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Posted by on Jan 27, 2016 in 2012 Elections, 2014 Elections, 2016 Elections, Economy, Finance, Government, Politics, Society | 14 comments

Democracy, Capitalism, and Inequality

shutterstock_128345045Inequality is inherent in the capitalist system, where those who are smarter or were born into the right family or work harder or take more risks can accumulate wealth and enjoy its benefits. This seems fair and most people accept that individuals who have greater responsibility or perform at a higher level or are more valuable to society should receive more compensation than their peers. Yet there are limits to how much inequality is reasonable in any society. This is particularly so if some of the acquisition of wealth is perceived to have been accomplished in an inappropriate or immoral fashion. Included in this are dishonest practices, bending or breaking the rules, or even inheriting riches because of parental achievement rather than one’s own efforts. Some of the most affluent may also use their money to buy political power, corrupting elected officials.

During Colonial times and the first half of the nineteenth century, the gap between the wealthy (mostly large landowners and successful merchants) and the average citizen (mainly farmers, tradesmen, and hired laborers) was much smaller than is true today. The industrial revolution and growth of the railroads were responsible for a widening gulf between the rich and middle class during the era of the robber barons in the Gilded Age (late 19th century) and again in the Roaring Twenties. The Depression along with the estate tax and progressive income tax reduced the disparity in wealth between the affluent and the working classes. Over the last quarter-century however, with marginal tax rates lowered, the disparity has again been increasing, the magnitude of difference greater than it has ever been.

Financial rewards from the performance of the American economy have not been dispersed through every level of society. The most affluent have benefited excessively, while little in the way of higher earnings has filtered down to the middle- and lower-income strata. In fact, these groups are falling further behind as real wages have stagnated, and they have little disposable income. Interestingly, Americans have no concept of the degree of inequality in their society, believing there is a much more equitable distribution of wealth than there actually is and preferring that wealth be spread more evenly still.

Capitalism as it is perceived today really did not begin until the Industrial Revolution in Great Britain in the late 18th and 19th centuries, eventually becoming a world-wide phenomenon. Though capitalism was able to spread its roots in any soil, it found democratic states to be exceedingly fertile for a number of reasons. Freedom and free markets were at the top of the list, followed by the rule of law, social harmony, and the respect for private property. Democracy also applauded the individual’s pursuit of his or her own goals, including economic self-interest and the accumulation of wealth.

The continued growth of inequality, however, is one of democracy’s most significant flaws, accelerating since the recovery from the recession of 2007-2008. To some degree, uninformed citizens voting against their own interests have played a role, electing officials who promoted government policies favoring the rich. Globalization and loss of well-paying manufacturing jobs has also contributed greatly. As noted in the Harvard Business Review, the huge rise in economic inequality has been the result of technological changes and political decisions including financial market deregulation, free trade, tax code changes, and various other policy choices. Though businesspeople pushed for the political changes to heighten economic growth, it appears that the politicians went too far, as too much inequality is not good for business. However, businesspeople now are reluctant to support policies that could reverse the trend to more inequality, as that would call into question some of their profound beliefs.

Another factor often overlooked in burgeoning inequality has been assortive mating- the tendency for successful men and women to marry one another. Lawyers are more likely to marry other lawyers or other high-income professionals, as are physicians, business executives, and so forth. Thus, these families earn more, and greater wealth is concentrated in their hands.

Currently, a small number of individuals control inordinate amounts of the wealth in most democracies. In the United States, the ultra-rich 0.01% of the populace was reported to have 11.1% of the nation’s wealth in 2014, with the top 1% having 39.8%, an astounding $32.6 trillion. These statistics do not consider assets held in offshore accounts which would skew the percentages even further. The upper 1 percent earns nearly a quarter of the nation’s income annually.

According to Forbes, the richest four hundred Americans alone were worth an unbelievable $2.29 trillion in 2013, increased by $270 billion from the previous year, while the middle class has stagnated financially and poverty appears to be intractable. Income inequality in the U.S. is greater than in any other nation in the developed world by a large percentage. Economist and Nobel Prize winner Joseph Stiglitz has said that “America’s inequality distorts our society in every conceivable way.”

And wealth creates wealth. The more disposable income and excess capital an individual possesses that is not required for living expenses, the more extra money he or she can accrue through investments. Then, that additional surplus can be reinvested along with the original sums, creating greater and greater wealth for that person and his or her family. This is not necessarily bad for society, creating more businesses, jobs and so forth. But reasonable limits must somehow be set as wealth can be transferred from generation to generation, continuing to grow with each cycle, assuming the heirs are reasonably intelligent and attentive. To a certain degree in democracies, many of the ultra-rich have achieved the same status the nobility were accorded in feudal societies, living in castles with servants and bodyguards, their every desire gratified.

Thomas Piketty in his book Capital in the 21st Century noted- “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems quite likely to do again in the 21st, capitalism generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are nevertheless ways democracy can regain control over capitalism and insure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.”

Thus, one of the major objectives of democratic societies must be discovering how to lessen the concentration of wealth in only a few hands with continuous generational transfer, and achieving this end in a rational fashion. Whether it will happen remains an open question.

Resurrecting Democracy

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  • There are some ways to help with the income and wealth disparity (note that those are, in fact, two different things). Let’s look at each:

    Income disparity: most of the obscene incomes are generated through either of: entertainment (including sports), endorsements (advertising, etc.), and corporate salary and dividends. Of these, most people would not insist that the entertainers and athletes should not receive such income, as they are contributing at that time for sales of goods and services (including tickets). As for corporate salaries, Bill Gates & Company could be (at least somewhat) reasonably considered to have made their fortunes. However, if the Gates decided to do so, they likely could create a group of people (their heirs and their heirs’ heirs) who could live off of the inheritance for the next thousand years. This gets into the wealth disparity I will cover in a bit.

    How to deal with (relatively speaking) unearned, but salaried none-the-less, wealth? Mandate that, other than stock options that must wait 3 years after issuance and can not be less than: 1) the stock price at issuance or 2) the stock price when the individual received his/her current position, whichever is greater; no employee of a public corporation may be given salary and benefits greater than (pick a figure–I kind of like 10x but would be willing to accept even 25x) the lowest paid worker who works for the corporation–regardless of whether or not such an individual is a corporate employee. (The last caveat is to prevent corporations from “outsourcing” the lower-paying jobs in order to increase salaries).

    How to deal with the insidiousness of inheritance: a couple of good ways
    1) Estate taxes (this is NOT a death tax, it is saying to the wealthy, “Use your money while you are alive or we get to recycle it back into the public trust!!”)
    2) Tax wealth. This is not a new idea; it is a very, very old idea. Property taxes were nearly the only revenue in England. If you owned a lot of land, it had better pay for itself or you had better have a really good source of other income. This could easily be extended.

    Any of these would at least temper some of the most egregious problems with wealth and income disparity. There are other things, but I would rather write an entire article (and will if enough people want it) than include it in a comment on someone else’s article.

  • Markus1

    I don’t have any major disagreements with this article, but I wish to hear a bit more about the assortive mating thing. I see reference to this on usually conservative leaning sites and don’t quite get it. Is not this what has always gone on? I know that there are fairy tales and Hollywood movies about princes marrying the servant girl, but they are not factual; they are fairy tales. The reality is that like marries like. In my ethnic group arranged marriages were the norm till recently, and the marriage brokers were very careful about the position of the pair. I know that now lawyers marry lawyers, but not long ago lawyers married the daughters of lawyers which is the same thing. Exogamy across social lines is pretty rare. Even when the coupling is not socially accepted, the pairs are within the same economic strata like Romeo and Juliette or Tristan and Isolda.
    BTW, isn’t this how one gets a Prince Charles?

  • It seems to me one of the easiest methods would be to just tax all income as income. It’s silly that ‘unearned’ income be taxed at a lower rate than ‘earned’ income. Allow corps to deduct dividend payments before taxes. That would change a lot of the corporate dynamics- like sitting on cash or stashing it overseas. Pull that cap on payroll taxes and apply it to all earnings- than lower the rate. As citizens, we also need to start participating in our process and pointing out factual errors in reporting/ social media/ politics. Whenever taxes are discussed- include payroll taxes as part of that discussion.
    For me, the fact that unearned become receives a better tax rate is the glaring inequity

    • Sal Monela

      Very good points Lorie. I take some issue with Robert’s comments on the estate tax. I think you could apply those principles to the very wealthy, but when it comes to persons who pass small businesses on to their heirs, increasing the estate tax would, in a number of cases, force liquidation. Those heirs often work in those small businesses and help to contribute to it’s success. This is not an argument to reduce estate taxes and I can see increasing them for the .1% but I don’t see a big equity issue in passing a $5,000,000 business or farm on to the next generation. A billion $ estate is another issue.
      There is another issue and that is paying CEO’s who fail (Carly Fiorina comes to mind) vast sums to go away. When this sort of compensation exceeds the normal severance pay for that industry, it should be subject to a tax penalty. Rewarding failure serves no one’s best interest apart from enriching the person who failed.
      Lastly, there are private sector economic activities such as high frequency trading and short selling, that produce absolutely nothing in the way of goods and services. These are simply wealth transfers from one group of investors to another. Profits earned from these money manipulation activities should be taxed at higher rates.

  • Slamfu

    I have a disagreement with this article. It states:

    During Colonial times and the first half of the nineteenth century, the gap between the wealthy (mostly large landowners and successful merchants) and the average citizen (mainly farmers, tradesmen, and hired laborers) was much smaller than is true today.

    That statement needs to be backed up with some data. There is no way back then that that was true. You were either rich, or dirt poor. There was no middle class. Life was miserable for 99% of the people.

    And another thing, Capitalism doesn’t have any flaws to it that the systems preceding it and the ones following it don’t also have. Inequality isn’t some new feature. And sadly today what many consider “Capitalism” is not what Adam Smith proposed. In fact, Smith’s ideal wasn’t reached until Unions and the New Deal came into play. Regulations are necessary for Capitalism to work as intended. What was going on in the 18th and 19th Century, and early 20th, wasn’t much different than what happened before. More goods have been produced, more wars have been stopped, more prosperity has been created than in any other system ever designed by man under it. It has it’s flaws, but most of those are violations of the rules of Capitalsim.

    An example. I was agruing this on another board and someone pointed to things like the millions of people around the world who’ve been displaced or had their land and resources stolen. He said that was all Capitalism. I pointed out that the strong taking stuff from the weak has been happening all throughout human history. That the point of Capitalism is to make trades, to the benefit of both parties involved in the trade. If you aren’t doing that, you aren’t engaging in Capitalism. You’re either just stealing from people, or you are just scamming the system. Companies that deregulate in order to reduce competition to the point it’s a virtual monopoly aren’t engaging in Capitalism, in fact they are aggressively undermining the Free Market when they do that. Ironically, as in the whole net neutrality thing, they do it in the NAME of Free Markets, which makes it even more frustrating.

    They are, excuse the pun, capitalizing on the fact that most people today think Capitalism is what we saw in the 1980’s movie “Wall St.” with Charlie Sheen and Michael Douglas, which couldn’t be further from the truth. Like football, Capitalism has rules. If the rules aren’t enforced, if regulations aren’t in place, if there is no competition in the market place, it’s like a football game with no referees to call penalties. Pretty soon you’d have 22 guys on the field going at each other with axes and firearms until someone could get the ball into the endzone. I’m not saying people wouldn’t tune in to watch, but we couldn’t really call it football anymore now could we?

    • Agreed Slamfu, but would argue that under current definitions you would have to call it a ‘mixed economy’. Adam Smith’s ‘invisible hand’ replaced by very visible government regulation.
      I would also argue that those elements have been with us from the beginning with homesteading and other programs. That the rich couldn’t just go and buy up all the land was a very ‘socialist’ move.

      • Slamfu

        Well actually the invisible hand and govt regulations are not opposite things. Assuming that you have a proper free market as proscribed by Adam Smith, i.e. – there are numerous buyers and sellers, each side having a plethora of options, the invisible hand refers to the automatic and unconscience collective activity of that free market to not only determine what people want, but inform producers what to make, and sets the price. The beauty of the system is that it happens automatically, without having to plan or guess, and reaches a natural equilibrium like water settling into depressions. As long as the conditions for an actual free market are met.

        In order to ensure that actual free market conditions are there, that is where regulation comes in. From providing currency, transaction laws, banking security, fraud protection, and making sure monopolies aren’t allowed to dominate the market, that is the govt’s role in this, and even Adam Smith said that it is the govt alone that can basically act as a referee in these matters to make sure Free Markets are functioning properly. Big business however, has frequent and urgent interests in actually undermining that free market so as to control it, to their benefit and the detriment of the public good. Adam Smith also recognized this, and warned against it at several places in Wealth of Nations. But the point of regulations is to maintain the integrity of a Free Market, and when that condition is met, the invisible hand does its thing. They are not in opposition, and in fact are dependent upon each other.

  • Slamfu

    Income inequality seems to be best addressed by 2 things. Very progressive taxation and govt spending, and Unions. Labor is a commodity like any other, and banding together in unions to barter a better deal for its value is no different than a large supplier commanding enough demand to get price breaks for volume deals on it’s purchases. Unions are the primary method, practically the only method I think, for labor to negotiate real value for that commodity. The fact that both of these things have basically fallen by the wayside since Reagan, and that income inequality has skyrocketed since then is no co-incidence.

    I was expecting median income to go up by now, now that unemployment has fallen below 6%. Sadly, the consumer class in this country doesn’t seem to have enough disposable income to keep the economy growing enough because so much of the money is pooling at the top, where it does the least good. If we can keep new jobs growing like they have for 2016, I’d would imagine that incomes will have to go up as employers have to fight to get more workers. I’ve had to in my company. It’s hard to find good people these days. It took me 3 months to find a carpenter to hire for a new division in our home services. I’m actually worried that it will take off and I won’t be able to grow it for lack of finding more. That is nuts, you used to put out an ad on craigslist and get flooded with more resumes than you could count by the end of the first afternoon. Anyways, that’s just my little corner of the world.

  • Unfortunately, capitalism doesn’t have rules. The “market” may work a certain way but investors and traders learn how to game the system. It is up to government to make rules and regulations for the market to work effectively and minimalize fraud.

    • Slamfu

      Capitalism does in fact have very clearly defined rules as set down by Adam Smith. The fact wealthy corporations are constantly trying to undermine it to their benefit doesn’t change that. That is the fundamental misunderstanding about Capitalism, so many people think it means whatever big business or Wall St is doing, and that is not the case. I’ve heard the rape of South American villages by USA food companies described as “Capitalism”, when in reality all that is is another example of the strong dominating the weak and taking their stuff. That is not Capitalism because Dole Fruit company made a profit off it, it is a tactic as old as time and predates Capitalism by oh, all of human history. Capitalism is about trade, to everyone’s benefit. So you don’t have to do things like murder the baker for bread, you can just buy it. But if you are killing the baker and/or just taking his stuff, you are no longer engaged in Capitalism, but a much older system of economic exchange.

      • Kudos, Slamfu. I learned and understood more about the “invisible hand” from your one or two comments above that I did in one or two college courses.


        • Slamfu

          Aw shucks, thanks DdW 🙂

      • Full Definition of capitalism: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

        Although…keep in mind that “free market” is usually meant as a market that is free of monopolistic practices.

        • Slamfu

          Exactly. As stated those things are determined in an environment of competition, which inherently precludes monopolies. Robust competition in the market is the cornerstone of a Free Market. Without it, you don’t have one, and therefore you don’t have Capitalism. Incidentally, the job of a business is to provide the least amount of service and/or goods for the maximum price. Competition prevents companies from doing so, forcing them to lower prices and/or increase quality in order to compete. Which is why they don’t like competition and seek to eliminate it whenever they can, the chief tool by which they do so is to undermine regulations that prevent them from doing so. This is why I cringe when I hear Republicans constantly talking about how deregulating businesses is great for the Free Market and in the public’s interest, when it is exactly the opposite.

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