Opinion

Lawrence Summers

On inequality

By Lawrence Summers
February 17, 2014

Inequality has emerged as a major economic issue in the United States and beyond.

Sharp increases in the share of income going to the top 1 percent of earners, a rising share of income going to profits, stagnant real wages, and a rising gap between productivity growth and growth in median family income are all valid causes for concern. A generation ago, it could have been plausibly asserted that the economy’s overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty. This is no longer plausible. The United States may well be on the way to becoming a Downton Abbey economy.

So concern about inequality and its concomitants is warranted. Issues associated with an increasingly unequal distribution of economic rewards will likely be with us long after the cyclical conditions have normalized and budget deficits finally addressed.

Those who condemn President Barack Obama’s concern about inequality as “tearing down the wealthy” and un-American populism have, to put it politely, limited historical perspective. Consider a sampling of past presidential rhetoric.

President Franklin D. Roosevelt, talking about the financial industry in his first Inaugural Address in 1933, said “Practices of the unscrupulous money changers stand indicted in the court of public opinion …. They know only the rules of a generation of self-seekers. They have no vision and when there is no vision the people perish.”

By his re-election campaign in 1936, this had become: “We had to struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking. … They are unanimous in their hate for me — and I welcome their hatred.”

President Harry S. Truman later observed, “The Wall Street reactionaries are not satisfied with being rich….These Republican gluttons of privilege are cold men. … They want a return of the Wall Street economic dictatorship.”

John Kennedy, dismayed by a steel price increase in 1962, privately cursed the steel executives — though the quote quickly became public — and had FBI agents storm into corporate offices and subpoena business and personal records. He very likely ordered the Internal Revenue Service to audit steel executives’ personal tax returns. President Richard Nixon also turned to the tax authority, announcing in 1973 that he had “ordered the IRS to begin immediately a thoroughgoing audit of the books of companies which raised their prices more than 1.5 percent above the January ceiling.”

President Bill Clinton, in a major economic speech of his 1992 campaign, complained, “America is evolving a new social order, more unequal, more divided, more impenetrable to those who seek to get ahead. Although America’s rich got richer … the country did not … the stock market tripled but wages went down.”

Many more examples can be cited to demonstrate that it is neither unusual nor un-American to be concerned about income inequality, the concentration of wealth, or the influence of financial interests. Given the public’s frustration with stagnant incomes and an increasing body of evidence linking inequality to reduced equality of opportunity, reduced demand for goods and services and increased alienation from public institutions, demands for action are reasonable.

The challenge is in knowing what to do. If total income were independent of efforts at redistribution, the case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom would be compelling. Unfortunately this is not the case. Technological changes and globalization, for example, have made it possible for those with great entrepreneurial talents to operate faster and on a larger scale than ever before — and gather profits on an unprecedented scale.

It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses. But it is far harder to see how such policies would raise the incomes of the remaining 99.9 percent, and such polices would surely hurt them as consumers.

It is true that there has been a dramatic increase in the number of highly compensated people in finance over the last generation. But recent studies reveal that most of the increase has come as the value of assets has increased — asset management fees as a percentage of assets remained roughly constant. Perhaps some policy could be found that would reduce these fees, but the beneficiaries would be the owners of financial assets — a group heavily tilted towards the very wealthy.

So it is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play here. Apart from its adverse effects on economic efficiency, our current tax code allows a far larger share of the income of the rich than the poor or middle class to escape taxation.

For example, last year’s increase in the stock market represented an increase in wealth of about $6 trillion — with the lion’s share going to the very wealthy. The government is unlikely to collect as much as 10 percent of this figure given capital gains exemption, the ability to defer unrealized capital gains, and the absence of any tax on gains on assets passed on at death.

Another example is provided by our corporate tax system. Because of various loopholes the ratio of corporate tax collections to the market value of U.S. corporations is at a near record low.

Then there is the reality that the estate tax can be substantially avoided by those prepared to plan and seek sophisticated advice. Closing loopholes that only the wealthy can enjoy would enable targeted tax measures like the Earned Income Tax Credit, which raise the incomes of the poor and middle class more than dollar for dollar by incentivizing working and saving.

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will be addressed. Much better that it be done by letting market forces operate and then working to improve the result than by seeking to thwart their operation.

PHOTOS: A homeless man snoozes on a bench in a park in Washington October 21, 2010. REUTERS/Molly Riley 

A member of the Occupy Wall Street movement shows his sign as he protests on 5th Avenue while marching through the upper east side of New York October 11, 2011. REUTERS/Shannon Stapleton

Comments
16 comments so far | RSS Comments RSS

1) Abolish all tax relief. Including that for churches and charities. The more complexity there is in the system the more inefficient, and the greater the advantage of the rich.
2) End prohibition. Reducing the rate of incarceration is essential. Tax newly legal substances.
3) Introduce a financial transactions tax (tobin tax). At a very low rate.

Posted by Urban_Guerilla | Report as abusive
 

“those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy.”

Crony Capitalism & Plutocracy!

It is what it is.

Posted by Flash1022 | Report as abusive
 

“those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy.”

Crony Capitalism & Plutocracy!

It is what it is.

Posted by Flash1022 | Report as abusive
 

During the day, the leader hops around the country claiming Grave Concern over rising income inequality pretending to be “one of us”.

At night, he quietly works on behalf of The Multinationals attempting to fast track the greatest “free” trade agreement ever…..Trans Pacific Partnership promises/guarantees the permanent destruction of even more living wage jobs… as in Today and Tomorrow.

Is his speech lulled loyal base in Denial?

Posted by SaveRMiddle | Report as abusive
 

Dearest Larry, “Inequality has emerged as a major economic issue in the United States and beyond.” This is a psycho/social/spiritual/health issue not just a economic issue. People are more than flack. I’m going to explore every paragraph, inch by inch. “Girls just want to have fun” after all.

Posted by 2Borknot2B | Report as abusive
 

Sharp increases in the share of income going to the top 1 percent of earners (intentionally designed this way by the wizards of the industry), a rising share of income going to profits (causing) stagnant real wages, and a rising gap between productivity growth and growth in median family income (because technology surpassed the need for this kind of labor) are all valid causes for concern (knot necessarily, this can bee a blessing in disguise). A generation ago, “it is plausible” that the economy’s overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty (because they worked their asses off in a fairly regulated system). This is no longer plausible. (Due to greed and corruption). The United States may well be on the way to becoming a Downton Abbey economy. (We are already there).

Posted by 2Borknot2B | Report as abusive
 

So concern about inequality and its concomitants is warranted. Issues associated with an increasingly unequal distribution of economic rewards will likely be with us long after the cyclical conditions (COMPLETELY MANIFISTED AND DESIGNED BY THE WIZARDS) have normalized and budget deficits finally addressed. NOT IF WE DO AWAY WITH THE CURRENT FINANCIAL SYSTEM. IF IT CAN BE CREATED – IT CAN BE UNCREATED. JANET CAN GO ALONG WAY TO PUT PROTECTIONS THAT WERE REMOVED BACK INTO PLACE. I NOTICED THE MEN OF POSITION WERE NOT WILLING TO DO THIS.

Those who condemn President Barack Obama’s concern about inequality as “tearing down the wealthy” and un-American populism have, to put it politely, limited historical perspective. Consider a sampling of past presidential rhetoric. IF HE WAS CONCERNED ABOUT THE INEQUALITY HE WOULD CAP ADMIN FEES FOR CONTRACTORS. I DO NOT BELIEVE THAT HE WAS THAT CONCERNED AND BELIEVE THAT HE WAS ALL ON BOARD FOR THE 75 YEAR PLAN. AS YOU SHOULD KNOW AT THIS POINT, WE ARE ON THE HERE AND NOW PLAN. WITHOUT ELECTRICTY AND POPULATION ALL HUMAN FINANCIAL PLANS ARE USELESS.

President Franklin D. Roosevelt, President Harry S. Truman, John Kennedy, and President Bill Clinton, DIDN’T DO ANYTHING TO STOP THE UNSCRUPLOUS. And as far as I can tell, Obama and the Republicans are not going to either. They all like the binary symbols bouncing around the casino “stalk” markets. The bond buying definitely needs to stop, the future generations of children are responsible enough for all the games the players (including yourself) have played with the future of the working class American tax payers. How would you like it if someone sold your children’s future to a gambling casino?

Posted by 2Borknot2B | Report as abusive
 

I don’t think tax reform will do as much as Mr. Summers believes it would. The reality is that it wouldn’t happen anyway with our current government. Regardless of who is president and what party “has control”. Tax reform would be written by corporate lobbyist and favor themselves and impact small and medium size businesses instead.
We must start with:
1. Term limits for congress.
2. Campaign finance reform for all elected officials.

Without these two things, nothing will ever seriously change.

Posted by tmc | Report as abusive
 

@tmc

100% true. The only way to eliminate the embedded corruption of those we elect who presently sit home in their pajamas working on their utmost top priority….making promises to the big players in exchange for enormous re-election contributions.

How is it Conflict of Interest is only a theme for a judge?

How is it UnSupreme Court Judges can find a way to jump ship on such a principle?

Posted by SaveRMiddle | Report as abusive
 

In the past the people forced the government to accomplish the peoples goals. The people in the US are too soften up by TV and video games. The answer to inequality is to work hard locally and try and not send your money to the wealthy. You know who they are and what they make and sell and yet america sends them their money because they think they need those products. In addition, America elects the same people over and over and both parties are corporate socialists (that’s where we all work hard to asure profits for corporations and when that doesn’t work we send them our tax dollars so they can build factories in China). But, america screams for the government to do something. Well, america, your the fools. The Government has never been on your side, and people used to know that, but somehow you don’t know that anymore. Add in that most people accept corruption and corruption on the local level is worst of all, and you have a nation of people who are totally out of touch with reality screaming for the corrupt government, who they refuse to hold accountable, to do something to make things more equal.

Posted by brotherkenny4 | Report as abusive
 

While Summers is long on discussing the issue, he is very short on solutions–so this article serves only to fill digital space.

Was he raising this issue while working for the current administration? Or was he joining hand-in-hand with the POTUS condemning the “wealthy” while at the same time soliticiting campaign contributions from that same group.

So, what’s the alternative? Perhaps a flat tax that hits all forms of income. No deductions (I can hear the real estate industry screaming already) of any kind (oops, CPA’s are getting vocal now). And we need to eliminate the fact that over 1/3 of households pay zero federal tax (Wow! the advocates for the poor are coming over the walls….) Everyone should pay something, even if it’s only 1% of their income so they have some interest in paying for what politicians propose.

But it won’t happen, because complexity in the tax code breeds K Street jobs and campaign contributions for our “leadership”–including that guy sitting in the White House (oh wait, he’s playing golf in CA while his family skis in Colorado). As if he is one of us. Not!

Posted by COindependent | Report as abusive
 

A possible solution is to have 100% estate tax over R1 million dollars per child. Having the top 100. This will over time contuously transfer the top 0.1%’s wealth to the bottom bottom half or so. Of course there would have to be oversight and a sort of exchange control system but with enough will it would work. This would make America as land of opportunity as anyone can become rich rather than Downton Abbey where heritage is everything.

Posted by BidnisMan | Report as abusive
 

@BIDNIS That is not a “solution”! You are proposing that those that invests their own capital and effort, assumes the risk, and is financially successful should have a limit on the wealth they retain; with the excess amount “distributed” by the government.

What you are proposing is a poorly disguised version of communism “from each according to his ability, to each according to his need”.

It always sounds reasonable, until they come to take what you have earned. Then the liberals will resort to anarchy. Useful idiots that you are.

Posted by COindependent | Report as abusive
 

“Many more examples can be cited to demonstrate that it is neither unusual nor un-American to be concerned about income inequality, the concentration of wealth, or the influence of financial interests”(careful and cute comment). “Given the public’s frustration with stagnant incomes and an increasing body of evidence linking inequality to reduced equality of opportunity, reduced demand for goods and services and increased alienation from public institutions, demands for action are reasonable.” CAP ADMINISTRATION FEES FOR CONTRACTORS. FLATTEN OUT THE FINANCIAL PYRAMID. MOST IMPORTANTLY FREE THE PLANTS. LEGALIZE PROSTITUTION. STOP PRIVATIZATION OF THE COMMONS. STOP OIL/COAL/NUKE BY INVESTING AND CREATING JOBS IN CLEAN ENERGY. STOPPING THE MONOCROPPING – WILL ALSO CREATE JOBS. THESE ARE SOME OF THE DEMANDS.

The challenge is in knowing what to do. (SEE ABOVE.) If total income were independent of efforts at redistribution, the case for reducing incomes (ONLY THE MONEY DERIVED FROM TAX PAYER SUBSIDIES, THAT IS VILE/BLOOD MONEY) at the top and transferring the proceeds to those in the middle and at the bottom would be compelling. Unfortunately this is not the case. (IT WORKED IN THE PAST AND BUILD THIS NATIONS INFRASTRUCTURE) Technological changes and globalization, for example, have made it possible for those with great entrepreneurial talents (a.k.a. BRUTALITY, GREED AND CORRUPTION) to operate faster and on a larger scale than ever before — and gather (STEAL FROM THE COMMONS) profits on an unprecedented scale. LIKE A DRAGON WITH HIS PILE OF GOLD!!!

Posted by 2Borknot2B | Report as abusive
 

“It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses.” THIS IS EASY TO DO BECASUE OF THE TAX SUBSIDIES GOING TO OIL. BY SUBSIDIZING OIL COMPANIES, WE POLUTE THE PLANET, AND LITTERALY MAKE IT POSSIBLE TO SHIP JOBS AND EXPLOIT LABOR OVER SEAS. CUTTING OUR OWN THROATS IN THE PROCESS. “But it is far harder to see how such policies would raise the incomes of the remaining 99.9 percent, and such polices would surely hurt them as consumers.” THIS CONSUMERISM DRIVEN ECONOMY IS GOING TO FAIL, ALONG WITH THE FAKE MONEY SYSTEM.

“It is true that there has been a dramatic increase in the number of highly compensated people in finance over the last generation.” IT IS ALSO TRUE THAT THERE HAS BEEN A DRAMATIC INCREASE IN AMERICAN POVERTY AS A RESULT. “But recent studies reveal that most of the increase has come as the value of assets has increased” NO, THAT IS JUST A ILLUSION PUMPED UP BY THE TAX PAYERS FUTURES. — asset management fees as a percentage of assets remained roughly constant. “Perhaps some policy could be found that would reduce these fees, but the beneficiaries would be the owners of financial assets — a group heavily tilted towards the very wealthy.” PERHAPS? I KNOW OF A FOR SURE WAY TO MAKE THAT HAPPEN.

“So it is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor.” STOP STEALING THEIR COMMON ASSETTS. Tax reform has a major role to play here. YOU BET! Apart from its adverse effects on economic efficiency, our current tax code allows a far larger share of the income of the rich than the poor or middle class to escape taxation. NOW WE ARE BACK TO THE WIZZZARDS OF CONTRACTS, LEGISLATION AND FINANCE. THAT IS WHY WE NEED TRANZPARIENCY, SO WE CAN SEE WHAT THE MAGICIANS ARE UP2.

THE CHICKENS STILL NEED HARVESTING. CHOP CHOP. I’m only temporarily holding back sensitive information. But you should know, that I know.

Posted by 2Borknot2B | Report as abusive
 

For example, last year’s increase in the stock market represented an increase in wealth of about $6 trillion — with the lion’s share going to the very wealthy. The government is unlikely to collect as much as 10 percent of this figure given capital gains exemption, the ability to defer unrealized capital gains, and the absence of any tax on gains on assets passed on at death. HOW MUCH BOND BUYING DEBT WAS ADDED TO CREATE THAT 6 TRILLION? ANOTHER ILLUSION.

Another example is provided by our corporate tax system. Because of various loopholes the ratio of corporate tax collections to the market value of U.S. corporations is at a near record low. THOSE LOOPHOLES ARE LEAKS THAT NEED TO BE SHORED UP.

Then there is the reality that the estate tax can be substantially avoided by those prepared to plan and seek sophisticated advice. Closing loopholes that only the wealthy can enjoy would enable targeted tax measures like the Earned Income Tax Credit, which raise the incomes of the poor and middle class more than dollar for dollar by incentivizing working and saving. THE WHOLE IRS SYSTEM IS JUST REDICULOUS AND THERE IS NO REASON NOT TO OVERHAULT IT AND ALL THE OTHER GOVERNMENT AGENCIES FOR THAT MATTER. I GUESS IF YOU WERE PRESIDENT, YOU COULD FIX ALL THE PROBLEMS. DO WE ALL WISH IT WAS THAT EASY?

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will be addressed. SOONER IS THE ONLY OPTION, THERE MAY NOT BE A LATER.

Much better that it be done by letting market forces operate (THEY CAN NOT AND DO NOT WORK IN THE SYSTEM OF MULTI-NATIONAL CORPORATE CONTROL, THERE IS NO FREE MARKET WHEN THERE IS TO BIG TO FAIL) and then working to improve the result than by seeking to thwart their operation. THAT IS LIKE TELLING A SURGEON TO WING IT, WHEN THEY DON’T HAVE TO. THAT IS NO WAY TO DO BUSINESS.

Sincerely, PL connection, can’t wait to find out more.

Posted by 2Borknot2B | Report as abusive
 

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