What caused the wealth gap?

Protesters are furious over America's growing income disparity. Economist Jeffrey Sachs explains where it came from

Topics: Occupy Wall Street, U.S. Economy, Economics, History, Nonfiction, , ,

What caused the wealth gap? Former president Ronald Reagan, left. Center: Protesters affiliated with the "Occupy Wall Street" protests march through the Financial District in New York. Right: Jeffrey Sachs (Credit: AP)

If you are still scratching your head trying to figure out Occupy Wall Street’s aim, you are not alone; the three-week-old movement has remained stubbornly resistant to stating clear demands. But one thing has become increasingly clear: It has managed to tap into a growing national frustration with the state of the American economy. And protesters are especially angry about our country’s increasing, outrageous income disparity. The numbers are astounding: As 2.6 million Americans fell under the poverty line last year, the top 1 percent continued to control more than 40 percent of the country’s wealth.

For anybody interested in understanding the reasons behind this economic travesty, economist Jeffrey Sachs’ new book, “The Price of Civilization,” is required reading. In the book, Sachs, who has focused much of his career on the developing world and eradicating global poverty, turns his eye homeward to examine the current economic crisis, tracing its roots not to the housing or financial bubbles of the ’00s, but to a shift in Washington toward smaller government that began in the early ’80s and has yet to be reversed.

Sachs talked to Salon over the phone to discuss the ills of small government and Reagan’s trickle-down economics, the Republicans’ and the Democrats’ culpability, and the need for more compassionate talk in politics.

You went to speak with the Occupy Wall Street protesters. What’s your opinion of the movement?

I’m very sympathetic to their message, and I’m glad that they’re protesting. I think that their key point — which is that the top 1 percent of society has run away with the income, the wealth and the power in this country — is correct. 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. A  majority of Americans are feeling very disgruntled about both the economic squeeze and their lack of political representation.

You try to dissect the current economic crisis in your book. What do you think caused it?

This story goes back a long ways.  It’s important to understand this because if we take this crisis to be something that started with the bankruptcy of Lehman Brothers in September 2008, or whatever recent event one might pick, we’re going to miss the big picture. The U.S. is facing a structural crisis that goes beyond the bursting of the financial bubble. The remedies, therefore, must also go beyond what I regard as gimmickry of a stimulus package, or a temporary tax cut – or, for that matter, even less relevant permanent tax cuts. So I try to peel back the story actually into the 1970s – from then until today.

Why the 1970s?

Beginning in the 1970s – this is crucial – the U.S. began to globalize, as did every other economy in the world. We felt it first with the competition from Japanese automobiles. But the dramatic story, of course, was the rise of China as a major world economic power when it changed its politics in 1978 [by opening its doors to foreign investors]. In the U.S., we were so focused on the Cold War and competition with a fourth- or fifth-rate economic power, the Soviet Union, that we didn’t understand that something far more consequential was occurring in the world economy.

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.  So our society began to separate between the “haves” and the “have-nots,” really in the early 1980s. And while this crucial dynamic was underway, American politics was going in almost the opposite direction.

How so?

Reagan came to office with a diagnosis, most famously put in his inaugural speech, that government is not the solution, but the problem. This was put forward as the reason why the 1970s were so shaky, why we were experiencing more instability. Reagan made a big and wrong diagnosis, with extraordinary consequences, and a lot of the country bought it.

He was playing to a lot of powerful interests [the rising Sun Belt, conservative businessmen, etc.], 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.

Each of the parties is constantly feeding at the trough of major interest groups. The Democrats, basically, were sold to Wall Street by [Bill] Clinton, and they’ve remained in Wall Street’s hands up until now. And that is one of the greatest failings of the Obama administration: the fact that he couldn’t find his way clear of the major interest group that helped bring him to office, and therefore he really couldn’t undertake deeper changes in the country.

Part of being in this straitjacket of fiscal or tax policy that Obama got himself into is that everything on the spending side has been short-term gimmicks rather than a long-term program, and it is exactly coherent with our incoherent nonstop campaign cycle. We don’t really have longer-term thinking in this country about our economic challenges.

You point to this political shift in the ’80s as a pivotal moment. What was public perception of government prior to Reagan?

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.

I think Ronald Reagan really had a devastating effect on this. The idea that one would elect a president on the premise of demonizing government rather than making it work properly is really a shocking idea – “I’m here to dismantle the role of government.” No president since then has deviated from that line. Bill Clinton declared the end of big government. Rick Perry has been quoted as saying that he wants to make the federal government as inconsequential as possible to the American people. Well, maybe he should look for another job. That’s a lousy platform for a president of the United States.

You, in fact, call for a renewed emphasis on compassion and social responsibility.

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.

We’ve arrived at a crossroads about the real meaning of our civilization. I think that we will need to reflect on how to achieve a higher level of happiness in this country —  [and think about] issues of social trust, social connectedness, decency, compassion.

And this isn’t in conflict with the American work ethic of “pulling yourself up by the bootstraps,” and everyone doing their fair share?

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. One of the most pertinent measures of social mobility is the correlation between parents’ and children’s educational attainment. If you’re lucky to grow up in [a middle- or upper-middle-class] household where your parents have a college degree, you have a very good chance of getting a college degree and gaining a good position in the economy. But if you grow up in a household where your parents’ highest educational attainment is a high school diploma [or less], the chance of you getting a bachelor’s degree, which is now the tollgate for middle-class success, is very, very small. That brings us back to globalization.  There really were middle-class paths with a high school diploma before. Those don’t exist now.

You lay out an extensive plan for climbing out of this crisis. What are some of the steps you propose?

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.

How do you propose paying for this?

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.

But what about the threat of job flight if we were to increase tax burdens on corporations?

There is a phenomenon called the race to the bottom. It says, what counts for me is whether my taxes are lower than your taxes so that I can attract capital from you. If everybody ends up racing to the bottom, so there’s a tax-cutting arms race, everyone ends up being a loser. We definitely have part of that happening right now.

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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