Top-Down Inequality

By Mike Koetting            July 5, 2017

This is the second post in a series focusing on what I see as the top three issues facing society—inequality, the environment and the meaning of work.  Last week’s post addressed the fact that changes in the labor market are generating inequality—to some degree regardless of politics.  This post addresses the fact that some inequality is being caused, deliberately or accidentally, by the people on the fat side of inequality.  The next post will address the specific issue of race and inequality.

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Top-down Inequality is what happens when people with more assets use those assets to improve their positions at the expense of the rest of society.  This happens

• Through direct action—as when Congress enacts policy that reduce taxes on those with higher incomes
• Through failing to act when other circumstances increase inequality—such as job loss due to automation or globalization
• Indirectly—as when educational opportunities become unequal which amplifies existing inequalities

We all know that each of these is at work in American society.  The blow graph illustrates that even after taxes the top income tier has grown disproportionately since the late 70’s.

The issue is not that everyone should have exactly the same income.  Among other things, that turns out to be an elusive goal.  When societies have put too much effort into making incomes equal, the net effect is ugly.  The relevant question today is at what point does income inequality become a threat to a society.  There is clearly a tipping point.  Too much inequality results in large pockets of alienation, withdrawals from the work force, and a search for easy answers.  It also can lower demand which will serve as a bigger brake on productivity than tax rates.  Sooner or later the society collapses.  I believe the degree and nature of American economic inequality is not just a moral issue, but an issue of the preservation of society as we know it.

The nexus of the current degree of top down income inequality is the Republican party, particularly that portion that has become enthralled to the far-right.  The ascendancy of Reagan and his accompanying ideology, seemed to remove any barrier–political, ideological or cultural – to pursuing policies that increased inequality from the top. Greed became totally acceptable.

Democrats, while materially better than the Republicans on this issue, have acquiesced to an embarrassing extent. No doubt a substantial amount of this acquiescence is due to the perceived necessity of building huge war chests to compete effectively with the seemingly bottomless coffers of the far right.

But that is not the whole story.  When the critical issues of the Sixties—civil rights, the war, the degree of self-expression—started to metamorphize the Democratic Party, the college educated children of the Sixties replaced union leaders as the moral voice of the party.  A deliberate decision was made to tack more to the center on economic issues.  While they continued to focus on the poor, economic issues impacting the middle class lost saliency.

Moreover, Democratic leadership is part of a “cultural elite”—where they live, where they shop, how they entertain themselves, their kids’ life chances, etc.  And, to be honest, to some extent they have benefited from the drift toward economic inequality.

Income of those in the 80^th and 90^th deciles, which probably includes many readers of this blog, has pulled away from working class incomes, just not as spectacularly as the top 1%.  The 2015 income for households in the 80^th percentile was about $117,000—which is almost exactly twice the median household income.  This means that everyone in the 80^th percentile made at least twice what the bottom 50% of American households made.  Percentiles above did better.  Moreover, the top quintile of earners (those over the 80^th percentile) has experienced a relatively better recovery from the Great Recession than those with lower incomes to start.  Ownership of wealth, which includes savings for retirement, is even more skewed.

This is not to suggest that the top quintile is as responsible for income inequality as the top 1%, something Richard Reeves and others have implied.  The major culprits really are the obvious ones–those who have promoted and implemented the policies that have led to this concentration of wealth, mostly under the dubious theory of “trickle-down”, an hypothesis proven time and time again to be fallacious.  One need only analyze the Republican proposals of the last 35 years and it is obvious they concentrate income and wealth in the upper 1%.  Gains for the rest of the upper quintile, while real, are mostly incidental.

But in understanding the current American political landscape, it is not insignificant that the entire top quintile has done just fine.  This is one part of the distrust of Democratic proposals by elements of the working class.

Equality Is Not Automatic

Although a fair amount of political conversation tends to assume equality as some sort of a baseline from which inequality is deviation, equality is not the historic order of things. A recent book by Walter Scheidel, The Great Leveler:  Violence and the History of Inequality, argues that most societies from ancient history to the present gradually grew more unequal over time—except when they were leveled out by violent forces—war, revolution or plague.  The introduction of democracies may exert some moderating influence, but even in America inequality grew early in the last century and it took a Great Depression and a World War to level things out and we have been unable to preserve that.

It doesn’t take great imagination to grasp how or why societies tend toward inequality:  once a group gets some advantage, they use to get more and then pass it on to the next generation.  And so forth.  Good fortune compounds—as, of course, does bad luck.  For this reason, it is also necessary to remember that the notion that equality of opportunity is more important than actual equality is mostly balderdash.  Inequality, ipso facto, changes the odds of inequality of opportunity.  The more the inequality, the more extreme the odds in either direction.

What to make of this?

First, we need to accept that reductions in economic inequality will not happen without effort.  It will take continuing and deliberate action to overcome the tendency toward inequality.  There is no basis whatsoever to believe that those efforts will come from anywhere but through government; markets by their nature accentuate inequality.  The Democratic Party needs to decide if it is going to make income inequality the centerpiece of their strategy.  In the last 25 years we have seen that although Clinton and Obama said all the right things, they were not able to enact programs that changed the course on income inequality.  To be sure, there has been stiff Republican opposition, both on the issues and indirectly through gerrymandering, voter suppression laws, and so forth.  But part of the answer has to be that the Democrats either soft-pedaled the issue of economic equality, failed to convince people they had a workable roadmap, or both. We have to own some of this.

If Democrats want to take on the issue of income equality, it will need to be a full-throated, no holds barred struggle.  They will probably need to change their model of campaign financing toward a Bernie Sanders model of small contributions and a very activated base.  Likewise, they will probably have to soften “identity politics”.  The needs of individual groups must remain important, but they must be incorporated in a way to more robustly include everyone who is disadvantaged by the current economic distributions.

This is a tall order.  But Republicans have made it clear they have no problem with the current level of inequality; indeed, will take any steps necessary to preserve it.  So, if one thinks that letting the economy get more and more unequal poses a real threat to the health of all society—and I clearly believe it does—then one has no choice but to line-up behind a much more concerted push than we have seen from the Democrats in a long time.  It should not be impossible to create a strong majority around a platform that wants to make life fairer for the vast majority of Americans.  The opposite has been summed up by Warren Buffet: “There’s class warfare, all right. But it’s my class, the rich class, that’s making war, and we’re winning.”