Guest Post: Why The Left Misunderstands Income Inequality

Tyler Durden's picture

Submitted by Azizonomics

Why the Left Misunderstands Income Inequality

There is a widely-held notion on the political left that the key economic problem that our civilisation faces is income inequality.

To wit:

America emerged from the Great Depression and the Second World War with a much more equal distribution of income than it had in the 1920s; our society became middle-class in a way it hadn’t been before. This new, more equal society persisted for 30 years. But then we began pulling apart, with huge income gains for those with already high incomes. As the Congressional Budget Office has documented, the 1 percent — the group implicitly singled out in the slogan “We are the 99 percent” — saw its real income nearly quadruple between 1979 and 2007, dwarfing the very modest gains of ordinary Americans. Other evidence shows that within the 1 percent, the richest 0.1 percent and the richest 0.01 percent saw even larger gains.

 

By 2007, America was about as unequal as it had been on the eve of the Great Depression — and sure enough, just after hitting this milestone, we plunged into the worst slump since the Depression. This probably wasn’t a coincidence, although economists are still working on trying to understand the linkages between inequality and vulnerability to economic crisis.

I mostly agree that income inequality is a huge problem, although I believe that it is a symptom of a wider malaise. But income inequality is an important symptom of that wider malaise.

Here’s the key chart:

However it is just as important, perhaps more important to identify the causes of the income inequality.

I have my own pet theory:

The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

 

Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.

However the dominant explanation on the left is that this is down to the tax structure. I can’t falsify this theory, because the data supports it:

But why has the government chosen to tax corporations less, and payrolls more?

Who owns the government? Political donors — they finance the political system. Before one vote is cast candidates tailor their platforms to meet the criteria of donors. Who are political donors? Well, they are people with spare capital to expend in the name of getting politicians elected.

Here’s a side-by-side comparison of the presumptive 2012 Presidential nominees:

(Even bigger money flows through the Super PACs. A full breakdown of Super PAC donors can be found here; the same donor profile emerges).

So who are the biggest donors? Banks & large corporations: the very people who have benefited most from the post-1971 tidal wave of fiat credit creation.

So not only has an exorbitantly high proportion of new credit gone into corporate and financial profits, but the beneficiaries have used these fruits to buy out the political system, thus ensuring that they keep an even higher proportion of their incomes, while making up for this slump with greater borrowing, and greater taxation of payrolls.

The political left — epitomised, I suppose, by the Occupy movement — often call for “taking the money out of politics”. By this, they seem to mean holding elections that are not funded by private money, where all candidates are given the same resources. The reality of this, of course, is that such a measure would require a change in the Constitution, as privately-funded political advertising is protected speech under the First Amendment.

But let’s assume — just for the sake of argument — that a law “taking the money out of politics” could be enacted by simple majorities in the House, the Senate, and a Presidential signature (after all, President Obama’s legislative program has not maintained much respect for the original intent of the U.S. Constitution). Even under those implausible circumstances, why would Congress pass such a law when the entire political system is dominated by financial donors who want their money to very much be in politics? After all, it is not just for the sake of tax avoidance — government largesse produces lucrative contracts for contractors. The more money the government has to redistribute, the more incentive there is to spend money to get your people into office redistributing it, and government has more money to distribute — both in absolute terms, and as a percentage of GDP — than at any time since World War II.

The other (and simpler) proposed solution from the left is raising taxes on the rich, so that they pay a “fair share”. There are two problems with this. Firstly, that raising taxes during an economic depression is contractionary, and will (like the misguided and destructive European austerity programs, which of course include tax hikes) depress economic conditions further. And even if this was a good proposal (it isn’t), the political class will fiercely resist such proposals. Today, the Democratic-controlled Senate voted down the so-called Buffett Rule, that would have imposed a 30% floor on taxation for incomes over $250,000. (Buffett — as a top recipient of Federal Reserve bailout cash — would have no problem paying such a rate, unlike those far poorer than him who never took a penny of bailout money. Buffett would do well to spend less time in the bath thinking about Becky Quick, and more time using his capital to create jobs, to end this depression.)

Income inequality is a symptom of a grave problem: corporatism.

From Professors Ammous and Phelps:

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

 

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

 

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

A realistic program to  ”take the money out of politics” — in other words, to return America’s form of government to its original constitutional intent, like the program advocated by Ron Paul — would do a lot to decapitate corporate power and the military-industrial-financial-corporate complex, who are mostly dependent upon government largesse, favourable regulation, bailouts, and moral-hazard-creating fictions like limited liability — for their very existence. But that won’t fly with either the political kingmakers, or the welfare-loving hordes of  voters (and often for good reason — many of us have paid taxes toward welfare all our lives, and don’t want to lose out of something we have paid for).

The real conclusion of this is that the status quo is not sustainable. Corporatism and oligopoly is almost never sustainable, because of the dire social consequences. Today, almost 20% of young people are unemployed, wasting on the scrapheap. The median net worth of the young is lower than it was 30 years ago. The number of long-term unemployed has spiked to an all-time-high. Prison populations are at all time highs — and the highest in the world, both proportionally, and in absolute terms. America’s former industrial belt rusts; American manufacturing (what’s left of it) has often been reduced to re-assembling foreign components. America is heavily dependent on foreign oil. The American imperial machine is suffering from a lack of manpower. America’s strengths are melting away in a firestorm of misguided central planning, imperial waste, and corporate corruption. America’s social culture is fiery and combustible and individualistic. Young people denied opportunity by a broken system will do something about it. Occupy Wall Street and the 2012 Ron Paul Presidential campaigns were the first manifestations of the jilted generation dabbling in politics.

The political left misunderstands the causes of income inequality —confused by the belief that government can somehow challenge the corporate and financial power it created in the first place — and thus proposes politically unrealistic (non-) solutions, particularly campaign finance reform, and raising taxes on the rich and corporations. Yes, the left are well-intentioned. Yes, they identify many of the right problems.  But how can government effectively regulate or challenge the power of the financial sector, megabanks and large corporations, when government is almost invariably composed of the favourite sons of those organisations? How can anyone seriously expect a beneficiary of the oligopolies — whether it’s Obama, McCain, Romney, Bush, Gore, Kerry, or any of the establishment Washingtonian crowd — to not favour their donors, and their personal and familial interests? How can we not expect them to favour the system that they emerged through, and which favoured them?

In reality, the system of corporatism that created the income inequality will inevitably degenerate of its own accord. The only question is when…

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brewing's picture

crime of the century...

hardcleareye's picture

Read all about their schemes and adventuring
It's well worth a fee
So roll up and see
And they rape the universe
How they've gone from bad to worse
Who are these men of lust, greed, and glory?
Rip off the masks and let see.

iDealMeat's picture

Cut your consumption / consent in half..  Buy the shit you don't need on craigslist..  Stop participating and stop caring..

 

Fukushima Sam's picture

Get rid of funny money, you get rid of the epidemic of mal-investment.  It's that simple.

Troll Magnet's picture

hmm...and i thought our liberals were just hopelessly brainwashed. 

donsluck's picture

Compared to most of the world, the USA has no liberals. We are much closer to Syria in liberal/conservative bent then to say France. This is mostly due to our large population of radical Christian fundamentalists, similar to the radical Muslim fundamentalists of Syria.

GeorgeHayduke's picture

Your are quite correct, but most folks will not have a clue as to what you mean. Most conservatives in America have been brainwashed to believe anyone and anything less conservative than themselves is outright Marxist, Socialism, Communism, or any other "-ism" from a list of antiquated, outdated ideals...much like conservatism. But hey, keep swinging, there are a few around here who might catch a clue.

Buckaroo Banzai's picture

Looks like you took a wrong turn at HuffPo, douchebag! Go back from whence you came.

Don't let the door hit you on the ass on the way out.

GeorgeHayduke's picture

See...brainwashed morons run rampant here.

I've rarely read HuffPo so go back to your bag of low-IQ stereotypes and pull out another one genius.

Buckaroo Banzai's picture

You haven't read HuffPo??? Well for pete's sake, man, get started! You'll be a lot happier over there, trust me. Chock full of libtards!

GeorgeHayduke's picture

Naw, It's much more fun over here riling up the conned-servitards. All you have to do is present facts, logic or a new idea and they go apeshit. They are quite happy in their mental rut, and they don't tolerate anything outside of that rut too well.

StychoKiller's picture

How many fish do you find in the treetops?

Harbanger's picture

This Article headline is a magnet for Lib Trolls.

JW n FL's picture

 

 

for ALL! of you that have been successfully programmed to believe the POOR! of America are to Blame!

for ALL! of you ignoring the Fact that Wall Street has been GIVEN! At LEAST 4 Times MORE! Money that ALL! of the military in the United States!! (that was waging 2 wars and multiple little fronts).

For ALL! of you that believe starving the most well armed populace in the World improves your quality of life and survivability!

This movie for you Dumb Fuck(s)!

http://www.youtube.com/watch?v=fMkrJOOTjj4&feature=related

 

The people who give Washington DC the most Lobby Dollars!

Get the Most FREE! Money from Washington DC in the form of the Working Classes Tax Dollars Paid into the System!

 

The Poor! are NOT FUCKING YOU!!

You being Ignorant! and staying Ignorant!! is what is FUCKING THE COUNTRY!!

YOU! wanna be thinkers who refuse to the numerical facts and follow your feelings!

YOU!! are to Blame! EVEN MORE SO THAN THE POOR!! who produce NOTHING!!

Because Your! CONTINUING IGNORANCE!! Enables! the Government to FUCK EVERYONE OVER!!

 

boiltherich's picture

In 2011 more than one in four Americans went without any kind of healthcare coverage at all.  When the average Cuban peasant has better care than hard working Americans there is something DESPERATELY wrong with our nation.  Now we are fast approaching a quarter of the nation on food stamps, and over 20% un or under employed.  Even as their are millions with untaxed dynastic wealth that do not constitute income and thus shelter trillions from the productive use of the economy. 

I understand income inequality all too well, it is the right that does not understand what is going to be done about it, here is a hint, a very large kettle and 55-65 gallons of very hot oil.  But to be fair, and it IS fair, what we need is a national property tax and personal luxury tax, lower the income tax to 12% on all income over the first 40k of income, delete ALL deductions and exemptions, and return the estate tax to 50% on everything over 2 million except for family owned productive land such as farms or factories, or other business related land and plant/equipment.  Call financial gains what they are, INCOME and tax accordingly. 

We are a lot closer to an uprising of the lower half of the population than any of you would ever believe and I for one wonder why they have been so patient.

midtowng's picture

Most conservatives in America don't know the definition of the words such as: marxism, communism, socialism, fascism, feminism, muslim, etc.

   They lump them all together as if they were equal. What they are really saying is "these words scare me".

   If they want to be scared of those words that is their right. The crime is that they don't know what they mean and they aren't aware of the fact that they don't know what they mean. What's more, they don't care to learn what those words mean.

GeorgeHayduke's picture

You are correct. And look at the posts above to see how pissed they get when someone points that out to them.

Harbanger's picture

They don't even know the definition of condescending liberal.

GeorgeHayduke's picture

Just because a person does not consider themselves a conservative, it does not mean they are a liberal. Black and white thinking...yet another flaw of the conservative mindset.

Harbanger's picture

Only a condescending lib would make the statement he made.  So what label box do you put yourself in?  Independent free thinker,  who doesn't see the challenge to individual liberty from the left.  And don't dare say you're a libertarian. 

GeorgeHayduke's picture

I would never call myself a Libertarian. That whole flawed concept is pure condescention!

I'm one of those people who are in the middle. That makes me a liberal to conservatives.

I see challenges to freedom from both the left and right. Wasn't it self-proclaimed conservative Republicans who sponsored the NDAA? Wasn't Bush a big proponent of the Patriot Act?

Try looking both directions when crossing the street, not just left.

Harbanger's picture

NDAA, Progressive Repubs.and all the Democrats backed it.  Obama signed it, so there isn't much outrage from the left.  Bush is anything but a conservative, he trashed the Constitution as much as Obama.  It's 2 flavors of more Govt.  control and less individual freedom, but if there's hope to change any one side, it's with the Repubs.

GeorgeHayduke's picture

You claim Bush wasn't a conservative. He would claim otherwise, as would many who backed him. There seems to be a big disconnect between conservative idealism and reality.

Ar-Pharazôn's picture

left or right doesn't matter........ IT'S THE SAME BULLSHIT OVER AND OVER AND OVER!!!!

NidStyles's picture

Most Christians are Progressives, they just don't understand what Progressivism actually is.

Harbanger's picture

If most Christians are progressives, why are progressives so afraid of Christians?

StychoKiller's picture

Progressives worship the State.

UGrev's picture

If you are not a constitutionalist conservative or hold the ideology that the blue print for this country, UNINTERPRETED, is the Constitution.. then you are on the left. To which degree is irrelevant as you are not on "the proper side".  

We are not a Democracy, much to your dismay. Please deal with this fact. 

Continuing to portray the many leftist ideologies in a manner which attempts to diminish their impact, or rather the impact the "words" have when uttered will fall on deaf ears here. We are not deaf, dumb or blind.  It's plainly obvious that people to the left of that line I described above have no desire to seek freedom, or balance. They just want to be part of the control hierarchy. 

Well.. to that I say.. EACH SHIT MOTHER FUCKER!! and come and try it.. 

WTFx10's picture

Fuckin religion just another control mechanism. Invented to play off the fear of death. Fuckin brain washed zombies believe everything that was written 2000+ fuckin years ago. But you scream the truth into there faces about the shit that our leaders lie about constantly and they believe the fuckin fear mongers.

Fear is the only thing to be afraid of.

Troll Magnet's picture

it'd be funny if 1,000 years from now the sheeps are worshipping harry potter.

Harbanger's picture

A 1,000 years from now? That's funny.

smb12321's picture

How will withdrawl from the economy help small business?   We should support those local businesses that are the lifeline of the nation.   And why stop caring?  Jeez

Pool Shark's picture

 

 

Somebody explain to me how the University of California; a taxpayer-funded entity, can give a single penny to Obama's campaign, let alone $1,648,685.00!!!

donsluck's picture

The Supreme Court, that's how. How long have you hated America?

Buckaroo Banzai's picture

For the same reason that government employees were allowed to unionize. To better loot the taxpayer and destroy the country.

mkhs's picture

 

Pool Shark

 

How can a bankrupt postal service afford to sponser a european bicycle team, the Olympics, whatever?

blunderdog's picture

It's called "freedom of speech."  Not sure I believe money should be treated as speech, but oh well, I don't make the laws.

If you hate the idea, you might want to check out North Korea.  I hear they have no use for such quaint concepts there.

NidStyles's picture

You aren't too bright, are you?

blunderdog's picture

I dunno, you think maybe I read the decision wrong?  What's your interpretation of the Citizens' United precedent?

smb12321's picture

Using someone else's money (the taxpayers" is not "freedom of speech."   Particularly when government monopolies advertise for folks to use their service.

blunderdog's picture

Well if you're the guy who gets to decide what is and isn't "freedom of speech," what's that old piece of paper for?  And those 9 assholes in DC?

If you lay out all the details, and I'm in agreement, I'll volunteer my time in the campaign to make you king.

GeorgeHayduke's picture

Can someone explain to me how contractual "defense" industries that have government contracts can donate to politicians? Seems like the same thing to me.

blunderdog's picture

It's called "freedom of speech."  Once the decision was made that we could treat money as equivalent to speech, it was all downhill.

Boris Alatovkrap's picture

But that's not right - oh no, what's the story?

A Nanny Moose's picture

 

...But there's you, and there's me.

Thomas's picture

The financialization at the end of empire is all described in Kevin Phillips's "American Theocracy".

duo's picture

I just don't see how the financial "industry" can peacefully and voluntarily return to the 10% of the economy it should be, from the 40% that it is now.

Harbanger's picture

I don't see how the financial "industry" could have remained at 40% if the Banks weren't bailed out by Government.