Some self-styled “pro-growth centrists” in the Democratic Party are worried the president is going too far in emphasizing widening inequality. They “wish the administration’s focus was on growth over fairness,” says the highly respected National Journal.
They’re wrong. Fairness isn’t inconsistent with growth. It’s essential to it. The only way the economy can grow and create more jobs is if prosperity is more widely shared.
For years, conservative “supply-side” economists have told America not to be worried about widening inequality. They’ve said tax cuts for corporations and the rich will lead to more economic growth and jobs.
It’s been a cruel hoax. Nothing has trickled down. The Bush tax cuts of 2001 and 2003 ― the lion’s share of whose benefits went to the wealthy ― ushered in an era of slow growth, fewer jobs, declining wages and mammoth budget deficits.
You want to know the real reason the economy crashed in 2008 and why the recovery has been so anemic? Because so much of the nation’s income and wealth have become concentrated at the top that America’s vast middle class doesn’t have enough purchasing power to keep the economy going.
This was masked when the middle class borrowed billions of dollars against the rising values of their homes. But since the housing and debt bubbles burst, borrowing on that scale is no longer an option.
The richest 1 percent of Americans save about half their incomes, while most of the rest of us save between 6 percent and 10 percent. Being rich means you already have most of what you want and need. Each additional acquisition yields a sharply declining level of satisfaction: That second yacht isn’t nearly as exciting as was the first.
So when the top 1 percent rakes in more than 20 percent of total income ― twice the share it had 30 years ago ― there’s insufficient demand for all the goods and services the economy is capable of producing at or near full employment. Without enough demand, the economy can’t grow or generate nearly enough jobs.
Many of these same “pro-growth Democrats” wish the president would stop attacking Bain Capital and private equity.
I think the president should go even further and take on all of Wall Street.
Private equity along with the rest of the financial sector is a big part of the problem. It’s responsible for much of the concentration of income and wealth at the very top, and the distress still felt in the rest of the economy after the Street nearly melted down in 2008.
The financial sector has turned a significant part of the American economy into a giant casino involving large bets with other people’s money. When the bets go well, the rich owners of the casino (Wall Street executives, traders, hedge-fund managers, private-equity managers) become even richer. When the bets go sour, the rest of us bear the costs.
The casino requires continuous subsidies from ordinary taxpayers. Some are built into the tax code. One is the preference of debt over equity (interest on debt is tax deductible), which rewards Wall Street banks like JPMorgan for risky lending and rewards private-equity firms like Bain Capital for piling debt on the firms it buys.
Another is the “carried interest” rule that, absurdly, allows private-equity managers (like Mitt Romney) to treat their income as capital gains, taxed at 15 percent, even when they don’t risk their own money on the deals.
A third is the invisible government guarantee that if the biggest banks get into trouble, taxpayers will bail them out. This reduces the big banks’ cost of capital relative to other banks and fuels even more risky lending.
How does the financial sector maintain these tax subsidies and hidden guarantees while eluding effective regulation? Follow the money. Its wealth gives it huge political clout.
None of this is fair. It’s also bad for economic growth and jobs, as we’ve so painfully witnessed.
The president should be talking about fairness AND growth and jobs, explaining why we can’t have the latter without the former, and why casino capitalism jeopardizes both.
By Robert B. Reich
Robert B. Reich, chancellor’s professor of public policy at the University of California and former U.S. secretary of labor, is the author of the newly released “Beyond Outrage: What has gone wrong with our economy and our democracy, and how to fix it,” a Knopf e-book original. ― Ed.
(Tribune Media Services)