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Norton: The Great Inequality :: Monthly Review

Norton: The Great Inequality :: Monthly Review
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Michael D. Yates (mikedjyates [at] msn.com) is associate editor of Monthly Review and editorial director of Monthly Review Press. He is the author of Why Unions Matter and Cheap Motels and a Hot Plate, and the editor of Wisconsin Uprising: Labor Fights Back, all published by Monthly Review Press.
This essay is, in part, a discussion of Inequality and Power: The Economics of Class by Eric A. Schutz (London: Routledge, 2011).

In the early 1980s, I began telling my students that growing inequality of income and wealth would become the dominant political issue of the future. I did not think that the future meant thirty years, but better late than never. The Occupy Wall Street (OWS) uprising has put inequality squarely on the political agenda, with the brilliant slogan, “We are the 99%.” While the “99%” includes many rich persons, the focus on the “1%” at the top of the economic pyramid serves to shine a light on those who rule both the economy and the politics of the United States. The 1 percent is a diverse group, but among them, especially at the top, are the men and (a few) women who own controlling interests in our largest businesses, including the financial corporations whose actions precipitated the Great Recession, which officially began in December 2007 and ended in June 2009, and has since morphed into what looks like a long period of slow growth best termed stagnation. They are also the people whose campaign contributions and prominent positions in Congress, as advisors to the president, and on the Supreme Court have placed the government firmly on the side of the rich.

Given the prominence that OWS has given to inequality, it is useful to know what causes it.1 We cannot just look at the facts, dramatic as they might be, and say that something is wrong or that all we need is to take money from the rich and transfer it to the poor. What is needed is a theory of distribution, because this can give us guidance on what political strategy might best confront the underlying forces that generate inequality. Fortunately, economist Eric Schutz, in his timely book Inequality and Power: The Economics of Class provides us with such a theory. His argument is simple and straightforward. Those who are rich have advantages that keep them rich, while the poor suffer disadvantages that keep them poor. However, there is a relationship between the two groups, one in which the rich have power over the poor, and this relationship is built into the nature of a capitalist economy and continuously reproduced by it. The power of the dominant group reinforces the existing set of social/property relationships, which serves to further enhance the power of the dominant group relative to all others. It turns out, no surprise to readers of Monthly Review, that the rich are the capitalists, and the poor are the workers (what differentiates the book, however, from most radical works is that Schutz provides concrete examples and extremely clear exposition to give chapter and verse to Marxian, and particularly Gramscian, concepts). All sorts of complications must be considered, but these work in general to strengthen the basic power inequality. Therefore, attacking inequality will require nothing less than attacking capitalism itself. There are a host of pragmatic measures that can reduce inequality, but only those that address the system-generated power of the capitalists can strike down the structures that give rise to it in the first place.

Schutz’s book does not contain much data, just the bare bones. So let us preface our interrogation of his theoretical analysis with a more detailed look at the facts. They are startling. There are many kinds of inequality, but the two most obviously important ones are those of income and wealth. Incomes—normally in a money form but also “in kind,” as when part of a worker’s pay takes the form of room and board—are flows of cash (or “kind”) that go to persons over some period of time, such as a wage per hour or a yearly dividend. Incomes are always unevenly divided in a capitalist economy, and in the United States they are more unequal than in every other rich capitalist country. Since 1980, the year Ronald Reagan became president and helped engineer a savage attack on the working class, income inequality has risen considerably.

Households are physical spaces identified by the Census where people live, excluding institutional spaces like prison cells. Those in a household need not be related. In 2010, according to U.S. Census data, the richest 20 percent of all households received 50.2 percent of total household income. The poorest 20 percent got 3.3 percent. A mere three decades ago, in 1980, at the outset of the so-called Reagan Revolution, these shares were 44.1 and 4.2 percent, respectively. Those in the least- affluent households thus lost 21.4 percent of their income share, while the most affluent saw theirs rise by 13.8 percent. The next two poorest quintiles also lost in their shares of the economic pie, while the next richest quintile gained, but not by nearly as much as the top quintile. The Census breaks out the richest 5 percent of households from the top quintile. The income share of the richest 5 percent rose from 16.5 percent in 1980 to 21.3 percent in 2010, a gain of 29.1 percent. In 2010, the share of the top 5 percent was greater than that of the bottom 50 percent of households.

Economists often use a single statistic, the Gini Coefficient, to summarize increases or decreases in inequality or to compare inequality among countries.2 The Gini is a measure of how far away the actual distribution of income is from one of perfect equality, which would be a distribution in which each income quintile received exactly 20 percent of the total household income pie. In this case, the Gini turns out to equal zero. If, on the other hand, one household got all the income, the distribution would be perfectly unequal, and the Gini equals one. The greater the inequality, the closer is the Gini to one; the more equal, the closer it is to zero. The Gini Coefficient in the United States has been rising for nearly four decades. In 2010, the U.S. Gini was, according to Census calculations, equal to .469. In 1980, it was .403.3 Most wealthy capitalist nations have coefficients considerably lower than that of the United States. An article on The Atlantic website puts U.S. inequality starkly: “Income inequality is more severe in the United States than it is in nearly all of West Africa, North Africa, Europe, and Asia. We’re on par with some of the world’s most troubled countries, and not far from the perpetual conflict zones of Latin America and Sub-Saharan Africa.”4 Recently, economic historians Walter Schiedel and Steven Friesen estimated that the Gini coefficient in the Roman Empire at its peak population around 150 C.E. was slightly lower than that of the contemporary United States.5

The Census data are based upon sample surveys of households, and these use a definition of income that does not include capital gains (an example would be the sale of a share of stock at a higher price than that at which it was purchased), which go overwhelmingly to high-income households. Therefore, the share of the top quintile is lower than it would be if capital gains income was included. In addition, the Census Bureau has found that non-wage incomes, such as rent, dividends, interest, and profits of unincorporated businesses, are underreported in the surveys, and this again lowers the apparent share of the most well-off households.

Economists William Piketty and Emanuel Saiz have used federal income tax data, with their broader definition of income and truer reporting, to provide a more detailed and refined picture of the U.S. income distribution. Their findings show that the income share of the richest 1 percent of individuals (note that individual and household incomes are not necessarily the same) is now at its highest level since just before the Great Depression, standing at 23.5 percent in 2007. This share fell some during the Great Recession, but it is reasonably certain that this decline has since been reversed. What is more, it has been rising sharply since 1980, when it was about 10 percent. If we take the total gain in household income between 1979 and 2007, 60 percent of it went to the richest 1 percent of individuals, while just 8.6 percent accrued to the poorest 90 percent. An incredible 36 percent found its way into the pockets of the richest 0.1 percent (one-one thousandth of all individuals).6

Amazingly, there is stark income inequality even at the top of the income distribution. In the United States in 2007, it is estimated that the five best-paid hedge-fund managers “earned” more than all of the CEOs of the Fortune 500 corporations combined. The income of just the top three hedge-fund managers (James Simon, John Paulson, and George Soros) taken together was $9 billion dollars in 2007.7

Perhaps a story and some striking facts will serve to sum up the grotesque nature of our skyrocketing income inequality. When I was a boy, I was amazed to learn in my encyclopedia how large a sum was one billion dollars. If a person spent $10,000 a day (my encyclopedia used $1,000 a day, but that was a long time ago), it would take 100,000 days to spend a billion dollars, just under 274 years. In 2009, Pittsburgh hedge fund manager, David Tepper, made four billion dollars.8 This income, spent at a rate of $10,000 a day and exclusive of any interest, would last him and his heirs 1,096 years! If we were to suppose that Mr. Tepper worked 2,000 hours in 2009 (fifty weeks at forty hours per week), he took in $2,000,000 per hour and $30,000 a minute. This means that he would have paid his social security tax for the entire year in about four minutes of his first workday. Today there are many individuals who, while not as rich as Tepper, make millions of dollars in a single year, enough money to secure them against any calamity.

Others are not so fortunate. In 2010, more than 7 million people had incomes less than 50 percent of the official poverty level of income, an amount equal to $11,245, which in hourly terms (2,000 hours of work per year) is $5.62. At this rate, it would take someone nearly three years to earn what Tepper got each minute. About one-quarter of all jobs in the United States pay an hourly wage rate that would not support a family of four at the official poverty level of income.

If incomes are unequal and becoming more so, the same can be said for a more important, though related, statistic—wealth. Simply put, wealth, for our purposes, is the money value of what we own at a given point in time. It includes houses, cars, computers, cash, stocks, bonds— anything convertible into cash. If we subtract what we owe from what we own, we get net worth. Wealth is important for many reasons. Some types of wealth, such as stocks and bonds, generate income, such as dividends, interest, and capital gains. A good deal of the income of people like David Tepper is saved and converted into wealth, which in turn, generates income, and so on, indefinitely. If incomes are unevenly divided, and if rich households save a bigger fraction of their income than do poor ones, wealth will get steadily more unevenly divided, even if the income distribution remains stable. Wealthy individuals with a lot less than Tepper can live, and live well, without ever working, simply by spending some of the income that derives from their wealth. Some wealth represents possession of the means of production, such as factories, land, banks, and the like, and such ownership is obviously important in terms of economic power. Even more mundane forms of wealth such as automobiles and houses can provide security and aid us in earning our incomes. Wealth can be used as collateral for loans; the more of it we have, the more we can borrow and the more favorable the terms of the loans. Wealth can be inherited and thus passed down, with its advantages intact, to future generations. Our capacities to work and earn wages, on the other hand, die with us.

Sylvia Allegretto of the Economic Policy Institute has done an extended analysis of the current U.S. wealth distribution.9 In her article, she provides charts and tables that show that in 2009, the top 1 percent of households owned 35.6 percent of net wealth (net worth) and a whopping 42.4 percent of net financial assets (all financial instruments such as stocks, bonds, bank accounts, and all the exotic instruments that helped trigger the Great Recession, minus non-mortgage debt). The bottom 90 percent owned 25 percent of net wealth and 17.3 percent of net financial wealth. The richest 1 percent had 33.1 percent of net worth in 1983 (the chart does not show the numbers for 1980), an increase of 7.5 percent; if we extend our view to the wealthiest 5 percent, we see a rise in share from 58.1 to 63.5 percent, an increase of 9.3 percent. The bottom four-fifths of households suffered a decline in their share of net worth, from 18.7 to 12.8 percent, a los

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