An Unequal Look At Income Inequality

money

A review of Wealth and Democracy: A Political History of the American Rich, by Kevin Phillips, 2002, Broadway Books, 472 pages.

Although Wealth and Democracy was published 22 years ago, the New York Times bestseller is worth revisiting, because it continues to have a big impact on how influencers and policy makers think about income inequality. The author’s earlier book, The Politics of Rich and Poor, also had a big impact.

This review summarizes and critiques the book’s major themes, which are as follows:

– Income inequality is a serious problem in the United States and has gotten worse since the 1970s.

– Wealth is too concentrated, and the wealthy have too much political power.

– Corporations also have too much political power.

– Many rich people have become wealthy through crony capitalism, not market competition, and it’s been this way since the nation’s founding. Many others have inherited their wealth through family dynasties.

– The economy has shifted from saving and production to indebtedness and financial gimmickry—similar to the shift that speeded the decline of the Spanish, Dutch and British empires.

– Both political parties have had a hand in the above, but Republicans more so than Democrats.

– The Federal Reserve has also played a role.

– All of this has corrupted democracy.

An astonishing amount of research went into the book. Data on wealth and income go back to the nation’s founding and are presented in a large number of graphs and tables. The book even lists the wealthiest individuals and families at different points of time in the nation’s history, including two people I worked for in the 1980s.

The amount of data is overwhelming, even to a data hound like myself. There is so much of it that it’s difficult to get through all of it or to study it in detail. It makes the reader wonder how many reviewers who gave the book a good review actually made it through all of the material.

Poring through the data is made more difficult by the author not always being clear if he is referring to nominal dollars (i.e., dollars not adjusted for inflation) or real dollars (i.e., dollars adjusted for inflation).

Comparisons are made for various periods between the income of the richest Americans and the income of everyone else. The comparisons are expressed in absolute dollars and in the form of a ratio.

For example, a chart shows that Elias Derby had the largest fortune in the US in 1790, a fortune of $1 million. The ratio of this fortune to the median family or household wealth at the time was 4,000:1. In contrast, Bill Gates’ fortune of $85 billion was the largest fortune in 1999. The ratio of his fortune to median family or household wealth was 1,416,000:1.

There is a big difference, however, between how Derby and Gates acquired their wealth. Derby became wealthy from being a privateer during the American Revolution and sacking British ships. Gates became wealthy from marketing a computer operating system to millions of people around the world, a system that may have been technologically clunky but provided value to users.

The book notes that privateering was a big business during the Revolution. An estimated two thousand vessels sailed under letter of marque from the revolutionary government or one of the thirteen colonies. They captured and plundered some three thousand British ships.

This is an example of how wars can generate wealth for some individuals. Of course, wars also destroy wealth.

The book goes on to show that income inequality becomes most pronounced during periods of technological innovation, such as the invention and adoption of the spinning jenny at the start of the Industrial Revolution, the spread of railroads in the nineteenth century, the growth of the oil industry after the discovery of oil in western Pennsylvania, or more recently, the development of semiconductors and the internet.

Other factors came into play beginning in the 1970s, such as global competition and tax and monetary policies that, according to the author, benefited the wealthy more than the non-wealthy. He wrote this before the advent in the twenty-first century of the Federal Reserve’s quantitative easing and zero interest rates, which increased inequality by benefiting owners of homes, stocks, and other assets.

The author correctly notes that data on income and wealth don’t capture improvements in quality of life, such as advances in medicine, safer and less polluting cars, larger homes, and so on. Parents of children afflicted with polio prior to the development of the polio vaccine would no doubt have been willing to forgo some income to have had a vaccine available.

In spite of the staggering amount of research that went into the book, and in spite of the author not making overtly biased political statements, the book doesn’t give the complete picture and omits relevant facts. This leaves the reader to wonder if the author had a hidden political agenda.

The Rest of the Picture

Transfer Payments

The author omitted transfer payments from his statistics on income; that is, he excluded what people receive from welfare, entitlements, subsidies, and earned-income tax credits. These payments can be substantial.

In their book, The Myth of American Inequality, Phil Gramm, Robert Ekelund, and John Early add transfer payments to earned income and get a different picture of income inequality. In brief, they conclude that the bottom fifth of Americans in earned income actually have more income than the next fifth when transfer payments are added to earned income. And they have almost as much total income as the fifth above that, which is where the middle class resides.

Granted, these three authors focus on income, not wealth or assets. It is indisputable that there are huge differences in wealth between socioeconomic classes in the US (and in much of the world).

Racial/Ethnic Diversity

Another flaw is that the book compares the US to cherrypicked countries that have less income inequality, including, predictably, Scandinavian nations, but not to the many countries that have greater income inequality.

The problem with comparisons to Scandinavian countries is that the US is much more racially and ethnically diverse and encompasses ethnocultural groups of significant size that lag in income for reasons other than public policy. At the same time, the Scandinavian countries are more homogenous and much smaller, thus making for more cohesiveness, stronger social bonds, and more willingness to share wealth. That’s changing, however, due to a marked increase in those countries of immigrants who have different values and less education and skills than the native-born population.

Take Sweden. Since the book was published, Sweden has made its tax code less progressive, and, according to some sources, is now surpassed in progressivity by the US tax code.

On a related note, the book doesn’t address how income inequality is affected in the US by an influx of emigrants from Latin America who are impoverished, unskilled and poorly educated. Unlike when my poor and poorly skilled and educated grandparents immigrated to America in the early twentieth century, it’s much more difficult for the unskilled and poorly educated to get ahead in today’s technologically advanced society and job market. Still, just by crossing the southern border and finding a job at minimum wage, today’s immigrants can see their income increase by 400 percent compared to what they were earning in their mother country—a point that goes unmentioned in the book and in other publications that bemoan US inequality.

Also unmentioned is the rise in single-parent families that began in the 1970s, a rise that has contributed to income inequality and to other social problems.

Corporate Power

The book claims that corporations have too much political power, which might be true; but two important facts go unmentioned.

The first is that corporations are not monolithic in their political interests and affiliations, and are often at political cross-purposes. Examples: Domestic sugar producers want tariffs on imported sugar, but candy producers do not. Hollywood leans left while the oil and gas industry leans right. The political culture within Google is quite different from the political culture within Lockheed. Tesla CEO Elon Musk has different politics than Disney CEO Bob Iger.

The second fact is that many nonprofit organizations are not only very powerful but also uniform in their politics. For example, the American Federation of Teachers ranks near the top in political power and is decidedly leftist and Democrat. The same for other public-sector unions. University faculty, who are the gatekeepers on what is instilled in college students, are Democrats by a margin of eight to one over Republicans.

Environmental groups also have considerable political power, as I know from heading one in metro New York. Then there are scores of interest groups with political power, such as the NRA, AARP, ACLU, NAACP, Urban League, Southern Poverty Law Center, and Black Lives Matter. Professional associations also abound, such as the American Medical Association, the American Bar Association, the Society for Human Resources Management, and the Association of International Certified Public Accountants.

The foregoing suggests that political power is widely diffused in America, but it also suggests that individual voters are at a disadvantage unless they join an influential group to protect or advance their interests.

The Power of the Wealthy

Do the wealthy have more power (and influence) than the non-wealthy? No doubt.
For sure, a fast-food worker has less power as an individual than either Bill Gates, Mark Zukerberg, Elon Musk, or Jeff Bezos. But that would be true even if the worker’s pay were quadrupled, or if the income gap between the poorest and richest Americans were reduced by half, or even if Gates, Zuckerberg, Musk, and Bezos had their wealth reduced by 99 percent.

A reality of the human condition is that people live and work in hierarchies, where those at the top of the pyramid have more power than those at the bottom. This is true regardless of the nature of the political and economic systems that they live under.

In fact, the power gap between the top and bottom is particularly wide in communist systems, where, theoretically, there is no income inequality. Party leaders and senior apparatchiks have authoritarian control over the masses. They also have valuable perquisites in lieu of income, which was the case in the former Soviet Union, where the nomenklatura had swank apartments, well-appointed dachas, well-stocked private stores, chauffeured cars, special medical care, and top schools for their children.

Or take Latin America. Much of it still suffers from the legacy of the Spanish empire, a legacy of a two-class society of aristocrats at the top and the poor at the bottom, without a large middle class in between.

Causes and Solutions

Concerns and conflicts over disparities in income, wealth and power are of course nothing new and will never be completely settled.

The author recounts historical watersheds on the subject, going all the way back to the philosophical and constitutional disagreements between Thomas Jefferson and Alexander Hamilton.

My list of watersheds in the twentieth and twenty-first centuries includes the following:

Theodore Roosevelt’s trust busting, the Prairie Populism movement, the ratification of the Sixteenth Amendment and the corresponding establishment of the Federal Reserve and income tax, the early battles between management and labor, the socialism of union leader Eugene Debs and his Wobblies, the Progressive era, FDR’s New Deal and Social Security Act, LBJ’s Great Society and passage of Medicare, the social and political turmoil of the sixties, Richard Nixon’s closing of the gold window, Henry Kissinger’s opening to China, Jimmy Carter’s stagflation, Ronald Reagan’s supply-side economics, Pat Buchanan’s nationalist run for the presidency, H. Ross Perot’s anti-globalist run for the presidency, Bill Clinton’s welfare reform, George W. Bush’s compassionate conservatism, Barack Obama’s national healthcare, the series of foolish wars and military adventures beginning with Vietnam, the staggering growth of the regulatory state, and a half-century of deficit spending.

More recent watersheds are Donald Trump’s populism and the shifting constituencies between the Democrat and Republican parties.

Speaking of Trump, the book was published in 2002, which was well before Trump ran for president. But the author claims that Trump had advocated a wealth tax in 1999, and specifically, a onetime levy of 14.25 percent on net worth of $10 million or more, in order to pay off the national debt.

A similar idea is a stiff estate tax. Proponents say such a tax would end the political and economic dynasties of rich families and would uphold the American ideal of meritocracy, in that the offspring of the wealthy would have to earn money instead of inheriting it.

But such a tax is an example of how attempts to reduce inequality can result in a different form of inequality. An estate tax does nothing to end the advantages that children of the wealthy or politically powerful have—the family name, the family connections, the prestigious K-12 schools, the special tutors, the legacy admissions to prestigious universities, and so on.

If Joseph Kennedy had left no wealth to his sons John, Robert and Ted, they still would’ve had an edge over unknowns named Tom, Dick and Harry. If George Herbert Walker Bush had left no money for his sons George and Jed, they still would’ve had an edge over Joe the Plumber.

Likewise, if Hunter Biden’s last name was Schmoe instead of Biden, it is doubtful that he could’ve parlayed his name into millions of dollars from foreign entities. And if Chris Cuomo, the brother of ex-governor Andrew Cuomo, had the last name of Dokes instead of Cuomo, it is doubtful that he would’ve become a TV personality.

Or take Warren Buffet. Please take him. In spite of advocating a confiscatory estate tax and wanting his kids and everyone else’s kids to earn their way, he placed his daughter as head of a foundation he had handsomely funded. She has a nice income, job security, and the prestige and influence that come from doling out millions of dollars in grants.

Joe the Plumber just wants to bequeath his small business to his son, but powerful politicians and others want to penalize him for doing so while feathering the nest for their own kids in non-monetary ways that are actually worth a lot of money. That’s a strange idea of equality.

So, what’s the solution to perceived disparities in income, wealth and power? At the risk of sounding naïve, idealistic, and glib, it is for citizens to learn all sides of issues, to be leery of ideologues, partisans, and dogmatists, and to value and advance the freedom they have in a pluralistic constitutional republic to change things without resorting to a revolution.

Conclusion

Wealth and Democracy is a tremendous work of research and scholarship, but it doesn’t tell the whole story. Nor does this review.

For the rest of the story, Americans have to get out of their comfort zone and echo chamber, have to spend less time in the shallows of social media and “See Spot run” sources of news and information, and have to demand that political agendas and ideology be removed from K-12 schools and universities.

I guess I’m naïve and idealistic after all.
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Living in Tucson with his wife, Mr. Cantoni is an author, columnist, activist, and retired business executive and consultant. Contact: ccan2@aol.com or craigcantoni@gmail.com.

About Craig J. Cantoni 25 Articles
Community Activist Craig Cantoni strategizes on ways to make Tucson a better to live, work and play.