Note: This is probably not my best work, but I figured it was worthwhile to populate this place with the things I have written anyway. –M
Ever since the Occupy Wall Street protests grabbed international headlines in 2011, the issue of income inequality has moved to the forefront of public discourse. Regardless of where someone finds themselves on the political spectrum between liberal and conservative, the fact that income gains in the United States have increasingly gone to the wealthiest citizens after the 1970s is not in dispute. In a speech at the Federal Reserve Bank of Boston in October 2014, Federal Reserve Bank Chair Janet Yellen mentioned various highly credible studies which demonstrate “significant income and wealth gains for those at the very top and stagnant living standards for the majority,” and said that “the extent of and continuing increase in inequality in the United States greatly concern me” (Parker). Where people disagree is in identifying the cause of this inequality, and what steps should be taken to address it. Generally speaking, people with conservative viewpoints believe in an extreme form of free market economics, where the “invisible hand of the market” in laissez faire capitalism works to distribute the fruits of effort based on merit, and where government intrusion through public policy is seen as a form of tyranny that robs the gains created by the producer class in an ideal meritocracy and distributes them to the undeserving, underperforming classes. The flaw with these viewpoints is in the assertion that such an “invisible hand” exists, that it acts to create an egalitarian outcome, and that public policies tend to benefit the poor. The simple truth is that there are inefficiencies inherent in capitalist economics and public policy that disproportionately benefit the wealthy over the poor and work to maintain the status of the wealthy and powerful elite.
First, it is important to understand the term “invisible hand” and how it has come to be used to describe economics. The term originated from Adam Smith’s seminal work, The Wealth of Nations, widely considered the foundation of modern economics. In this initial work, however, the term had a more nuanced meaning than it has today. Smith wrote:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention (Smith).
Smith specifically references the support of domestic over foreign industry as a self-interested action that supports society through the unwitting decisions of an individual actor. Even in this more nuanced instance, it is questionable whether an individual actor in a modern global economy can exert noticeable pressure on larger trends. A business owner may find it preferable to buy cheap supplies manufactured overseas in order to maximize profits, and although this may erode the buying power of domestic consumers in the long run, it could seem like the obvious, self-interested choice in the short run. The owner may even rely on foreign goods if they are no longer produced domestically, to the benefit of large multinational corporations and detriment of smaller local businesses. This in turn puts downward pressure on wages and impacts the economy negatively. In modern parlance, however, “invisible hand” has a broader connotation that self-interested actions in the aggregate produce the best possible outcome for society as a whole. An example which shows this to be blatantly false can be found in the 2008 financial crisis. After the economy crashed, it was determined that Morgan Stanley had lied to investors about the value of various mortgage-based financial instruments in order to reap enormous profits for their shareholders—people who tend to be among the wealthy elite. Similarly, lies about the potential future value of homes were told to homebuyers to encourage them to invest in homes they could not afford. Morgan Stanley was fined $2.6 billion for their malfeasance, or about one third of its 2014 income (Baer). Their activities in part resulted in a huge devaluation of houses for regular investors, and in many cases forced people out of their homes. When an individual defaults on a mortgage, they lose one hundred percent of their investment. The self-interested actions of Morgan Stanley created a benefit for an elite few in the investor class while funneling money away from a larger segment of the population of more moderate means. The degree of punishment meted out to them falls far short of providing justice to the millions of people affected by their actions. All actors were promoting their own self-interest, but only the powerful came out ahead. This trend is often referred to as “privatizing profits and socializing risks.”
A curious insinuation in the logic of the modern interpretation of the “invisible hand” is that if someone is not financially successful, the individual actor bears responsibility for that. This is an amplified version of “caveat emptor” or “buyer beware,” where an actor in a market secures a good deal for him- or herself or is cheated in a transaction dependent on their own savvy. An obvious problem with this view is that it suggests that the other actor in a transaction is held blameless for cheating. Volkswagen has recently been held accountable for cheating on emissions tests to circumvent Environmental Protection Agency standards, and there is some evidence that other diesel manufacturers have cheated, too. Not only did VW customers receive a product that was markedly different than the one advertised, but the public was subjected to increased pollution, and that so-called “externality” and the costs related to health problems and climate change are shifted from the company to the public. In the instance of Volkswagen, they are being held accountable by the EPA, an agency that many conservatives work hard to weaken because of the demands (and costs) that they put on business. Those demands represent the collective bargaining power of individual actors through the power of representative government, and are a crucial component of providing justice and opportunity to people.
This example of regulatory power at work undermines another assumption of the efficiency of the “invisible hand”—that all actors in an economy are on a level playing field. If a worker decides that his or her labor is not being compensated properly, the thinking goes, he or she can refuse to provide services to an employer and choose to work for someone else. This oversimplifies matters greatly. For one, a worker often does not enjoy a surfeit of employment opportunities. Workers are constrained by geographical, educational, and economic boundaries that put them at a disadvantage when negotiating with an employer. Also, a worker requires employment in order to meet significant financial obligations, whereas an employer can shift work to other employees or even employ workers in a different country. Throughout American history, labor unions helped to address the weak negotiating position of the worker by organizing to demand reasonable accommodations from employers, with the powerful threat of depriving them of all labor. Unions are responsible for many workers’ rights that we take for granted today, such as weekends, safety standards, and pensions. Unfortunately, unions have become drastically weakened through the efforts of conservatives, especially since the 1980s and Ronald Reagan. Conservatives have successfully enacted “right to work” laws in many which states have eroded the power of unions to collect dues from employees. While bonuses and golden parachutes for Wall Street executives are defended as necessary to retain quality, the pensions of public union members are increasingly derided as a give-away to greedy, overpaid, undeserving workers. It would seem that there are two different systems of measurement for economic justice—one for the wealthy, and one for everyone else.
Another blatant example of public policy disproportionately benefiting the wealthy is in taxation. Conservatives have consistently supported policies that lower taxes on the wealthy, while shifting the tax burden to the working classes. Wealthy shareholders who earn dividends on their investments passively and without effort pay a much lower capital gains tax than workers who have to expend the effort of their bodies and sentience in order to earn a living. In fact, it is the physical and psychological effort of millions of workers that provides the capital input from which the wealthy elites withdraw their profits. In many instances, very wealthy people and large multinational corporations pay no taxes in the United States because they are able to hide their wealth in overseas accounts, and can afford to pay crafty accountants and attorneys to help them do this. They also use their wealth to support political representatives and enact policies which safeguard their wealth. The amassed wealth of these individuals is then passed on to their progeny as inheritance after their death. To turn public perception against what was once known as the “estate tax,” conservatives redubbed it the “death tax.” The combination of these tax policies has diminished the earnings of the majority of people while protecting the earnings of the very wealthy.
In his book Capital in the 21st Century, economist Thomas Picketty succinctly expresses the result of this inequality as r>g, that is, the rate of return on capital investments is greater than the rate of growth of the economy as a whole (Picketty). While worker productivity has steadily increased, wages stopped increasing along with them in the 1970s (White). If there is an “invisible hand,” it would seem that it is the hand of the wealthy picking the pocket of everyone else. It is clear from the evidence that the system is rigged to benefit those at the top. The solution to this is to make changes to the system so that the aggregate benefits of society are more evenly distributed. Raising the capital gains tax, increasing the estate tax, and raising the top marginal tax rate would go a long way to addressing these inequalities. Stronger unions would help to push back against the downward pressure on wages as corporations use every advantage to disenfranchise and disempower workers. Better enforcement of regulations designed to protect against abuses in the financial sector would help to put an end to predatory lending practices and pushing costs onto the general public through externalities. The only institution powerful enough to protect the people from the combined forces of capital is the government, and it has been hijacked by those same powerful interests and put to work for them. We should use our very visible hands to pull the levers in the voting booth that will elect representatives who will support the common good and fight against the destructive and selfish powers of corporations and the wealthy.
26 September 2015
Baer, Justin. Wall Street Journal. 15 February 2015. Web. 26 September 2015. <http://www.wsj.com/articles/morgan-stanley-to-pay-2-6-billion-to-settle-mortgage-cases-1424904275>.
Parker, Nicholas. “Federal Reserve Bank of Atlanta.” September – December 2014. EconSouth. Web. 26 September 2015.
Picketty, Thomas. Capital in the Twenty-First Century. Cambridge: The Belknap Press of Harvard University Press, 2014. Print.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Straman, 1776. Print.
White, Gillian B. Why the Gap Between Worker Pay and Productivity Is So Problematic. 25 February 2015. Web. 28 September 2015. <http://www.theatlantic.com/business/archive/2015/02/why-the-gap-between-worker-pay-and-productivity-is-so-problematic/385931/>.