Our Upside Down Economy

By BOB RUNDLE

In any nation the government sets the rules that determine how its economy works. This is one of several key realities about our economy that Robert Reich superbly explores in his new film Inequality For All.

Over the past 40 years middle class incomes in the United States have essentially been flat. But with the faster rising costs for things like food, education and cars, their effective income has declined. Because of our rules, the benefits from the great growth in productivity during this period have gone mostly to the top income earners, particularly the top 1%.

Income for the average CEO in the United States is now about 350 times that of their average worker. The international Organization for Economic Cooperation and Development (OECD) studies show we now have the greatest income disparity and rate of poverty of all industrialized nations.

The average earner spends most of their income for goods and services. Top earners spend a small fraction of their income on these. The bulk of their income goes into investments in such things as oil, gold, or mortgages around the world aimed at the greatest returns, not producing jobs. Professional investors handle most of this job. This has led to a large increase in the size and power of our financial sector in recent decades. The rules supporting the present gross distortion of income largely flow from this change.

The film shows clearly that huge differences in income closely relate to U.S. economic ills. (See the Journal of Economic Perspectives Vol. 27 No. 3 Summer 2013 for details on these figures.) Between 1913 and 2007, the biggest income differences occurred in 1927 and 2007 when the top 1% got almost 25% of all income. Our two greatest economic depressions in this period started in 1929 and 2008. What’s the connection? There are two major ones.

First, about 70% of our economy depends on spending for goods and services. In periods of these huge inequalities of income such consumer spending declines. CEOs don’t buy 350 more cars, haircuts, shoes or houses than the average worker. Second, all that extra income looking for investment returns helps to fuel the investment bubbles that have preceded the crashes.

Nick Hanauer, a CEO with an annual income in the millions, was interviewed in the film. He said that if you want to support business then support efforts to increase the income for those in the middle and bottom income levels. He notes these are the real job producers. Hanauer points out the myth that top earners generate most jobs has little to do with economics but a lot to do with maintaining status. His company cannot increase sales and jobs if most of the people who buy his products have declining incomes.

The life style of the wealthy depends partly on the spending of those with little wealth. The next time you hear about workers trying to increase their wages and benefits remember they are, in effect, also trying to support this life style. So are those fighting for fairer rules for poor, disabled and unemployed people. More top earners need to recognize the self-destructive result of opposing fair incomes for all and other actions aimed at protecting their bloated incomes.

We cannot avoid the reality that we are all in this together if we want an economy that does not produce periodic misery for millions. We had better start facing the injustice of our present economy - based on making more money for those with money - and start building an economy that better reflects our shared values. Economic thinkers like David Korten, Gar Alperovitz and Robert Reich point the way.

Bob Rundle of Knoxville, Tenn., is co-director of the Institute for Spirituality and Global Economics (SAGE). Email bobarundle@gmail.com.

From The Progressive Populist, March 15, 2014