Distribution of Wealth : Way Out of Whack

Image from OECD / CBS News.

Trickle UP theory:
The recession and its roots

By Ted McLaughlin / The Rag Blog / July 15, 2010

Have you ever wondered just what caused the deep recession that the United States is in? Many people believe it was the meltdown of Wall Street and the financial industry. That was the trigger that began the recession, but was it the true cause of it? Robert Reich has a very good article in The Nation that the folks over at Alternet have reprinted.

Reich agrees that the Wall Street meltdown was the trigger to the recession, just as the Wall Street disaster in 1929 triggered the Great Depression. But the real cause of both the current recession and the Great Depression was the absurdly lopsided distribution of income. In 1928 the income distribution had reached a point where the top 1% of the population was making 23.9% of all income in the United States. With only 76.1% of the country’s income left for 99% of the country’s people, the situation created was like a loaded gun waiting for something to pull the trigger (and that trigger was pulled with the Wall Street crash of 1929).

Conservatives don’t like to admit it, but a capitalist economy such as ours simply cannot function correctly when such a large proportion of the country’s income is going to such a small percentage of it’s people. The country did not pull out of that depression until the income was redistributed in a more equitable way. This was accomplished by the New Deal programs putting people to work, World War II (which employed even more people), the GI Bill (which educated many soldiers, qualifying them for higher-paying jobs), the Great Society, which decreased the number of people in poverty, and higher income taxes.

By the 1970’s the income percentage of the top 1% had been reduced to around 7% or 8% of the nation’s total income — a much more manageable figure. But the Great Depression had taught the Republican Party nothing it seems. In 1980, Ronald Reagan became president and began the process of again redistributing the income toward the top 1%.

The Republicans did this with a really good propaganda campaign which convinced many Americans that a “trickle down” theory of economics would work. This was the idea that if we just let the rich make more and more money, then they would share it with the rest of us — in other words, it would trickle down and benefit all Americans. Sadly, all it did was fatten the bank accounts of the rich.

The Republicans redistributed the country’s income by busting unions, deregulating the stock market and the financial industry, severely cutting social programs, deregulating college tuitions (which priced college out of the budgets of many Americans), and by repeatedly and radically cutting taxes for the richest Americans. By 2007, the top 1% of Americans was again controlling 23.5% of this country’s total income.

Once again the country’s economic gun was loaded and cocked. The trigger was pulled by the meltdown of the financial industry. Reich says the reason this has not caused another depression was the bailout of the financial industry with the TARP funds. I’m not so sure we have yet escaped that. The bailout saved the financial giants and the rich, but many smaller banks have gone under (and it’s still happening), and all but the rich are still mired in a deep depression because of the loss of 12 to 15 million jobs. We may still see a deeper recession (depression?) because the jobs situation has not been adequately addressed and the income distribution is still way out of line.

So what can be done to cure the current recession? Further deregulation or tax cuts will not help. That would only exacerbate the situation and make the income distribution problem even worse (which was the cause of this mess in the first place). The problem must be attacked on a broad front by government targeted at re-distributing the country’s income. Conservative’s hate the term “income redistribution,” but they have been doing just that for the last 30 years. The problem is they have been redistributing the income away from the people who need it and toward the richest among us. This process must be reversed.

The government must spend a lot more money on job creation. Much of this can be directed at the private sector through the building and revamping of our transportation infrastructure (bridges, streets and highways, mass transit, trains, etc.). They could also create government programs to clean up and improve our National Parks, wetlands, monuments, and other things along the lines of the New Deal’s WPA and CCC.

Another thing needed is a massive influx of money into low-cost and easy-to-pay-back loans for small businesses (since small businesses provide the bulk of jobs in this country). These small businessmen and -women are hurting too, and they are certainly not among that richest 1% of Americans. Although the government bailed out the financial giants, these financial giants have not repaid Americans by making loans available to small businesses as they should have. They have instead used that money to speculate in the stock market and give themselves enormous bonuses.

A couple of other things that could be done: strengthen worker unions and have the government provide a much larger portion of the money needed for a college education. Strengthening unions would insure workers’ wages and benefits and guarantee that those workers receive their fair share of increased production. Paying a much higher portion of the cost of a college education would once again let all Americans take advantage of educational opportunities to create a better and higher-paying future for themselves.

Finally, income taxes should be raised significantly on the richest Americans — especially that top 1%. I know the right-wingers will whine that this would hurt job creation. That is false. High taxation does not cause job losses and low taxation does not create jobs. Businesses will hire only the number of workers needed to appropriately deliver their goods or services to their customers — regardless of what the tax rate is.

In fact, there is a good argument to be made that our country prospers the most when the rich are highly taxed (as they were during the boom times of the 1950s). For one thing, it helps to distribute the country’s income more evenly and fairly. It also encourages business interests to re-invest their excess income back into their business to save on the taxes they would owe, thus creating new jobs and helping the economy (and creating even more income for the business).

The right wing will scream that much of what I have proposed will increase our already large deficit. That is true. But it must be done if we are to stave off an even deeper recession and eventually pay off that deficit. As the income is redistributed and jobs are created there will be an ever increasing number of people paying taxes. The higher taxes on the rich and the increasing number of tax-paying workers will pay down the deficit as these proposals begin to take effect.

The deficit is important, but just trying to reduce it without creating jobs and redistributing income will not bring the country out of the recession. It will only make it worse. Job creation and income redistribution are much more important — not only to bring the country out of recession but also to prevent another even worse recession.

[Rag Blog contributor Ted McLaughlin also posts at jobsanger.]

The Rag Blog

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11 Responses to Distribution of Wealth : Way Out of Whack

  1. The majority of us know all of this, but the majority of us are not that top 1% who’re making all the money (and you don’t see them writing articles like this).

    Remember, it’s always been the elite and wealthy who’ve made the rules and by-laws; who break even the laws they create, and this country has always suffered from the greed of the few, and probably always will.

  2. Anonymous says:

    I think it is cyclic; when enough people (a significant portion of the 99%) get angry the cycle changes. Then after the change allows them relief from poverty they get complacent.The avaricious get on with getting it all, and around and around we go.

  3. So lets focus on the other end of the spectrum. The poor lack a place to live, money for food, affordable child care so they could be available to find and hold a job, public transportation to get them around, a free education, job coaching / training/ job search assistance, free or low cost medical care.

    If the poor had all those things, then they would lift themselves out of poverty. Yeah right!

    If you are not mentally ill or unstable, or addicted, then you already have access to all of those things. Education is free for at least 12 years, yet kids, poor and otherwise, show little respect for the education they are given. Many drop out before finishing. After HS, local community college combined with loans can put at least an associates degree in the hands of nearly anyone who can write their name. Women shell out kids like popcorn without being in a committed relationship and then complain about how hard it is to make ends meet.

    Welfare provides money for food. Local charities also help with food and clothing. People eligible for welfare have access to health clinics, can get free rides on public transportation, reduced cost or free rent for apartments, reduced cost or free child care.

    In Texas, workforce centers provide every needy person with free job coaching and job searching.

    You may argue that its not enough. I would argue that even the poor here in the US have more opportunity and a higher standard of living than 80% of the worlds population. Yet even with all the assistance that our society provides, many simply don’t take advantage of it, They demand more.

    Many in the US will find themselves temporarily needy and poor but will climb out of that situation with support from the government and charities and their own drive and effort. Those that are addicted or mentally ill will always be poor. The long term poor simply wont put forth the effort to rise above poverty.

    Giving them more, will simply make them demand more. But they know that folks like the Rag Bloggers will always be around to tell them its not their fault, its the evil rich guys fault that they are poor

  4. Anonymous says:

    The root problem is a failing empire of finance capital which has made many rich at the expense of the poor. Wealth divisions in the USA now resemble a banaana republic.

    The poor and the US middle class are its victims as surely as the poor abroad who are caught up in a global web of corporate domination.

    For “Extremist” to blame the poor rather than the unregulated corporate empire that drove the US economy into a ditch — this is a quite revealing political statement in itself.

  5. Grohbba says:

    Although i live in another country, i can see and understand was is said here. US economy and way of economic distribution is reflected here as well in a extreme way.
    I can only define this situation as a modern form of Feudalism, were the Feuds are no longer territorial, but economical with the Feudal Lords distributing gain, coordinating peoples lives as they see fit.

  6. We know that the Great Depression was brought on by underconsumption. But if we make this argument today, we are accused of playing the class card.

    Today, the elite cannot afford to promote a more jusd distribution. We have massive debt and a very sick manufacturing sector. They make their money by war, exploiting other countries, and manipulating the world financial system. Now that their financial structure has become wobbly, they need government bail outs. Hence the new financial reform says no more bail outs but makes them inevitable.

    The masses must be distracted from wanting entitlements so that we can keep the big war machine and be in a position to shore up finance.

    How this occurs will be interesting to see. It won’t be hard, and we are already seeing how it works.

  7. There is a whacky guy here in Austin named Alex Jones. Alex has a nationally syndicated radio show caleld InfoWars. He also runs a website called Prison Planet.

    The more I read the musing of Rag Bloggers, the more apparent it becomes just how much the two groups have in common. I know, I know, different agendas and worldviews. But if you read the actual positions, conspiracy theories and future preditions taken by each group, they are eerily similar.

  8. To Extremist to the DHS:

    Please help me with the meaning of DHS.

    I agree that “conspiracy theory” is a problem in a society where so many essential pieces of information seem hard to find. Often, its opposite is the official story, which sometimes can be called “coincidence theory.” I could give you many examples.

    I admit I went far beyond the evidence in suggesting what might come about. But I suggest that you do some reading, beginning with Joseph Stiglitz’s work on the Washington consensus as implemented by the World Bank and IMF. They you might read John A. Perkins’ three books, beginning with Confessions of an Economic Hit Man.

    This is the younger John A. Perkins, not the deceased one whom I knew.

    Everyone knows that we carried out a coup in Guatemala in 1954 at the urging of United Fruit. Kermit Roosevelt was working for the US and our oil companies in Iran.

    I ,for one, have no absolutely certain idea why we are in Afghanistan. I have found documentation to support my piece on the pipeline there, but more is involved. My second piece on the reasons for being there had to do with the poppy trade and narcodollars.

    I submit to you that I can build a better case for what I have written than the spinmeisters can for the official story.

    As for my prediction on future needs and choices, I only point to the UK, where they are cutting both the military and entitlements because they are having problems peddling bonds at low rates. When that time comes for us, will we also slash defense as well as entitlements??

    Many of our people are so brainwashed that they would give up entitlements so we could continue to take names and kick ass all around the world.

  9. richard jehn says:

    The only DHS I know of immediately is the “Department of Homeland Security.” As for the underlying meaning of Lance’s pseudonym, that’s a bit mysterious.

  10. Sherman, I get your points. Our military spending is way out of whack and that affects our ability to provide for social services. But here is where I have a problem.

    In many parts of the world, poverty exists because it cannot be overcome. Illiteracy, gender, illness due to lack of clean water, lack of any healthcare, lack of education, lack of work, violence, injustice among many others conspire to keep all but the lucky few in a life of poverty. These people need help, especially from those in the developed world so rich in opportunity and resources. They are truly victims of forces beyond their control.

    In the US and much of the developed world, not everyone in poverty is a victim of forces of nature. Many are victims of their own destructive habits and choices. There are exceptions of course. The mentally ill, along the Mexican border, in inner city slums wracked with gang violence and drug crime, in Appalachia and parts of the deep south. The poor there face many challenges that conspire to keep them in poverty. But outside those few areas, the poor in the US can be divided into the long term poor and the situational poor. Everyone struggles with situations that can create poverty. In those cases, there are safety nets, some good, some inadequate, to provide a hand up.

    For most of the long term poor in this country, they need to get off their ass and make better choices.

    I have a problem with the “victimhood” message of the Dems and liberals and progressives. They want to convince 90% of America to see themselves as victims of the ultra rich. Every poor person, according to your theories, is a victim and needs more entitlements in order to help themsleves, let alone anyone else. Everyone that struggles with education is a victim. Everyone that struggles with rent is a victim. Capitalism and the ultra rich are too blame for “their” powerlessness. You play the class warfare card to either keep, get, or increase your political and cultural power.

    The real tragedy of your message is that we need to have 100% of Americans see themselves not as victims, looking for entitlements, but as incredibly blessed and looking to help the truly needy, the real victims around the world. Even the poor in America are rich beyond imagination for a villager in Malawi. The left has given America a pass to say “we cant help the world, we ourselves need more goodies just to survive” I say bullshit to that.

    I am selling my house. I am in the process of developing a ministry to help the poor and needy in Central Texas. My ultimate goal as I serve the needs of the poor, is to get them to see themselves as incredibly blessed despite their circumstances and the only real hope for the truly poor, the real victims.

    The ultra rich cant and wont lift the world out of poverty. It will have to be done by the poor and the middle class in America and Europe and other developed and developing countries. But that message wont get through, as long as Progressive are hard at work spreading a message that capitlasim and the “rich” are the villans and creating victims out of the middle class as fast as you can.

  11. DHS,

    I salute your work in central Texas and will add it to my prayer intentions.

    Much of what you say cannot be quarrelled with.

    We are living in a country where the main decisions are made to take
    serve the interests of the powerful few. That is a simple fact that too few grasp. By pointing to that, I do not want to immobilize people by leading them to see themselves as powerless victims.

    I admire your decision to sell your house to generate income to help others. I would be afraid to do that. I just finished reading a long article about how conservatives are thinking about slashing pensions of people like me who have been long retired.

    Progressives who actually get out there and work in food kitchens, homeless shelters, and community organizations know better than to feed any sense of victimhood. I have never heard anyone, including community organizers, deliver a rant about capitalism or do anything to encourage a sense of victimhood.

    Yes, there are cultural problems seem to lock in poverty. I don’t know how we get at them.

    Some few progressives have some sort of need to feel morally superior to others. They seem to be doctrinaire and rarely do anything themselvs to make thing better. But they are a tiny, tiny group. They might think in terms of enhancing their own political power.

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