Gap between rich and poor doesn't have to grow wider

Robert Kuttner

November 07, 1990|By Robert Kuttner

IN 1983, I wrote an article for the Atlantic Monthly titled "The Declining Middle." My subject was the increasing evidence that America's middle class was fragmenting into a society of the rich and the poor.

There was no single cause. Rather, the reasons included everything from the new global economy -- which put American factory workers under pressure from cheap foreign labor -- to the rise of a poorly paid service economy, demographic changes in the work force, deregulation, anti-unionism and shifts in federal taxing and spending policies.

At the time, the thesis was highly controversial. Although a handful of economists had done research on income distribution that seemed to confirm this trend, the reaction of much of the press and most political conservatives was scorn. The great middle class, in their view, was as healthy as ever -- and these were just carping criticism by left-wingers.

The debate about the declining middle indeed had an ideological subtext. If America was still a broadly middle class country, there was nothing seriously amiss about American capitalism. But if the rich were really getting richer and the poor getting poorer, perhaps our economic policies were heading in the wrong direction.

Fast-forward seven years. Now nearly everybody agrees that during the 1980s the rich got a lot richer and the poor got poorer. In fact, some of the same people who at first dismissed the trend are saying that it is so potent that nothing can be done.

During the past decade, Reaganism compounded several underlying trends. The tax system gave special breaks to the very rich and withdrew subsidies from the poor. New opportunities for speculative gain in a deregulated environment made the already rich even richer. The jobs created by the economy for the bottom half of the labor force paid diminishing wages. And the so-called underclass became all the more isolated.

In the '80s, according to Lawrence Mishel of the Economic Policy Institute, the richest 1 percent increased their average income by 75 percent. The bottom 40 percent had no real income growth at all.

Today, the conventional wisdom about income inequality has flipped 180 degrees. Mickey Kaus, author of a forthcoming book on equality, argued in a recent Washington Post column that this trend is so deeply rooted that progressive tax reform -- of the sort just sponsored by congressional Democrats -- is powerless to make much difference. "Greater income inequality is just something the Democrats, and the country, are going to have to learn to live with," Kaus wrote.

MIT Economist Paul Krugman also has argued that little can be done, both for political and economic reasons. "Today, relatively few people believe, as so many did in the 1960s, that government can help the poor become more productive . . . . But if aid to the poor is simply charity, then its political base is nothing more than public generosity" during an era when the public cupboard is relatively bare.

Once again, I beg to differ. The fact that America of two decades ago was a more equal society was no accident. It reflected a different public philosophy, and a different set of policies. If we want to reverse the declining middle, we might begin with more progressive taxation. Kaus is right that it is not sufficient, but it is certainly necessary.

America of two decades ago was less tolerant of the kind of speculative excess that characterized the 1980s. In a less-speculative economy, there is more-productive use of economic assets, and fewer unearned overnight fortunes.

It is possible to use tax and regulatory policy not just to redistribute income around the edges, but to tax or regulate away certain classes of windfall gain -- and thereby eliminate entire speculative subcultures. Twenty years ago, there were no overnight savings-and-loan millionaires -- because the law required savings and loans to be nonprofit institutions. (And there was no $500 billion S&L bailout either.)

It is possible to have strategies for improving both the quality of labor and the jobs the economy creates. It is even possible for government to be benignly neutral toward trade unionism, as it was between the mid-1930s and the late 1970s.

It is possible to have policies -- ranging from Head Start, to on-the-job training, to wage subsidies, to a full-employment economy -- that improve the chances and incomes of even the hard-core poor. In much of Western Europe, there are no hard-core poor. A key difference is that few Europeans believe that whatever the "free market" does is optimal and hence just, hence immutable.

A century ago, America in the robber-baron age was far more unequal than it is today. But things changed -- and they can change again. All it takes is political imagination.

It is appalling that the standard line on the declining middle has gone straight from "It isn't happening" to "We can't do anything about it." But then, one should never underestimate the power of the status quo.

Robert Kuttner writes regularly on economic matters.

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