Income Inequality – Impact on Democracy

Review of Robert Reich’s 2013 Documentary “Inequality for All” – part 4 of 4

“You load sixteen tons, what do you get
Another day older and deeper in debt” (Merle Travis’ song, 1946)

During the last part of his 2013 documentary film, “Inequality for All,” Robert Reich asserts that a big lie was spread in this century. This lie says there exists a form of ‘class warfare’ against the very wealthy.

Those who disagree with higher taxes on the rich say that’s an attack on the ‘1 percent’. Supposedly these attacks come from the ‘99%’ and spring from envy.

Reich replies that this is the opposite of the truth. The middle class are the real “job creators,” not the rich. (See how Reich comes to this conclusion).

Another big lie promulgated in this century is that government is “bad” and financial markets are “good”.

In reality, governments, Reich says, are needed to create the rules by which financial markets function. This is necessary in order to construct and maintain our free market system.

Then Reich steps outside the usual realm of modern economics and harkens back to an earlier era of this field when it was called “political economy”. Reich makes a fourth assertion about income inequality:

High income inequality correlates directly with political polarization

Reich notes that big money (domestic and foreign) began entering politics in 2010 when the passage of Citizens United Act (“Corporations are People”) was upheld by the US Supreme Court.

This Act allows billionaires and millionaires to donate large sums of money anonymously to candidates in our elections through PACs.

Meanwhile special interests use lobbyists to pay off politicians. Money from the top spent to buy politicians which Reich, a liberal, and Senator Alan Simpson, a conservative, both see as an abuse of wealth, is increasingly controlling US politics.

Alan Simpson of Wyoming, a far-right Republican says he has been called a communist after years of service in the Senate. Reich, a mainstream liberal has been called a socialist and a communist as well.

Reich tells us he became a champion of those at the bottom of the income and political power levels when he was young after an older boy he looked up to as his protector in school was murdered in the South while seeking voting rights for black Americans.

Reich worked for Presidents Gerald Ford (Republican) and Bill Clinton (Democrat). Income inequality has been Reich’s chief concern for over thirty years.

Reich is a firm believer in capitalism and democracy. He currently teaches economics to college students in hopes they they will spread the word about the dangers of rising income inequality.

My comments

Professor Reich offers no evidence for his fourth correlation with income inequality: that income inequality promotes political polarization. However anyone watching the 2016 US Presidential race can hardly disagree that polarization seems to be the case today.

I think it is great that Reich is re-combining economics with politics again. This is what the founders of the field once called “political economy” did.

Most of us can see how big money can create conflicts of interest for politicians in democratic governments. In fact, my next post will give an egregious example of that. However, few solutions to this problem seem to be on the horizon.

Can economics offer a solution to the woes of democracy? Here we butt heads with the issue of “morality”. Talking about morality is a strict taboo in both economics and finance. However, morality or rather the lack, has played a key role in the history of American politics.

But I note that Reich’s plain-English summary of the past 100 years of economic history in the US with the easy-to-read-graph resembling our iconic Golden Gate bridge, lacks one additional graph.

Golden Gate Bridge stock photo

This would be a graph comparing peak numbers of financial scandals with Pikittky and Saez’ graph of the two biggest “business cycle” booms and busts.

It’s clear to me that in our recent economic history “busts” or “crashes” have turned over the rocks each time and allowed us all to see a flood of hidden scams and gross immoralities that lay hidden out-of-sight during boom times.

I would ask economists who are concerned about income inequality, such as Reich, Saez and Piketty—how much of income inequality is due to financial and political corruption?

Also, in my previous post I mentioned the need for a field of global economics. The need for global economic theory is obvious.

As I wrote in my comments about Part 1 of this post series, you can’t go back again, only forward.

Economists on the right and the left need to set aside their rigid positions and start over again by taking the best thinking for both sides and applying it to create a global view of the world’s economy. Here’s one reason why:

Victor Gasper of the International Monetary Fund (IMF) announced that, after world debt hit $152 trillion, the highest amount ever—an amount twice the current value of global wealth:

Excessive private debt is a major headwind against the global recovery and a risk to financial stability.”

Note that Victor Gaspar says “private” sector debt, not government debt. Private debt includes consumer debt and investor debt, two chief sources of job creation.

At present the US public debt to GDP ratio is 76%. This is a rate deemed safe by the World Bank. Our government can still pay debts. But many Americans cannot pay theirs.

Moreover, the word ‘investment’ no longer means simply investing capital in new goods and services.

Private debt includes the “assets” of the 1% who invest trillions of dollars on currency exchanges, futures contracts and a multitude of derivative products, as well as payments to lobbyists and political candidates— none of which things create much real wealth for the world as a whole.

Private debt is a result of income inequality that all 21st century economists should look at—from a global as well as national point of view.

 

 

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