I grew up in a great country. True, we only had one bathroom for a family of four; getting two cars for the family seemed like a dream come true, and travel for vacations was never much more than a 2 hour drive to Lake Tahoe (until age 18, my only travel outside of California was one trip to Hawai’i for a “once in a lifetime” vacation). I spent most of the very rainy winters playing pinochle and singing songs with my friends, summers in a day-camp in San Rafael hunting for scorpions, deer bones, and arrowheads or swimming in a lake and riding horses (and shoveling out the stalls afterwards!). From the age of 10, I spent many of my Saturdays working in our family business for a pittance; but if it was enough to buy a plastic model of a naval ship or a fighter plane to glue together in my spare time, I was happy to do it. The nearby Golden Gate Park and Sunset Beach were free, open, and well-maintained playgrounds, and the city was safe enough for a 14 year old to travel almost anywhere by public bus and streetcar. And oh yes, we could fill our time listening to the greatest new music ever – from Elvis and Johnny Cash to the Stones, Beatles, Beach Boys, Zepellin, Airplane, Simon & Garfunkel and so much more.
What made it especially great was our optimism about the future. Our country’s free public education system, starting in kindergarten, was the best in the world. If you could go to college and become a lawyer, doctor, engineer, accountant, or professor, you were assured a prosperous middle class life. And that college degree was available for free at some of the best universities in the world for anyone who qualified to enter. Business was another option, but didn’t seem all that glamorous: bankers had great hours but incomes not any greater than other successful professionals. Even becoming a high-school teacher seemed like an interesting, secure job that would provide a solid income to raise a family, and almost any white male with a 9-5 job got decent health care, and a paycheck that would cover a home, car, some vacations, and savings for the future. We knew things were getting better because since 1950, incomes of average folks had been going steadily upwards. And you could be almost certain of a decent pension when you retired. True, if you were black or a woman, your opportunities were still quite limited, and you had to fight enormously hard against prevailing social norms to get any kind of important position. For Latinos and Asians, things were not much better.
Today, I live in a very different country. Where I live today, if you are not a business executive or in investment banking, it’s almost impossible to have a top-tier income. I “made it” to become a successful research professor, with a greater income than I ever imagined when I was working for cents on the hour unpacking merchandise crates in the back room of my family business. Yet it is still often a struggle to live somewhere to obtain, or to pay for, a top-quality high school for my kids (overall, the 16-24 years olds in the country where I live now have the worst performance on technology and numeracy tests in any developed country in the world), to afford decent health care (women in my country now are twice as likely to die in pregnancy or childbirth as women in Canada, and infant mortality ranks 34th in the world), or even to manage the costs of keeping up a car, a house, and to save anything for times ahead. I’m not alone in that; most people in my country in their 50s and 60s have wholly inadequate savings for retirement, will not get a government or job-guaranteed pension that meets their needs, and will likely have to keep working much longer than they expected just to get by. And as for college, the days of the free four-year degree are a distant memory; where I live today the same university degree that cost nothing beyond the cost of used books and travel to campus where I grew up now costs over $30,000 per year for local residents, and almost $60,000 for those coming from further away. What’s more, even when youngsters here get a college degree, their future may still be limited; upward social mobility in the country where I now live is the lowest in the developed world, with kids in Denmark twice as likely to move up if born into a low-income family as kids here.
Of course, it is all the same country: The U.S.A. Most of this data is taken from a recent op-ed by Nicholas Kristoff in the NY Times. Kristoff is one of many who have been pointing to how much the U.S. has changed in things that really matter to people in the last forty years. Of course, if you are lucky enough to make it into the top tenth of the top one percent, you are one-in-a-thousand and doing better than anyone in living memory. That’s 300,000 people who collectively have more wealth than the other 270 million Americans in the bottom 90%.
The big book on inequality at the moment is Thomas Piketty’s Capital in the 21st Century, which argues that this is the natural tendency of capitalism, and that the country that I grew up in – American in the 1950s and 1960s – was an anomalous place in an anomalous time. It benefited from the great destruction of accumulated wealth in the Depression and WWII, and the fact that America alone among wealthy countries avoided the devastation of the great war. With a unique global position, and a special period in technology that was boosting productivity but not yet enabling the outsourcing or replacement of workers on a large scale, the growth of average incomes and the reduction of inequality of that period was a once-in-forever situation that we will not see again.
And yet I can’t quite believe that’s the whole story. The country that I lived in believed in the future and invested for it. We put children first in building schools and parks (of course with the fast expanding youth cohort of the baby boom bursting upon us, we had to build new schools, train new teachers in the latest methods, build new colleges and fund them, or we would have had a generation of kids growing up in the streets.) We built up social security and medicare, created the interstate highway system and electrified America, and by the early 1970s we even tackled our terrible air and water pollution head-on in the Clean Air and Clean Water Acts. We fought a terrible war with tragic mistakes in Vietnam, but we thought we had learned our lesson (only to find out in Iraq and Afghanistan that this was untrue).
We did all of this with very progressive taxes – from 1941 to 1981, the top income tax rate was over 70%, and the tax rate on inherited estates was also 70% or higher – rates that today would be equated with instant economic collapse. Yet the U.S. thrived. Stock options and 15% capital gains rates weren’t yet around, so it was darn hard to get filthy rich just by having a managerial job. So instead, top managers sought to increase their power and influence by expanding the size of their companies and their work forces – a very different incentive than squeezing out costs (and workers) as much as possible to maximize profits for executives and share-holders.
A different book from Piketty’s that I think explains more is Hedrick Smith’s Who Stole the American Dream? Smith shows how it was a deliberate decision of executives in America to campaign for a system of rewards and incentives that would let them maximize their wealth, while minimizing the share of national income that went to everyone else in the form of either wages or public spending or government benefits. The real fundamental change in America is that from the 1940s to the 1960s, to greatly simplify, we believed that broad social benefits and gains were good, and concentrated individual wealth was bad (a belief held over from the early days of the country, when the founding fathers, rich themselves but only middle class by the standards of European aristocrats, sought to discourage the formation of an aristocracy of wealth in the US, a trend reinforced in the Jacksonian era, and again in the Progressive era as well.) So we arranged our social and economic institutions to provide broad social benefits, and make it difficult to accumulate and pass on concentrated personal wealth.
Of course, we still applauded, rewarded, and encouraged people who built great businesses. The people who founded and ran Ford, General Motors, Bell Telephone, Bank of America, IBM, Xerox, and tens of thousands of other companies, and who invested in real estate in New York and California still got rich and were regarded as the natural leaders of society. They had schools and libraries named after them too, appeared on magazine covers, and were revered for creating “the affluent society” in the words of Harvard economist John Galbraith. Yet that was the point – they were lauded for creating an affluent society, not for being as personally wealthy, compared to fellow-Americans, as princes or kings of yore.
What has changed is that today we have a system that scrimps on providing social benefits but maximizes the personal return on high-end capital intensive activities, so that those with large amounts of capital, or those who manage large amounts of capital, find it easy to accumulate ever larger amounts of capital for themselves. High marginal tax rates encouraged those in earlier decades, once they had achieve a certain income, to put their time and effort into other things than further increasing their own incomes; today both the tax and basic reward structures (stock options and low capital-gains rates) do the reverse, encouraging people to continue to find ways to increase their personal incomes because they reap almost all the benefits for themselves.
The confusion over more progressive taxes is often severe because they are portrayed as an attack on successful business people. That is not right. Successful people DO deserve to be exceptionally rewarded. But the choice is over how they should be rewarded. Should it be with fame, adulation, respect, and power, or with as much personal material wealth as possible? There is nothing in the stars or the constitution that says a society can survive only by providing the maximum in concentrated material wealth to its economic elite. After all, scientists, soldiers, politicians, teachers, and government officials are all expected to excel at their jobs with modest material rewards; why should a bank manager be different from a general or a top civil official in what motivates them to perform well?
In fact, there is quite a lot of historical evidence that an over-concentration of wealth, as opposed to growing and generous rewards, for the economic elite is dangerous to a society’s well-being. If ordinary people are unlikely to benefit from growth, they will eventually be discouraged and not invest in their own human capital; or they may attack the rich as such or the economic assets of the society, rather than simply modifying the reward structure to keep motivating economic effort and success. The road to socialism, in fact, has not come from too-generous investment in promoting broad social prosperity. Historically, the road to socialism has been the conspicuous over-concentration of wealth for personal benefits to the few at the expense of the many, leading to a revolt against the social order and demands for radical change.
I believe in capitalism, and I do not believe it has an inherent tendency to concentrate wealth. Capitalism only survives when governments insure contracts and private property, and they can do that under a variety of conditions and terms. In Canada for example, no less a success in capitalism than the United States, the top 1% of income earners take home 10% of total income, not the 23% taken by the top 1% in the U.S. In Germany, another success, the top 1% take home under 10%. So evidently government policies, not iron laws of capitalism, make a rather large difference, and having a rising share of growth going to top earners is not necessary for an economy to do well.
Thus our problem is not how to tax the rich or redistribute income; it is how to make sure capitalism works for the benefit of all. Other countries do this much better than we do, and unsurprisingly, the result is that they score much better than the U.S. on measures of health and education while doing no worse (often better) on overall economic growth.
Oh by the way, we used to be one of those “other” countries. Can we be again?