Dateline US: Economic Power for the 99%
Economic shame haunts hard-working Americans. They ask themselves why they can’t do as well as their parents.
August 2, 2020
The American dream has been lost. A tiny parasitic upper class has managed, with the aid of a political party adept at cultural division, to suck away the benefits of a generation of economic growth from the vast majority who produced it.
The loss of economic opportunity has dealt a near-fatal blow to U.S. democracy. Popular support for democracy may not require breakneck economic growth, but it does require fairness.
And, unless things change, the benefits of another generation of economic growth will be lost and the blow to democracy will be fatal. Unless the United States’ small-d democrats build a platform around two pillars of economic power — even if both seem a bit obscure at first:
1. Restructuring the boards of directors of all the companies that have come to monopolize the U.S. economy.
2. Passing a fair tax that treats earned income no worse than unearned income.
To see how tax and antitrust policy have effected a sea change in U.S. social and economic justice, we must get smart about root causes. Because two things have gone deeply wrong to let this tiny parasitic upper class — let’s call it the wealth cartel — accumulate unprecedented power.
The first is unrestricted payouts to corporate executives. For what, exactly, are they being compensated? For building oligopolies — if not monopolies.
CEOs of public companies must rise above the middling outcomes of market competition. Only monopolies and oligopolies reliably do that. In effect, CEOs must make it their business to take money out of the pockets of workers and customers and hand it to the owners who pay them.
The AFL-CIO Executive Paywatch website reports CEOs of firms in the S&P 500 Index took home $14.8 million on average in 2019 — 264 times the average pay of their production workers.
Of course, the companies and finance firms carving the U.S. economy into monopolies and oligopolies make rich payouts to plenty of executives other than CEOs.
By 2015, the average income of the top 1% of U.S. earners was $1,300,000, while the average income of the other 99% was $50,000. Average earners in the top slice were taking home 26 times the average of everyone else, according to the Economic Policy Institute’s New Gilded Age report.
The second root cause is tax holidays for unearned income — i.e., income on wealth that was earned some other time, some other place, and usually by somebody else.
The Institute on Taxation and Economic Policy estimated the middle 20% of Americans paid 25.4% of their income — almost all of it earned income — in taxes of all kinds in 2018.
In contrast, people with unearned income pay just 15% in federal taxes on most of it. On top of that, many of them claim residence in states with low or no further taxes on it.
So while the typical wage earner pays 25% in taxes, a lot of people who don’t have to work pay just 15% on income from whatever they have inherited.
How much of a difference does a 25% rate on earned income vs. a 15% rate on unearned income make over time?
That is $5,000 a year for a family bringing in $50,000. So you get a $5,000 per year break in taxes for every $50,000 of income that was earned some other time, some other place, and probably by someone else.
No growth dividends for the powerless
How significant are these gaps? The simple truth is that they have been devastating.
From 1979 to 2015 — an entire career — the Congressional Budget Office calculates that real income after all taxes and transfers grew an average of 1.1% per year for the middle 60% of U.S. households vs. 3.5% per year for the top 1% — a difference of nearly 2.5% per year.
For a perspective on that, total U.S. real income grew roughly 2.5% per year over the same period for the entire country. It’s as if the top 1% of U.S. households were racing ahead of the middle 60% at a rate as great as the rate of growth of the entire U.S. economy.
Over a generation, the impact has been vast. From 1979 to 2015, average household income has more than tripled for the top 1% while growing by less than half for the middle 60%. Imagine what an optimistic, secure, entrepreneurial, thriving place the United States would be if it were the other way around.
It’s probably the most that the wealth cartel could have extracted. Had they extracted any more — had typical wages not just stagnated but dramatically declined — a political realignment or civil unrest would probably have put an end before now to the cruelty of an economy run almost exclusively for the very rich.
This wouldn’t be so bad if the lottery winners who run monopolies or inherit vast fortunes plowed their plentiful earnings back into the economy.
But the wealth cartel doesn’t do that anymore. To maintain its economic power, it buys political power. And the cumulative loss of democratic freedoms that have resulted from its four-decade buying spree is staggering.
A successful effort to block U.S. campaign finance reform in the 1980s and 1990s paid fantastic dividends. Wealthy out-of-state donors focused their resources on low-population states, winning state assemblies, governorships and Senate races.
Governors and state assembly members beholden to the wealth cartel attacked voting rights and unions, making it hard to vote, gerrymandering voting districts and passing right-to-work laws restricting workers’ right to assemble. Senators owing their seats to the same people focused on seating friendly judges and blocking neutral ones.
Those judges, in turn, handed down a cynical stream of legally dubious decisions to strengthen their donors. They hollowed out restrictions on political spending by extending free-speech rights for people to corporations and supported state efforts to restrict voting rights — starting the whole cycle over again.
Striving for a one-party state
This army of senators, governors, judges and members of the U.S. Congress and state assemblies — now joined by reporters, pundits, think tank executives, researchers and news anchors paid directly by the wealth cartel — is trying to build a one-party state.
The United States has turned into a country where the FBI investigates only Democrats and where the central bank fights recessions only when Republicans hold the White House.
And their reason for replacing the institutions of a competitive democracy with a one-party state?
• Creating hidden subsidies for the very rich, and
• Cutting services for the middle class as discreetly as possible.
In other words, extracting further hidden transfers from the middle class.
Hidden transfers to the rich
The Roosevelt Institute’s report New Rules for the 21st Century provides a sweeping view of just how far the wealth cartel’s efforts to extract hidden transfers from the middle class have advanced in every corner of American life.
• In healthcare, the U.S. system subsidizes employers providing insurance instead of people who need care. It ties workers to their jobs by making healthcare in the United States unaffordable for anyone between jobs.
• On the environment, the Trump Administration is rolling back a generation of clean air and water protections at the behest of a handful of fossil-fuel industries.
• On education, most state funding formulas let the wealthiest districts outspend the rest, while privatized student loans leave the poorest college graduates most deeply in debt.
• On childcare and parental leave, U.S. practice is not to share costs, leaving a uniquely American burden that blocks poor and middle-class families from getting ahead.
• On infrastructure, the undeviating practice has been to underinvest year after year in public works while moving to gated communities with privatized public services.
• The minimum wage has been frozen at $7.25 per hour for the last ten years.
• Welfare, popularly thought to run rampant, has been abolished for adult males out of work since the 1990s.
• On sentencing, the prison population has increased by 500% over the last 40 years, 40% have been jailed with no compelling public safety reason, and black males remain six times likelier than whites to be jailed.
• On immigration, Republicans after Reagan have diverted policy from citizenship paths for people raising families here who don’t lower wages to guest-worker programs for temporary migrants who do lower them.
• On agricultural subsidies and wellness, subsidies have increased for big, industrialized farms, while funding for the Center for Disease Control has disastrously been cut.
• On drug patents and pricing, U.S. drug firms run the table by benefitting from the world’s most generous patent protection, while friendly legislators forbid Medicare to negotiate drug prices.
• On banking deregulation, the mortgage market collapsed less than a decade after the U.S. Congress let banks evade Treasury oversight of mortgage lending in 1999.
• On corporate power, by extending individuals’ free-speech rights to businesses, so-called conservative judges have opened the floodgates of corporate political spending and undermined truth in advertising at the same time.
• On unions, Republicans have made organizing nearly impossible in state after state and even blocked some unions from charging for collective bargaining.
• Protecting monopolies, so-called conservative U.S. Supreme Court appointees have made it much harder to enforce antitrust laws by giving monopolies mysterious exemptions if they serve multiple customers.
• And on fiscal policy, the Trump Administration deeply cut corporate taxes — which just means the contribution of individuals who own a lot of stock. The immediate result was to open a pre-pandemic 4.7% of GDP budget deficit that was, itself, unprecedented outside of war and financial crises.
And it left us utterly unprepared to counter even mild economic and health crises, let alone one like COVID 19 that the Administration’s now ballooning 15.9% deficit scarcely cushions.
Restoring economic power to the people
To stop the wealth cartel from sucking away the benefits of another generation of economic growth from the people who produce it, small-d democrats must restore economic power to the people. We must attack the root causes of the loss of that power by fixing the principal policies that let the cartel concentrate its wealth and then keep it.
In other words, first and foremost, we must fix antitrust and tax policy. Everything else — all 16 of the policy areas listed above — will follow from these two.
And here, at least, democrats enjoy a stroke of good luck. Because antitrust and tax policy are the easiest ones to reform. And there’s a good chance of getting agreement on reforms that would do the trick despite the country’s deep political divisions.
Making trust busting easier would be popular
Take antitrust first. The reason majorities of legislators have let antitrust enforcement lapse is that its main remedy — fighting decade-long legal battles to break up monopolies — is so difficult and uncertain. If the worst the government can do to you is take your company to court for ten years with an uncertain outcome, why hesitate to stifle competition?
The U.S. Congress could easily give trust busters a simpler tool — restructuring the boards of companies found to exercise undue market power. Require monopolies to allocate a third of their board seats to employees, a third to customers — and a third to owners.
After all, customers and employees are the ones monopolies hurt. Their voices need to be heard in the board room of companies that competition does not constrain.
The deterrent effect of this seemingly innocent reform would be powerful. Owners would lose enormous voting power if they push their management teams to acquire competitors only to tear them apart or fix prices and wages. Give companies a credible reason not to monopolize their sectors and they won’t.
Best of all, both U.S. political parties would support the idea, but for different reasons. Republicans would sell it to constituents as another victory in the culture war against coastal elites, and especially the hated tech giants.
Democrats, of course, would see it as a way to make senior managers accountable to the public and arrest the over-concentration of wealth.
Dust off Reagan’s greatest legislative achievement
Strangely enough, there’s a similar opportunity in tax policy. Americans of all persuasions strongly supported tax simplification under the Fair Tax Act of 1986.
Signed by Reagan at the urging of his technocratic second-term staff, it’s sacred stuff for Republicans to this day. But its Democratic origins show themselves in what was really the single most important provision of the Fair Tax — treating earned and unearned income the same.
And the impact of that simple provision was vast. You can still see it in charts of the U.S. GINI statistic measuring economic inequality.
The brief three-year life of the Fair Tax from 1988 to 1991 mark the only time the U.S. inequality index stopped climbing since 1980. And the years immediately after the U.S. Congress rescinded it at the behest of Texas wildcatters in 1991 mark its steepest jump.
Passing the Fair Tax wasn’t easy in 1986, but it would be easier now. Democrats have had time to see the impact taxing earned income more heavily than unearned income has had on inequality and the concentration of political power. Republicans look at it at as Reagan’s crowning achievement without worrying too much about its outcomes.
Revolutions can be simple
Restoring the last generation of economic growth taken from the vast majority of Americans may be beyond hope. But restoring economic power to them is not.
Antitrust and tax policy hold the keys to the catastrophic concentration of wealth and power in the United States over the last 40 years. And simple, powerful reforms are available that for a variety of reasons could attract support across deeply divided political parties.
Restructuring the boards of monopolies and taxing earned income no more heavily than unearned income may not sound as sexy as raising the minimum wage and offering free college. But they would restore the economic power that 99% of Americans must reclaim to protect their families over the next 40 years.
The American dream has been lost. A tiny parasitic upper class has sucked away the benefits of a generation of economic growth.
Economic shame haunts hard-working Americans. They ask themselves why they can’t do as well as their parents.
The US wealth cartel is trying to build a one-party state with an army of senators, governors, judges and members of the US Congress and state assemblies.
The loss of economic opportunity has dealt a near-fatal blow to US democracy.
Restoring the last generation of economic growth that was taken from the vast majority of Americans (and mostly clawed by the top 1%) may be beyond hope. But restoring economic power to them is not.
Taxing earned income no more heavily than unearned income would do much to restore the economic power to the 99% of Americans.
Co-Founder, GoalScreen LLC David Apgar is the author of Risk Intelligence: Learning to Manage What We Don’t Know (Harvard Business, 2006) and Relevance: Hitting Your Goals By Knowing What Matters (Jossey-Bass, 2008). Both books are based on ten years of best practices research for corporate finance teams as a managing director at the Corporate Executive […]