us (sorted by income, not net worth) received 45.60% of the income when capital gains are excluded and 48.23% of income including capital gains. (For 1988, the corresponding figures are 38.63% and 40.63%; in 1958, 32.11% and 33.56%. Do we notice a trend here? Do we like it or think it a healthy trend?)
We have permitted and supported a structure which funnels wealth and income into relatively few pockets. We have to reform this structure, and we have to recognize that the current beneficiaries are not likely to be keen on reform -- conservatives have a lot to conserve for themselves -- and those who are dependent for their salaries on being popular with those beneficiaries are not likely to be particularly interested in looking at the underpinnings of the structure with an eye to removing some of the ladders (escalators!!) or gentling the chutes.
Those who get to privatize the value of what ought to be common assets grow wealthy in their sleep. Until enough of us understand the mechanism to constitute a majority, we aren't likely to correct it.
It is a bit disheartening to think how many well-regarded economists live in California, the land of Proposition 13, and haven't lifted a finger or opened their mouths to suggest that it is not in the best interests of California's people. Milton Friedman acknowledged many times that the tax on land values was the "least bad" tax -- and didn't have anything to say about Proposition 13, which was the antithesis of what a wise person or society would do with that information. So I guess I shouldn't be surprised that today's California economists, with very few exceptions, aren't all that concerned with the economic wellbeing of ordinary people any more than economists elsewhere are. Or maybe, as my late mother would have expressed it, their educations have simply been neglected. (At which point she would proceed to fill in my newly-identified knowledge gap.) Economists can start with the links in this post, and then explore from there.