The economy is stuck in a ditch, with even Federal Reserve chair Ben Bernanke voicing serious concerns about a double-dip recession. Despite this, the focus of economic policy debates in Washington is drifting dangerously away from fighting mass unemployment and Wall Street hyper-speculation in favor of cutting social spending to reduce the federal deficit. State and local governments throughout the country are imposing major cuts in healthcare, education and social services. This is while the official unemployment rate is 9.6 percent, but a more accurate measure would be close to 20 percent. Also, a high proportion of workers who have been rehired after having been laid off during the recession are taking big pay cuts.
All these trends will contribute to worsening the economy’s long-term pattern of sharply rising inequality. Rising inequality, in turn, increases the difficulties of mounting a sustainable recovery. The logic is simple. When the overall amount of income produced in an economy is shared broadly, more people have money in their pockets to spend, which bolsters demand in the markets and encourages private businesses to invest more. This leads to expanding employment opportunities, which then strengthens market demand further. Conversely, when an excessive share of an economy’s overall income is concentrated at the top, then more money gets channeled into the Wall Street casino. This sets the stage for the type of financial collapse we experienced in 2008-09.
Just how severe has been the rise in inequality? For starters, the share of total personal income going to the richest 1 percent of earners more than doubled between the late 1950s and 2005, from 10.2 to 21.8 percent. Even more extraordinary, the share received by the richest one out of 1,000 households—the top 0.1 percent—more than tripled over this same period, from 3.2 to 10.9 percent.
Of course, capitalist economies are not designed to create equality. They are designed to reward winners in marketplace competition and correspondingly punish losers. This is supposed to be the motor force that drives capitalist economies to produce ever more products and ever greater riches, even if it also generates inequality. But recognizing this central fact about capitalism in general does not explain why US capitalism circa 2010 is producing a much greater level of inequality than during the 1950s and ’60s.
The recent book Unequal Democracy: The Political Economy of the New Gilded Age, by distinguished Princeton political scientist Larry Bartels, provides important perspectives on the situation. It does so through the impressive evidence and arguments he assembles but equally through the single overarching consideration that he neglects, even while his data lead us right to this point.
Debates have been raging for decades without resolution about the major causes of rising American inequality. Bartels boldly tosses almost all of this literature aside and offers instead his own simple explanation: that the Democratic Party overall supports greater equality and the Republican Party supports greater inequality. Bartels’s broad explanation for the rise in inequality since the 1960s is thus that Republicans have dominated politics over that period, especially by maintaining control of the White House for most of that time.