Wednesday, October 12, 2011

What caused the wealth gap?

And how do we fix it? This Salon interview with Jeffrey Sachs explains the causes and some possible remedies. Here are a few excerpts:

“The income distribution in this country has gotten out of whack to a historically unprecedented extent and it has come with a very serious derangement of our political processes.

Beginning in the 1970s – this is crucial – the U.S. began to globalize, as did every other economy in the world…. The main effect of globalization, which is known but somehow weirdly separated from our politics, has been that those who have products, or services, or celebrity, or other things that they can sell to world markets, have found a boon in globalization. But for most of American society, and certainly for the majority of Americans who don’t have a bachelor’s degree, globalization has meant facing much lower-wage workers abroad and increasingly powerful competitive pressures.

Reagan came to office with a diagnosis, most famously put in his inaugural speech, that government is not the solution, but the problem…. He was playing to a lot of powerful interests…and the dismantling of government began, all in the service of cutting top tax rates as a theory of how to make the economy function properly. It’s a weird idea because there is plenty of evidence that government and markets are complementary parts of a healthy society – it’s not one of the other. The interests at the top benefited from globalization through market forces, tax avoidance and tax havens — and they absolutely grabbed hold of the federal government.

When I was growing up, it was a commonly thought that America needed a mixed economy, that there were spheres of life where the market economy should prevail, and there were spheres of life where the government would be crucial. [The mixed economy] has had great history in all of the high-end democracies and there is a lot of economic reasoning behind it.

Basically, government has to be operating where the profit motive won’t suffice. The profit motive works where you have good economic competition, but if you just need one highway between city A and city B, that’s not going to be a competitive highway, so you’d better involve the government. If you want scientific knowledge in a society, for example, you don’t patent basic theorems, because everybody needs to use them, so you have to find a different way other than the profit motive to get science to develop.

Ronald Reagan really had a devastating effect on this.

What are our deeper economic objectives? Among these is a sense of well-being, of life satisfaction. Income can play a role in that, but so do things like social trust and honest government – and compassion for other people. This kind of discussion is considered odd and I think that is part of our problem right now. We don’t have effective ways to discuss these things in our society.

Instead, we have people who represent a cult of selfishness, what I would consider Ayn Rand libertarianism. They are political figures who say that the goal of America is to leave [people] alone, and that ideas like compassion and so on are dangerous. What the Republicans have on offer – which is based on this 30-year misdiagnosis – is cruel and deeply wrong, because they express disdain for the idea that people are suffering and they need help.

This [crisis] isn’t really about hard work and effort. It is about a society in which the options for a lot of people seem to be closed off right now. One of the great visions of America has been that this is a society where if you work hard, you can make it. But today we have the lowest social mobility of any high-income democracy….

There is no quick fix right now. A quick fix would occur if we had hit a bump in the road of a normally functioning economy, but my point is that we had growing rot that was disguised by financial bubbles. Rebuilding the infrastructure, strengthening the scientific base, having an energy system that moves to a sustainable renewables, low-carbon economy, improving educational outcome so that more kids make it all the way through – those are 10-year projects, more or less. When the [national highway system] started in the mid-1950s it was understood that this was going to take a long time to do but that we were going to make the investment to build a whole national system.

Americans have a pretty accurate picture of a lot of this [crisis]. They sense, first of all, the huge inequality that we have. They know that something is really wrong, that the top has really run away with the prize. About 60 percent of Americans wanted to repeal the Bush-era tax cuts at the top, and yet Obama ended up siding with the Republicans. I think that epitomizes the break between normal, American public opinion and policy. It reflects this remarkable, unprecedented since the period before 1929 swing toward  the super-rich.
I’ve been pretty impressed by the core trilogy of what opinion surveys say America wants: tax the top, end the wars [in Iraq and Afghanistan], and protect social spending. We ought to be going after the corporations that have, basically, a deal with the IRS that keep abroad what they earn abroad and they don’t pay any taxes on it. We should be taxing worldwide income, not just U.S.-based income.

Every country has an incentive not to have their tax base disappear into a Cayman Islands post office box. There has been talk of ways, through shared action, exchange of information, and so on, of possibly closing down these havens. But it has to do with the way the rules are written by our own governments. One of the arguments against the taxation is that if we tax the rich, they’ll move someplace else. It’s not so simple. We need to recognize that in a global, interconnected economy, with highly mobile capital, we need some cooperation to make sure that we don’t end up with all our governments in fiscal crisis simultaneously.”

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