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What’s So Bad About Inequality? A Lot, Actually


Wealth and income inequality has been in the news a lot this past week. Why an issue that has been a growing problem for so long has suddenly become the topic du jour in Washington DC is unclear to me—but I am glad it is finally rearing its head so publicly. Unfortunately, as with many hot new topics, the ferocity of the spin on both sides of the aisle is muddying the waters, badly.

Wading into this class warfare, some things have to be cleared up.

First, let’s discuss what this debate isn’t about – social mobility. A study out of Harvard University last week showed that the degree of social mobility in the United States today is roughly the same as it was in 1970. I wasn’t the least bit surprised by this result. After all, it was in the 1970s that returns to education and investment in higher education began to take off. And in our world since then, there have been plenty of opportunities for even the least advantaged to access these resources. Add to this a whole new generation of tech millionaires and billionaires and it seems pretty clear that there is plenty of new money to go along with the old money.

But the report’s result has nothing to do with growing income inequality—which is defined as the gap between high and low income earners —nor the even scarier growing inequality in the distribution of wealth. Just because a lucky few catapult to the top here and there (and presumably a few fall from the heavens to balance things out) doesn’t mean that inequality is, well, less unequal. And it surely doesn’t mean that the long-term problems that go along with inequality don’t exist.

The Harvard study also went a long way in undermining President Obama’s State of the Union speech because, for whatever reason, the President’s speechwriters decided that saying ‘inequality’ was not catchy enough or sent the wrong message, so they instead used the phrase ‘ladders of opportunity’ which refers of course to mobility, not the gap. Oops. And when the President did raise the specter of the problem, the solutions he offered were at best vague and at worst useless.

One of these solutions, hiking the minimum wage to address the income gap, has been heavily debated recently and the discussion is particularly galling to me. While I support increasing the minimum wage (it makes sense in many ways), the increase ends up being a tax on the middle class, which in turn supports those lower on the income scale. It has nothing to do whatsoever with the top 1%, who have been accumulating a greater and greater share of income and wealth over the past 30 years. Raising the minimum wage won’t do a thing to slow that frightening process down.

But why should I be scared? What difference does it make to me that Mitt Romney or the Koch brothers have 18 or 30 homes spread across the United States as long as I have a good standard of living? Because, when you see such sharp accumulation of wealth among a very fortunate few, bad things begin to happen in the political process, things that allow those at the top to accumulate more and more wealth by taxing the rest of us, and that limit mobility by ensuring these perks remain in place permanently. In the United States, this process has already begun.

Humorously, of the various Republican State of the Union responses, the one by Tea Party favorite Senator Mike Lee of Utah contained the most truth—although I am sure he’d dispute my interpretation of his words. He said, “…but where does this new inequality come from? From government — every time it takes rights and opportunities away from the American people and gives them instead to politicians, bureaucrats, and special interests.”

You’ve got that right, Senator Lee. Take for example the special tax laws that allow Mitt Romney to pay an income tax rate of 14% while others, trying to climb the ladder, regularly pay well over twice that rate on their incomes. Or the rules that allow politicians to inside trade, or that allow the ultra rich to hide their earnings in offshore tax havens and write-off travel on their personal jets. Right here in California, Prop 13 notoriously allows the most rich, long term land barons to dodge paying their fair share of taxes.

A good portion of today’s growing income and wealth inequality is built on special perks and back room political influence – and it’s only going to get worse. The hollowing out of rules regarding political campaign contributions and the blatant flouting of remaining controls means that the ultra wealthy among us now have more sway than ever. This is why President Obama did not even utter the phrase ‘tax reform’ in his speech. Why bother? It wouldn't have a chance.

The legislative gridlock keeping these perks in place is astonishing strong. Grover Norquist, Founder and President of the anti-tax advocacy group Americans for Tax Reform, travels the nation counseling his base that removing special perks and abused loopholes in the tax code is the equivalent of raising taxes. Even California’s own pragmatic Governor, Jerry Brown, who seems inclined to tilt at all sorts of windmills (witness his efforts to keep pushing the state’s high speed rail project forward), won’t even consider reforming Prop 13, something he labeled a “big fat loser.” Substantive banking reform remains mired in legislative muck and remember, to date, not one of the central figures in the subprime mortgage disaster has been sent to jail.

While this is maddening, what’s frightening is what will eventually occur—a major political backlash. When wealth becomes too concentrated and the frustration of the rest of the population become acute, things come to a head. In the worst case you end up with revolution—think China, Russia, Cuba or a host of other countries that experienced violent overthrows of their existing governments. In other cases, the change may be non-violent, such as the rise of Hugo Chavez in Venezuela. Granted the United States is nowhere near this terrible outcome, but the trend is clearly moving in that direction.

And as is often the case, the cure can end up being as bad as the disease, where all sorts of populist rules and regulations do as much damage to the economy as did the concentration of wealth and the rules that supported it. Meet the new boss, same as the old boss. To stop this, we need to put moderate policies in place. Better public education and a minimum wage are all good things. But the real solution ultimately must be based on tax reform.

Begin by leveling the playing field and closing the tax loopholes that allow the very richest to pay so little. By the way, this is what President Ronald Reagan did so wonderfully well. I would also raise the top level of tax payments, and maybe include a small wealth tax.

Then we need real political reform to prevent people with wealth from having such monstrous political pull. Everyone should have some influence on political outcomes, not just a select few. At the very least, we could create a system where political money has to be claimed so voters and the general public know exactly who is spending money on what.

And these tax changes won’t ruin the U.S. economy. The issues facing many European economies are not related to their progressive tax rates, but have far more to do with labor policies and unions that reduce the incentive to work hard and stifle entrepreneurialism.

By shifting power back to the middle, maybe, just maybe, we’ll have a government that pays attention to what the majority wants.

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