(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Lawrence Summers
Feb 16 (Reuters) – Inequality has emerged as a major
economic issue in the United States and beyond.
Sharp increases in the share of income going to the top 1
percent of earners, a rising share of income going to profits,
stagnant real wages, and a rising gap between productivity
growth and growth in median family income are all valid causes
for concern. A generation ago, it could have been plausibly
asserted that the economy’s overall growth rate was the dominant
determinant of growth in middle-class incomes and progress in
reducing poverty. This is no longer plausible. The United States
may well be on the way to becoming a “Downton Abbey” economy.
So concern about inequality and its concomitants is
warranted. Issues associated with an increasingly unequal
distribution of economic rewards will likely be with us long
after the cyclical conditions have normalized and budget
deficits finally addressed.
Those who condemn President Barack Obama’s concern about
inequality as “tearing down the wealthy” and un-American
populism have, to put it politely, limited historical
perspective. Consider a sampling of past presidential rhetoric.
President Franklin D. Roosevelt, talking about the financial
industry in his first Inaugural Address in 1933, said “Practices
of the unscrupulous money changers stand indicted in the court
of public opinion . They know only the rules of a generation of
self-seekers. They have no vision and when there is no vision
the people perish.”
By his re-election campaign in 1936, this had become: “We
had to struggle with the old enemies of peace – business and
financial monopoly, speculation, reckless banking. They are
unanimous in their hate for me – and I welcome their hatred.”
President Harry S. Truman later observed, “The Wall Street
reactionaries are not satisfied with being rich .These
Republican gluttons of privilege are cold men. They want a
return of the Wall Street economic dictatorship.”
John Kennedy, dismayed by a steel price increase in 1962,
privately cursed the steel executives – though the quote quickly
became public – and had FBI agents storm into corporate offices
and subpoena business and personal records. He very likely
ordered the Internal Revenue Service to audit steel executives’
personal tax returns. President Richard Nixon also turned to the
tax authority, announcing in 1973 that he had “ordered the IRS
to begin immediately a thoroughgoing audit of the books of
companies which raised their prices more than 1.5 percent above
the January ceiling.”
President Bill Clinton, in a major economic speech of his
1992 campaign, complained, “America is evolving a new social
order, more unequal, more divided, more impenetrable to those
who seek to get ahead. Although America’s rich got richer the
country did not the stock market tripled but wages went down.”
Many more examples can be cited to demonstrate that it is
neither unusual nor un-American to be concerned about income
inequality, the concentration of wealth, or the influence of
financial interests. Given the public’s frustration with
stagnant incomes and an increasing body of evidence linking
inequality to reduced equality of opportunity, reduced demand
for goods and services and increased alienation from public
institutions, demands for action are reasonable.
The challenge is in knowing what to do. If total income were
independent of efforts at redistribution, the case for reducing
incomes at the top and transferring the proceeds to those in the
middle and at the bottom would be compelling. Unfortunately this
is not the case. Technological changes and globalization, for
example, have made it possible for those with great
entrepreneurial talents to operate faster and on a larger scale
than ever before – and gather profits on an unprecedented scale.
It is easy to conceive of policies that would have reduced
the earning power of a Bill Gates or a Mark Zuckerberg by making
it more difficult to start, grow and globalize businesses. But
it is far harder to see how such policies would raise the
incomes of the remaining 99.9 percent, and such polices would
surely hurt them as consumers.
It is true that there has been a dramatic increase in the
number of highly compensated people in finance over the last
generation. But recent studies reveal that most of the increase
has come as the value of assets has increased – asset management
fees as a percentage of assets remained roughly constant.
Perhaps some policy could be found that would reduce these fees,
but the beneficiaries would be the owners of financial assets –
a group heavily tilted towards the very wealthy.
So it is not enough to identify policies that reduce
inequality. To be effective they must also raise the incomes of
the middle class and the poor. Tax reform has a major role to
play here. Apart from its adverse effects on economic
efficiency, our current tax code allows a far larger share of
the income of the rich than the poor or middle class to escape
taxation.
For example, last year’s increase in the stock market
represented an increase in wealth of about $6 trillion – with
the lion’s share going to the very wealthy. The government is
unlikely to collect as much as 10 percent of this figure given
capital gains exemption, the ability to defer unrealized capital
gains, and the absence of any tax on gains on assets passed on
at death.
Another example is provided by our corporate tax system.
Because of various loopholes the ratio of corporate tax
collections to the market value of U.S. corporations is at a
near record low.
Then there is the reality that the estate tax can be
substantially avoided by those prepared to plan and seek
sophisticated advice. Closing loopholes that only the wealthy
can enjoy would enable targeted tax measures like the Earned
Income Tax Credit, which raise the incomes of the poor and
middle class more than dollar for dollar by incentivizing
working and saving.
It is ironic that those who profess the most enthusiasm for
market forces are least enthusiastic about curbing tax benefits
for the wealthy. Sooner or later inequality will be addressed.
Much better that it be done by letting market forces operate and
then working to improve the result than by seeking to thwart
their operation.
(Lawrence Summers)
