Is Reducing Inequality a Lost Cause?

 

Capital is triumphant, labor is weak, inequality is inevitable. And while we can make tweaks around the margins -- say, with higher taxes and more redistribution -- it's not going to make a real difference given the powerful structural forces at work. Certainly a move like capping CEO pay won't count for much. 

 

That's an argument you often hear, including most recently by Zachary Karabell who writes in Slate:

Well, yes and no. 

 

Yes, the old system stopped working for most people while super-empowering a sliver at the top. But it didn't just stop working because of inexorable historic trends like the liberalization of China or advances in technology. The system also stopped working -- and hasn't been replaced with a better system -- for political reasons. American elites barely lifted a finger to help the bottom half of the working population as the old industrial regime fell apart. Quite the contrary: The U.S. enacted a series of policies that exacerbated harmful structural changes at every turn. 

 

Trade rules were liberalized even as those two billion new workers starting showing up and new technology made it easier to hire them, and even as our competitors pursued neo-mercantalist strategies. No backup plan was devised for displaced American workers, such as an industrial policy to invest in new sectors where the U.S. could compete and training workers for those jobs. The old defined benefit pension system was allowed to collapse and be replaced by a 401(k) system that shifted risk to individual workers and, predictably, things didn't go so well. The financial system was deregulated in ways that made consumers more vulnerable to predatory lending and increased market instability. Taxes were lowered, particularly on capital gains, greatly increasing the income of the rich on top of the greater returns they were already reaping on their skills. Government began investing less in some of the key foundations of prosperity, such as infrastructure. 

 

These were all political choices -- choices that benefited well-positioned educated elites over everyone else. Just like it was a political choice for decades to leave the healthcare of Americans so beholden to market forces, and letting this be yet another area where the middle class got walloped.

 

Karabell is right that the middle class in every other advanced country in the world has also been badly hit by large-scale structural changes and that inequality has risen everywhere. But there are any number of countries that have done a much better job of responding to these changes and trying to mitigate the damage. Germany, for example, has moved pretty adeptly over recent decades to strategically position itself to compete globally in certain sectors, investing heavily in training and re-training workers to maximize the wealth creation potential of its human capital. The United States doesn't even really have a human capital strategy. It's another job we've left up to the market, for political reasons. 

 

Perhaps most importantly, though, other countries have made political choices over time that both limit wealth accumulation at the top and limit how far people at the bottom can fall. There are plenty of billionaires in Europe, because even higher tax rates can't do much to stop the accumulation of great fortunes. But there's less inequality overall and many more resources devoted to ensuring basic economic security and opportunity for all. Which helps explain why many of these countries have both less poverty and more upward mobility than we do. 

 

If the U.S. made similar political choices, we wouldn't get rid of inequality or maybe even reduce it all that much. But we could soften the destructive impact of big structural shifts in significant ways and, at the least, we could reverse -- as Obama has started to do -- the way that fiscal policy has exacerbated inequality by allowing the rich to keep more of the money they earned at a time that their earnings were rapidly rising already. 

 

Even changes in executive compensation, which Karabell sees as a small side issue, could be significant. For example, let's say that Yum! Brands only paid its CEO, David Novak, $20 milllon in 2012 instead of $44 million. And instead it distributed that other money in the form of bonuses to its 10,000 best performing workers at places like Taco Bell and KFC. That would have been nearly $2,500 per worker -- which is serious money when you're earning under $25,000 a year. It's enough to beef up a savings account for eventually buying a home, or even putting a down payment down on a place in some parts of the country. 

 

Karabell is right that lowering the compensation of tech executive like Larry Ellison wouldn't make much of a difference. But Yum! Brands has a half a million workers. McDonalds has even more. Walmart has even more than that. And, actually, reslicing the compensation pie at these company and thousands of other labor intensive employers in retail, restaurants, hospitality, and so on really could make a big difference to many workers. Legislation on CEO pay can't accomplish this, but unions could, which is why the new organizing of low-wage industries has big potential implications. Remember, we're talking about jobs that can't be moved offshore. 

 

On another front, a shift away from the 401(k) to pooled retirement accounts -- or at least greater regulation to reduce the fees that mutual funds can charge -- and other steps to reduce the take of middlemen on Wall Street could bolster the nest eggs of millions of workers. 

 

I could go on. Karabell is right that structural forces have conspired against the little guy and only big economic changes will restore the American Dream. But we can't forget the all-important role that politics has played in destroying the dream. Or how changes in politics are prerequisite to reviving it.