Capitalism based on the
profit motive and private ownership is supposed to provide the best economic
outcomes for everybody. As the owners of industry and commerce enrich
themselves, they provide employment for the rest of the population. Everyone
shares in economic growth, even if owners reap a greater share. The metaphor “a rising
tide lifts all boats” describes this explanation of how capitalism should
work.
Proponents of socialism argue
that only the owners of capital profit from such a system. The great majority
of people labor for the profit of a few. They propose an economic system based
on social ownership and more equal distribution of profits.
These competing theories tend
to leave out the role of government in shaping an economy and influencing the
distribution of wealth. In every economic system, the state encourages and
restricts economic activity, and funnels economic advantages to selected
population groups.
In all of the real existing
systems that have called themselves socialist, social ownership has meant in
practice government ownership. In every case since the creation of the Soviet
Union, socialist governments have been
dominated by a single political party, which have not allowed any
challenges to their power. Inevitably, this has led to the corruption of the
ideal of popular ownership of the economy. Those in charge of socialist
governments have given themselves and their close supporters economic
privileges denied to the wider population, from the special access to goods and
services enjoyed by members
of the Communist Party in the Soviet Union and its Eastern European
satellites to the accumulation
of wealth by the leading families of Communist China.
The absence of democracy, the
brutal repression of critical ideas, and the continuing economic weaknesses of
the Soviet systems led to their collapse in 1989. But not all socialist states
were so unsuccessful. China, which had one of the world’s poorest populations
through the first half of the 20th century, has nearly
eradicated extreme poverty, according to the World Bank. Although the Cuban
economy is one of the most government-controlled in the world, the poverty
level is very low, and education
and health care rank high.
In the US, capitalism has
sometimes worked to make all boats rise. A remarkable study last year of
the history of national income, written by the foremost French researchers
about income inequality, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman,
shows that from 1946 to 1980, real income doubled across the economic spectrum.
That was also a period of extraordinary
economic growth: gains of over 5% in gross domestic product for most years,
and occasionally more than 10%. The top
income tax rate for the richest Americans was higher than 85% until 1964,
and then 70% until 1980. Nevertheless, the top 0.01% tripled their income after
taxes in this period.
But since 1980, the story has
been very different. The income of the poorer half of Americans has remained completely stagnant. The
upper half has seen its income grow, but most of that growth has been at the
very top: incomes of the top 1% have tripled, and that tiny rich slice earns
almost twice as much before taxes as the whole bottom half. The few thousand
families in the top .001% have multiplied their income 7 times. Our graduated
income tax, along with other income-based payments like Medicaid, does
redistribute money toward the bottom, but that hardly dents the huge
inequality.
That’s due to political
choices. The top tax rate has fallen
steadily, to 50% in 1982, to 40% in 1993, to 35% in 2003. The tax rate on
capital gains from stocks, which nearly all go to the wealthiest Americans, has
also fallen from
40% to 20%. After nearly tripling from 1940 to 1970, the real
value of the minimum wage has fallen since then. One of the least discussed
but most important political policies that contributes to growing inequality is
the ability of the very rich to hide their income in international tax
shelters. The leak of the so-called Panama Papers
brought the illegal use of tax havens into the international spotlight: the
anonymous leaker said he was motivated by “income inequality”. It is estimated
than 10%
of the world’s GDP is held in offshore banks,
including about 8% of
American GDP.
Corporations have contributed
to rising inequality by boosting the incomes of top management. CEO’s earned
about 30 times the income of a typical worker in 1980. That ratio has
skyrocketed to 300 times
average wages.
Political choices continue to
widen the economic gulf between the few and the many. The Republican tax reform
of 2017 mainly benefitted the rich, notably by doubling the amount of money
that can be left in an estate without being taxed, helping only a few
thousand families.
Growing inequality is not
only an American problem, but a global problem that keeps getting worse.
Between 2010 and 2016, the total wealth owned by the poorest half of the world’s
population fell
by over one-third. At this moment, the world’s top 1% owns more than all
the rest of us. The world’s economy keeps growing, but the yachts of the
wealthiest are disappearing from view. Since 2000, the bottom half of the world’s
population has gotten about 1% of the increase in global wealth. The top 1%
took in half
of that growth. The 8
richest men in the world now own as much as the poorer half of the global
population, 3.6 billion people.
Rising inequality in the US has
provoked louder discussion. Conservatives try to derail political discussions
about economic inequality by talking about the “politics
of envy”. Mitt Romney as presidential candidate in 2012 criticized
President Obama’s concern for the poor: “I think it’s about envy. I
think it’s about class warfare. When you have a President encouraging the
idea of dividing America based on the 99 percent versus 1 percent—and those
people who have been most successful will be in the 1 percent—you have opened
up a whole new wave of approach in this country which is entirely inconsistent
with the concept of one nation under God.” Scary
diatribes about the failures of “socialism” are designed to support the
status quo.
It’s a common mistake of both
left and right to talk about capitalism and socialism as if there were only two
choices. One-party socialist systems in less developed countries have not
worked well over the past century. Capitalism as practiced in the United States
and many other nations has mainly benefitted those who already are wealthy. The
nations in which all citizens gain from economic growth have combined elements
of market economies, private ownership, and political policies that mitigate
inequality. In western Europe, public health care, nearly free university
education, stronger progressive taxation, higher minimum wages, and inclusion
of trade unions in corporate decision-making result in much lower inequality
and much
happier populations.
No American politician argues
for replacing capitalism. The political choices of the past 40 years have
weakened our national economy and our political unity by favoring the wealthy.
The rising tide is swamping too many American boats. It’s time for a different
politics.
Steve Hochstadt
Berlin
January 29, 2019
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