No one wants to talk about the elephant in the room during this election season, wealth redistribution. No one mentions it because it brings up the tremendous growth in inequality over the past 30 years that require unpleasant political choices. But there is a Win-Win solution to the debate, that would allow a more level income field. It is also a solution to the wildly fluctuating financial markets that have impoverished so many.
And yet if we realize the potential for growth inherent in the U. S. economy, we might not be having such a debate between the have and have-nots. One example is the controversy over social security solvency. The headlines say its Trustees predict it will run out of money in the 2040s. Yet the reality is that if the average annual Gross Domestic growth of the last 75 years, including the Great Depression (which is 3.5 percent per year) and from which the Trustees calculate its longevity continues, social security would not run out of funds—ever.
But its Trustees have chosen to use a more conservative projection of 2.6 percent—one of 3 included in the Trustee’s annual report. And this has only happened during the worst downturns. The lesson is that if we focused on policies that nurture sustainable economic growth, social security doesn’t become a problem in 2043.
That is why wealth redistribution should be discussed, because it is a way of ensuring sustainable growth. It is not only the middle class, but most income segments that have seen a decline in their real (after inflation) incomes since the 1970s—except for the top one percent income bracket. And economists are discovering that such income inequality, now the greatest since 1929, was a main cause of the tremendous market instabilities that led to the 2007-09 Great Recession, as well as the Great Depression.
For example, according to the Center for Budget Policies and Priorities, between 1979 and 2007:
• The top 1 percent’s share of the nation’s total after-tax household income more than doubled, from 7.5 percent to 17.1 percent.
• The share of income going to the middle three-fifths (or 60 percent) of households shrank from 51.1 percent to 43.5 percent.
• The share going to the bottom fifth of households declined from 6.8 percent to 4.9 percent.
• The share going to the bottom four-fifths (80 percent) of the population declined from 58 percent to 48 percent.
Hardest hit were families living in deep poverty, defined by the Census Bureau as incomes of less than $22,000 per year for a family of four. In fact, the number and percentage of people in deep poverty hit a record high in 2009, with the data going back to 1975. Nineteen million people were living in deep poverty in 2009, up 2 million from 2008, according to the U.S. Census Bureau and CBPP.
The most obvious solution is to implement measures is put more money into consumers’ pockets (i.e., the lower and middle class income brackets that spend the most), and we all win. It creates greater aggregate demand for all—i.e., demand for not only more goods and services, but investments that create jobs. And demand can be created from either the public or private sector.
This win-win policy is a truth most explicitly formulated by John Maynard Keynes, the economic theorist most reviled by those who oppose most forms of government spending—except for defense, of course.
There is another disadvantage to high income inequality, as well. It leads to more severe recessions, as we have said. The greatest periods of income inequality, 1928-9 and 2007-08, also led us into the severest economic downturns—the Great Depression and Great Recession.
The Great Recession is but one example of the consequences of such a continued degradation of middle and lower income brackets. There is no good economic or political reason for such inequality to continue, if we want more sustainable—and predictable—economic growth. But first we have to win over the Win-Lose crowd who don’t believe the U.S. economy is capable of growing as much as it has over the past 75 years. We already know how to level the income playing field. And it will be a Win-Win solution for all.