America the Unequal

PARK CITY, UTAH – The last documentary film that used dry charts and statistics to make an abstract argument about a global issue and nonetheless became a pop-culture hit was Al Gore’s An Inconvenient Truth. But the hit of this year’s Sundance Film Festival was a low-key affair called Inequality for All, in which Robert Reich, a labor secretary in the Clinton administration, explains how rising income inequality and the demise of the middle class is causing so many Americans to suffer.

With President Barack Obama recently taking up some of these themes in his second inaugural address, it is worthwhile to examine the message of Inequality for All more closely. The film’s charts are not boring, but actual showstoppers: Reich makes the point that the mid-1940’s to the mid-1970’s were decades of relative income equality, which corresponded with overall affluence. (The last time that income inequality in the United States was as deep as it is now was immediately before the 1929 stock-market crash.)

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But the last 20 years have witnessed a spike in the difference between the top earners and the middle class: the “1%” really are living in a stratospheric bubble. As the journalist Chrystia Freeland has recently argued, a meta-class of global “plutocrats” is emerging – people who have little in common with the rest of us.

Inequality for All makes the case that the wealthiest 1% simply cannot consume enough, no matter how hard they try, to generate the revenue that an affluent middle class could. The secret to a strong economy is to invest in education, strengthen household incomes with a decent minimum wage and strong unions, and raise skill levels, thereby generating sustained consumer demand. This, Reich argues, is the “virtuous cycle” that we see in strong economies such as Germany, in which workers are highly skilled and educated, unions are protected, and the middle class has leisure and money to spend.

Reich also persuasively describes the “vicious circle” – with falling wages undermining consumer demand and leading, in turn, to shrinking output – that has made the US economy fragile and boosted social instability. He analyzes a middle class that is skating on the thinnest of ice, with employment coming at the price of lower wages and benefits. Moreover, millions of middle-class American homes are “underwater” (the mortgage is more than the home’s underlying value).

The film interviews one of the rich, a charming millionaire who owns a pillow company and points out that he and his fellow rich guys and their families simply cannot spend enough to offset the lost demand of a strong middle class. In fact, the richest save rather than spend their dollars, and send them around the globe in transnational hedge funds rather than using them to create more jobs at home.

So, the “trickle-down” story that the middle and working class are told every election cycle in America – that cutting wealthy people’s taxes means more job creation in America – is simply not true. Those wealthy people’s untaxed dollars stay in hedge funds and out of the revenue stream. The cost to social programs, infrastructure, and public schools intensifies stress on the middle class, who end up poorly educated, work long hours in dual-career ill-paid jobs, lack leisure time and money to spend, and so on.

Are we stuck with this vicious circle, which advocates of laissez-faire globalization have told us for 15 years is an inevitable consequence of the “invisible hand”? Or could Reich’s retro prescriptions, which he has affirmed for decades, be taken up again? Could they bring back the affluent years of the early Clinton era, when it seemed as if domestic policies could actually influence and even benefit the US economy?

I asked Reich what three policy prescriptions he would give to an American president and Congress today, especially drawing on the lessons of other countries. “I’d like to see what we did so successfully in the first three decades after World War II, when prosperity was widely shared.” That means large investments in public education, including higher education; substantial investments in infrastructure, funded by a highly progressive tax whose top marginal effective rate never fell below 50%; and strong labor unions.

“Anyone who thinks these policies are no longer feasible in a global economy,” Reich told me, “hasn’t looked at modern Germany, which features all of them, and where the median wage is higher than ours.”

It sounded great – but it also seemed to contradict the conventional wisdom, according to which cut-rate labor in Pakistan or Mexico is the inescapable death knell for $25-an-hour union jobs, with benefits, in Detroit.

“How do you keep US labor unions strong if Mexico, for example, undercuts US hourly wages,” I asked. Reich replied in more detail: “Strengthen labor unions in industries sheltered from global competition – workers in retail chains, hotel chains, restaurant chains; childcare and elder-care; hospital workers; and so on. Attract manufacturing and manufacturing engineering back to the US by improving the skills and productivity of US workers (as Germany has done for German workers). And encourage trading partners to improve their own wages and labor standards (for example, by requiring in all trade treaties that a country’s minimum wage be half its median wage).”

Is this agenda feasible in America today? To be sure, one would have to mend the broken political system first. But, looking at the affluent German middle class from the US, where a quarter of jobs pay wages that place workers at or below the poverty line, Reich’s recommendations seem worth fighting for.