Part 1

Wealth inequality among citizens within a capitalist economy is unavoidable, but even though the rules of capitalism say it is unavoidable, stark inequality should not be required for healthy capitalism, and some economists even believe that this inequality brings more risks to the health of capitalism than benefits. Throughout history, capitalism has wielded a double-edged sword that has created prosperity for some while destroying the liberty of others. The ongoing battle between capital and labor provides modern American society with a catalyst for a debate that has waged for nearly thirty years now, beginning in the 1980s with the introduction of a neoliberal economic policy and continuing into the 2000s with the out of control growth of the financials market. Because of these changes, the wealth accumulated by the top 1% of Americans has grown exponentially, while those at the bottom have heard not only the sound of the vacuum cleaner sucking wealth from their already meager portfolios, but also the sound of “sorry, we are not hiring!” The backlash to this situation has included movements like Occupy Wall Street and the Arab Spring phenomenon, proving that the problem of wealth inequality has not been restricted to the U.S. but has instead, through globalized markets, affected the entire world.

David Harvey, a noted Professor of Geography and Anthropology in his book The Enigma of Capital: and the Crises of Capitalism, reminds the reader that capitalism requires a minimum 3% profit rate to continue its competitive edge, which leads to economic prosperity for the company and its workers. But during the thirty year period of neoliberalism, most of those profits ended up in the pockets and speculative stock portfolios of the wealthiest 1% rather than going back into the business that would continue to ensure workers’ wages remained viable in the growing economy. This flattening of worker wages, tied to an increasing rate of production and easy lending practices, left many workers in the position of using credit to maintain their American lifestyle – a lifestyle that was sold to them as the ‘American Dream’. As speculative stock and the housing markets ballooned out of control, it was only a matter of time before the bubble popped.

This is not the first time the U.S has experienced this kind of inequality of wealth. History shows that the same conditions existed prior to at least one past economic event of this nature – the Great Depression. The extreme capitalist drive beginning in the late 1800s brought an agrarian America into the throws of industrialism – pulling farmers off their lands and into large cities with the promise of jobs and the prosperity it promises. But after 1900, as industry grew, more workers were drawn into large cities, and the growing excess of labor started the downward trend of prosperity for the common man. Wages began to flatten even as company profits grew rapidly, working conditions began to deteriorate further, with many workers losing their lives due to unsafe working conditions, and the quality of life for those defined as ‘labor’ dropped dramatically over a few decades while those at the top gained an even more opulent lifestyle. By 1928, the average income for all Americans increased by $421, with all of that gain going to the top 10% while the bottom 90% actually saw their wages decrease (Figure 1).

Figure1

 Economic Policy Institute

Because the top 10% within American society had seen their wealth increase so rapidly during this time period, they became intoxicated by the possibility of gaining more wealth and began playing speculatively, building up the stock market bubble only to see it deflate rapidly in late October 1929. In the first decade after this crash, average incomes in the U.S. fell by $1,869 – with most of that loss absorbed by the top 10% (Figure 2).

Figure 2
Economic Policy Institute

During the Great Depression that resulted from this crash, Marriner Eccles became chairman of Federal Reserve (the building that houses the Federal Reserve today bears his name).  Eccles had a long history as a financial capitalist, but began to see that recovering from this economic downturn was not going to be precipitated by industry or financial institutions. He realized that it would be necessary for government to step in and neutralize the excess of labor by increasing demand for product. The only way he saw this happening was through government projects that would put men to work building an infrastructure and buying produced goods to build that infrastructure. 

 

 During his time at the Fed, Eccles encouraged Franklyn Delano Roosevelt (FDR) to increase federal spending with a stimulus to increase demand for goods, and therefore increase the demand for labor within industry. His ideas of government intervention were pre-Keynesian, and he felt monetary policy (the role of the Federal Reserve) should be second to U.S. Treasury needs, which together serve to strengthen the economy. He also saw the reality that when workers’ wages are suppressed, overall demand for goods go down because workers are no longer able to afford the goods they produce, and Eccles believed it was the purchasing power of the common man that ensured a fair distribution of wealth;

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth."

Eccles and FDR met with some very hard opposition during this time, mainly from the wealthiest Americans, but many Republican legislators opposed their plans as well. The push from them was to balance the budget, a goal that is incongruent with the deficits commonly created with stimulus spending.  Joseph Stiglitz, in his book The Price of Inequality: How Today’s Divided Society Endangers Our Future - argues that when executed in the right manner, this kind of deficit spending can stimulate economic growth and lower government debt due to the increased tax revenues brought on by the economic growth. In Stiglitz’ way of thinking, the best way to do that is to spend stimulus money on education, infrastructure and technology, all things that will spur further economic growth. After the initial shock, and stimulus spending began, American incomes began to climb somewhat, but pressure from Republicans in Congress to balance the budget brought tax increases that served only to stall the progress of economic growth and industry reacted to the tax increases by laying workers off – therefore reducing demand and stalling the economic growth. During this period America saw the creation of the Works Progress Administration (WPA), which hired millions of unemployed workers to build highways and rural utilities, the Wagner & Fair Labor Standards Acts that promoted labor unions and prevented exploitation of workers by setting maximum work hours and minimum wage laws, and also the Social Security Act which provided people with an old age pension when none was available from their employer.

Over the next three decades, America prospered economically, partially due to the changes of FDR’s New Deal, but also from the effects of World War II.

But during the 1970s, wages started to stagnate and inflation began to creep upward due to what some say was a bloated government entitlement system. Because of the Vietnam War and Watergate, public sentiment began to sour on big government, and conservatives began to seek out an alternative to Keynesian economic policy. They found what they were looking for in the Chicago School of Economics - Milton Friedman’s neoliberal economic platform – a platform built on the principles of small government, deregulation, low taxation, and the privatization of public goods and services. This  platform quickly became the basis of economic change in America, Great Britain, Mexico and Chile. One by one these countries began to see problems, the main issue being a failure of the proposed ‘trickle down’ in wealth, which instead created a growing inequality. Rather than wealth trickling down, it gradually moved upward to those who were already considered the wealthiest (Figure 3). 

Figure 3
 Economic Policy Institute

Even those who were content with their way of life, and had no aspirations to climb the ladder of affluence were not safe from the ravages of neoliberal economic policy. Gar Alperovitz, in America Beyond Capitalism, explores the gradual destruction of labor unions during the period between 1980 and 2008, and sees this as a primary catalyst to the dis-empowerment workers experience today. The author also sees the U.S. economy as too large to truly empower the individual to gain a foothold economically, and that smaller units of government are more conducive to true economic stability.

With neoliberal economics, people had been sold on the myth that those who work hard would be rewarded with higher incomes, greater wealth and a brighter future. But in reality, most would never have the opportunity to achieve an economic status much above where they currently were. The notion that 'gaining an education and working hard would ensure the average person a place in the upper classes' began to erode as citizens lost faith in the institutions in which they had placed their trust - and the people who controlled these institutions. The American meritocratic system was failing. The elites this system produced were, according to Chris Hayes, author of Twilight of the Elites: America Beyond Meritocracy, becoming more of an oligarchy - distancing themselves from mainstream America and frequently guilty of 'pulling the ladder of opportunity up behind themselves' and reducing the mobility that was promised by those proposing a more neoliberal approach to economics. He also investigates the idea that as the elites who controlled industry grew more powerful, they used their money to influence the way government operates in relation to business. Regulatory capture became the mainstay in government, further eroding worker's rights and the public's view of government. 

Yet even with this trend of decreasing wealth for 90% of wage earners, many still believe that inequality is not as bad as they are told (Figure 4). Many also feel that a graduated tax system that taxes the wealthy at a greater percentage than they themselves are taxed is unfair, and that entitlements for those without employment are counterproductive to society by encouraging people to avoid work. Peter Edelman explores the causes and our conceptions of poverty in his book,  So Rich, So Poor: Why It's So Hard to End Poverty in America, and finds that the lack of a living wage has put many Americans in the predicament of working full time and still living in poverty.  He also discusses the roots of poverty alleviation attempts and how Americans view governmental support of those less fortunate.

Figure 4
Connect the DotsUSA 

Marriner Eccles, surely one of the wealthy elite of his time, knew that it was unlikely that the average citizen could ever climb that ladder without a great deal of luck and some help from the government, yet the average citizen today truly believes that the government is too large and only wants to control our destiny. But with the kind of growing inequality we are seeing in America, one wonders why so many people still believe that they should support political groups whose goals are counter to the their own, and the public's, best interest. Some social scientists believe that the rhetoric we have been subjected to for thirty years has been engrained so deeply in our social psyche - "if we work hard, we too can become part of the economic elite of this country, so don't tax the rich because you may be one someday"- that it will take too much effort to change our society. But younger citizens, especially those involved in the Occupy Wall Street Movement, are too young to have been heavily affected by this rhetoric, and thus are the most likely people to find a solution out of this situation.  

As for solutions, it is likely that these young people, as they age and become stronger within the socio-political arena, will surely decide on a solution, but for now, some economic thinkers prefer to stick with the old Chicago School of thought while others look to the need for a modern approach to solving this crisis. Alperovitz believes in the value of a Pluralistic Commonwealth, where all citizens share in the wealth of corporations through public stock ownership and true worker ownership of business, while Stiglitz notes the value of capitalism, but acknowledges the need for government intervention in order to protect citizens from wealth inequality and the social problems it brings. Edelman and Harvey both acknowledge that the only way a capitalist society can be maintained is if workers are ensured a living wage - one that will allow them to maintain a decent standard of living, which tends to go against the nature of capitalism in general. Hayes tends to see the problem as a crisis of authority, and only when the tides of leadership have changed, either over time or by force, can we find a solution.

 Note:
The United Nations released a guideline in 2010 that outlines the role governments should play in enforcing corporate responsibility, so it seems that the world in general is looking to government for the solution - all except that is - the U.S.  

References

Alperovitz, Gar. America Beyond Capitalism: Reclaiming our Wealth, Our Liberty, and Our Democracy. Takohma Park, MD: Democracy Collaborative, 2011.

Eccles, Marriner S.; Hyman, Sydney (ed.), Beckoning Frontiers: Public and Personal Recollections, New York: Alfred A. Knopf, 1951.

Edelman, Peter. So Rich, So Poor: Why It's So Hard to End Poverty in America. New York: The New Press, 2012.  

Harvey, David.  The Enigma of Capital: and the Crises of Capitalism. New York: Oxford University Press, 2010.

Hayes, Chris. Twilight of the Elites: America After Meritocracy. New York: Crown, 2012.

Peters, Anna; Daniela Rob. The Role of Governments in Promoting CorporateResponsibility and Private Sector Engagement in Development. Bartelsmann Stiftung. UN Global Compact, 2010.

Stiglitz, Joseph.  The Price of Inequality: How Today’s Divided Society Endangers Our Future. New York: Norton, 2012.