Economics, like grey hair and cellulite, is slowly growing on me. A decade ago, I used to think that the “dismal science” was just that: boring, dry, and completely irrelevant to my life, unless I was demanding a beer and an economist was supplying one. But my interest in politics, and therefore economics, has evolved. So much in fact, that I recently found myself in packed auditoriums, paid ticket in hand, ready to hear a purveyor of the dismal science speak.
Of course, this wasn’t just any old professor of pie charts. This was Paul Krugman, a professor at Princeton and a New York Times columnist who often opines about politics and economics (he has twenty books under his belt). The reason I went to go see Krugman is because I find his columns elucidating and spot-on, and because he was addressing an issue I believe to be of fundamental importance for the upcoming election. That issue is income inequality and the future of the middle class.
According to Krugman, the United States currently has one of the largest income inequalities in history. The middle class is shrinking, and our income distribution almost exactly matches what it was in the 1920s, when we lived in the so-called Gilded Age.
I was a little rusty on my economic history, so I had to remind myself what, exactly, this period in time meant.
After the Civil War, the oil, steel, and railroad industries exploded, creating a group of wealthy businessmen. With little government regulation, people like Vanderbilt, Rockefeller, and Carnegie, and a handful of others, got extremely rich, often at the expense of others. Wealth through exploitation earned these capitalists the name “Robber Barons,” a term that is now synonymous with questionable business practices. Mark Twain dubbed the nineteenth century the Gilded Age, referring to the wide displays of wealth glittering on the surface, with corruption and inequality lying underneath. When the then French Prime Minister, Georges Clemenceau, visited the United States, he is rumored to have said that the nation had gone “from a stage of barbarism to one of decadence—without achieving any civilization between the two.”
But have we really returned to such a divisive time?
According to the Federal Reserve Boards’ Survey of Consumer Finance, we have. Thirty-three percent of all the wealth in the United States is owned by the top one percent of the population, and their percentage of the pie has been steadily growing over the past decade. At the same time, 50 percent of the population—half of all Americans—own just 2.5 percent of all the wealth in the United States.
A prime example of this top-heavy wealth explosion is hedge fund managers. Krugman pointed out that the top twenty-five hedge fund managers last year earned 14 billion dollars—enough to pay New York City’s 80,000 public school teachers for nearly three years. This could be a learning lesson in career choice: if you want to make a lot of money, don’t be a teacher, be an investor.
But the income gap is not solely a result of career choice or education disparities (investors and teachers generally both have higher education.) The inequity problem, according to Krugman, does not lie in economics. It lies in politics.
That’s because it is political decisions driving the distribution of income. Since the 1970s, union busting, tax cuts for the wealthy, and politicians that play possum to business interests have help create the gap between the extremely rich and the rest of us.
For instance, when the Bush Administration talks about “tax-breaks,” who gets the break? About two-thirds of the benefits from 2001 and 2003 tax cuts went to households in the top fifth of the income bracket. Though many low income Americans did receive a tax refund (in 2004, the bottom fifth received—whoopee!—$250), the enormous loss of revenue at the top resulted in budget cuts for social programs like schools, financial aid, and Medicare, and resulted in huge budget deficits.
Some of the Administration’s tax cuts are simply irrelevant for many Americans. Those with lower incomes or without investment portfolios don’t usually benefit from capital gains and dividend tax breaks because their money isn’t tied up in stocks and bonds. According to Krugman, when the Administration cut these particular tax rates, almost half the breaks went to those Americans who make over one million dollars. It’s not hard to see why Krugman calls the Republican tax breaks “elitist.”
Capital gains tax breaks, and tax loopholes, are one reason why those hedge fund managers had such an enormous annual booty. While a percentage of their income is taxed at the normal 35 percent, some of it is considered a capital gain—even though it is clearly income—and is only taxed at 15 percent. The Economic Policy Institute estimates that the “privileged tax treatment” given to hedge fund managers resulted in six billion dollars in lost tax revenue; two billion of this went to a mere twenty-five people.
During this time of explosive wealth, real wages for most Americans have stagnated. Workers today are faced with rising health insurance costs and the inability to save for retirement. Krugman points out that unions usually take up issues like fair wages, health insurance, and retirement funds, but they have been in steady decline since the seventies, when Reagan declared “open-season” for union busters. Home ownership, often considered a hallmark of the middle class, has been eroded by an unregulated sub prime lending market and is at historical lows.
Krugman is not the only one to call attention to current economic issues that are political at heart. In Robert Kuttner’s new book, The Squandering of America: How the Failure of Politics Undermines Our Prosperity, he writes that “people who look purely at technical economic factors to explain why living standards for most Americans stagnated during a period of sharply rising productivity are looking in the wrong place. They should look at the politics.”
So why haven’t we been? Why hasn’t there been a backlash against a party that favors a small percentage of extremely wealthy and doesn’t favor the populous? Obviously political decisions are not based solely on finances, and Republicans don’t run solely on their economic platform. If they did, most Americans—the ones who want to make a decent living, want affordable health care, want to send their kids to decent public schools—presumably wouldn’t vote for them.
Which is why Krugman ended his speech on a positive note. As the tides turn toward a change in leadership, he feels the things are going in the right direction. “This may turn out to be the country I hope it is.”