The Price of Inequality: How Today's Divided Society Endangers Our Future (42 page)

In short, an unbalanced bankruptcy law has contributed to a bloated financial sector, to economic stability, to exploitation of the poor and less financially sophisticated, and to economic inequality.

End government giveaways—whether in the disposition of public assets or in procurement.
The preceding four reforms focus on restricting the ability of those at the top, including those in the financial sector, from exploiting consumers, borrowers, shareholders, and others in
private
transactions. But much of the rent seeking takes the form of exploiting taxpayers. This exploitation assumes many different guises, some that are best described simply as giveaways and others that fall under the rubic of corporate welfare.

As we saw in chapter 2, the amounts of government giveaways to corporations are huge, ranging from the no-bargaining provision in drugs, to the cost-plus Halliburton contracts in defense, to the poorly designed auctions for oil, to the giving away of spectrum to TV and radio, to the below-market royalty rates for minerals. These giveaways are a pure transfer, from the rest of the population to corporations and the wealthy; but in a world of budget constraints, they are more than that, for they result in less spending on high-return public investments.

End corporate welfare—including hidden subsidies.
We explained in earlier chapters how the government too often, rather than helping people who need assistance, spends its valuable money helping corporations, through corporate welfare. Many of the subsidies are buried in the tax code. While all the loopholes, exceptions, exemptions, and preferences reduce the progressivity of the tax system and distort incentives, this is especially true of corporate welfare. Corporations that can’t make it on their own should come to an end. Their workers may need assistance moving to another occupation, but that’s a matter far different from corporate welfare.

Much of corporate welfare is far from transparent—perhaps because if citizens really knew how much they were giving away, they would not allow it. Beyond the corporate welfare embedded in the tax code is that embedded in cheap credit and government loan guarantees. Among the most dangerous forms of corporate welfare are ones that limit liability for the damage the industries can cause—whether it’s limited liability for nuclear power plants or for the environmental damage of the oil industry.

Not bearing the full cost of one’s action is an implicit subsidy, so all those industries that impose, for instance, environmental costs on others are, in effect, being subsidized. Like so many of the other reforms discussed in this section, these would have a triple benefit: a more efficient economy, fewer of the excesses at the top, improved well-being for the rest of the economy.

Legal reform—democratizing access to justice, and diminishing the arms race.
The legal system generates enormous rents at the expense of the rest of society. We don’t have a system in which there is justice for all. We have a system in which there’s an arms race, and those with the deepest pockets are in the best position to fight and to win. The details of the reform of our legal system would take me beyond the confines of this book—or even a much longer tome. Suffice it to say that the required reform is far more extensive than, and very different from, the litigation reform advocated by the Right. Embracing the conservative reform agenda, as trial lawyers correctly point out, would leave ordinary Americans unprotected. But other countries
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have, for instance, developed systems of accountability and protection—where doctors that engage in malpractice are held accountable, and where those who suffer injury, whether as a result of malpractice or simply bad luck, are compensated appropriately.

Tax reform

Each of the seven reforms that we have described yield a double dividend: enhanced economic efficiency and increased equality. But even after we do that, large inequalities will remain, and to provide revenues for public investment and other public needs, to help the poor and the middle class, to ensure the existence of opportunity for all segments of the population, we’ll have to impose progressive taxes and, most importantly, do a better job in closing loopholes. As we’ve seen, in recent decades, we’ve been creating a less progressive tax system.

Create a more progressive income and corporate tax system—with fewer loopholes.
Our tax system, while nominally progressive, is much less progressive than it seems. It is riddled, as we have noted, with loopholes, exemptions, exceptions, and preferences. A fair tax system would tax speculators at at least the same rate as those who work for their income. It would ensure that those at the top pay at least as large a percentage of their income in taxes as those with lower incomes.
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The corporate tax system should be reformed, both to eliminate loopholes and to encourage more job creation and investment.

In chapter 4, I explained that, contrary to the assertion of the Right, we could have a more efficient tax system that is, in fact, more progressive. Earlier I cited studies that showed, on the basis of the response of savings and labor supply, that the top tax rate should be well in excess of 50 percent, and plausibly in excess of 70 percent.
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And these studies have not fully taken into account the extent to which very high incomes arise from rents.
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Create a more effective, and effectively enforced estate tax system, to prevent the creation of a new oligarchy.
The restoration of a meaningful estate tax would help in the prevention of a new American oligarchy or plutocracy, and so would the elimination of the preferential treatment of capital gains. The adverse effects are likely to be minimal: most of those who accumulate these large estates do so as a result of luck or the exercise of monopoly power, or are motivated by nonpecuniary incentives.
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Helping the Rest

We can judge our system by its results, and if we do so, we have to give it a failing grade: a little while ago those at the bottom and in the middle got a glimpse of the American dream, but today’s reality is that for a large segment of the population that dream has now vanished.

Some of the reforms described earlier would not only curb the top but help the rest. For instance, ending some of the abusive and monopolistic practices will, by itself, increase their
real
well-being. Ordinary people will pay less for credit cards, telephones, computers, health insurance, and a host of other products.

Several additional actions would, I think, make a big difference in the plight of the 99 percent. Some of them require resources, and the reforms described above, and amplified in chapter 8, would generate the required revenue.

Improving access to education.
Opportunity is shaped, more than anything else, by access to education, and the direction we have been going (income-segregated residential communities, sharply decreased public support for higher education—and the resulting sharp increases in tuition in public colleges and restrictions on places available in engineering and other high-demand but high-cost fields) can be reversed as well, but it will take a concerted
national
effort. What can be done to improve access to education, and, in particular, to improve the quality of public education, would itself take a tome.
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But there is one thing that can be done quickly: the for-profit schools, whether financed by government loans, government-guaranteed loans, or private loans, with the noose of nondischargeability, have failed to increase opportunity, and have in fact been a major force dragging down poor aspiring Americans. A few may emerge with better jobs, but the vast majority simply emerge encumbered with greater debt. It is unconscionable that we allow this predatory activity to continue, and even more unconscionable that it is, in effect, supported by public money. Public money should be used to expand support for state and nonprofit higher educational systems and to provide scholarships to ensure that the poor have access.

Helping ordinary Americans save.
Wealth dynamics are affected, both at the top and the bottom, by government policies. We described how the tax system helps the rich accumulate and bequeath money to their heirs though a variety of incentives. The poor get no such assistance from the tax system. Government incentives for the poor to save (say, a matching grant or expansion of first-time homeowner programs)
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would, over time, help create a fairer society, with more security and opportunity, with a larger fraction of the nation’s wealth at the bottom and in the middle.

Health care for all.
The two most important impediments to individuals’ achieving their economic aspirations are the loss of a job and an illness. The two together form a lethal combination, one often associated with bankruptcy. Health care in America has traditionally been provided by employers. This inefficient and antiquated system has contributed greatly to the reality that the United States has the most inefficient and poorest-performing, overall, health care system among the advanced industrial countries. The problem with our health care system is not that we spend too much; it’s that we don’t get value for our money and that too many people don’t have access to health care. Obama’s health care reform partially addressed the latter problem, though court challenges combined with cutbacks in public support may undermine the effectiveness of the reforms. But it did little (at least in the short run) to improve efficiency.
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Our high costs are due in part to rent seeking by insurance companies and the pharmaceutical industry. Other countries have curbed these rents. We have not. Other countries not as well-off as the United States have managed to provide universal access to health care. Most countries treat access to medicine as a basic human right. But even if one doesn’t approach the issue from this principled perspective, our failure to provide access to health care increases the inefficiency of our health care system. In the end, with much delay, we do provide some health care to those who are in desparate need. But it happens in emergency rooms, and costs are often much increased as a result of the delay in treatment.

Lack of access to health care contributes significantly to inequality, and this inequality in turn undermines the performance of our economy.

Strengthening other social protection programs.
The crisis has shown how woefully inadequate our unemployment insurance system is. We shouldn’t have to have a major political battle, in which the unemployed are held hostage, every few months as financial support for extended unemployment insurance comes to an end. The new reality is that, given the magnitude of the recession of 2008 and given the magnitude of the structural transformation our economy is going through, there will be large numbers of long-term unemployed for the foreseeable future.

Government programs (like the earned-income tax credit, Medicaid, food stamps, and Social Security) have proven very effective in reducing poverty. More spending on these programs could reduce poverty even more.

Tempering globalization: creating a more level playing field and ending the race to the bottom

Globalization and technology both contribute to the polarization of our labor market, but they are not abstract market forces that just arrive from on high; rather, they are shaped by our policies. We have explained how globalization—especially our
asymmetric globalization
—is tilted toward putting labor in a disadvantageous bargaining position vis-à-vis capital. While globalization may benefit society as a whole, it has left many behind—not a surprise given that, to a large extent, globalization has been managed by corporate and other special interests for their benefit. Too often, the response to the threat of globalization is to make workers even more worse-off, not just by cutting their wages but also by lowering social protections. The growth of the antiglobalization movement is, under these circumstances, totally understandable.

There are myriad ways in which globalization could be brought back into a better balance.
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In many countries the onslaught of hot money moving in and out of the country has been devastating; it has caused havoc in the form of economic and financial crises. There is a need for regulations on cross-border capital flows, especially of the short-term, speculative kind. For most countries some restrictions in the unbridled flow of capital would create not only a more stable economy but also one in which capital markets would exert a less heavy hand over the rest of our society. This may not be a policy that is easily available to the United States. But because of the dominant role we play in the global economy, we do have opportunities to help shape globalization—opportunities not available to others.

In reshaping globalization, we have to realize that there has occurred a race to the bottom from which we have all suffered. The United States is in the best position to stop this (if its politics would allow it); it can fight for better worker rights and conditions, better financial regulations, better environmental conditions. But other countries, working together, can also fight against the race to the bottom.

Even the advocates of globalization should understand that tempering globalization is in their interests. For if globalization is not managed better than it has been, there is a real risk of a retreat, into protectionism or forms of beggar-thy-neighbor policies.

There are specific policies that the United States can undertake to rebalance globalization in ways that are consistent with increasing global equity and efficiency. For instance, current U.S. tax law, where U.S. corporations are taxed only on profits that they bring back home, encourages outsourcing of jobs. Our system of global competition encourages firms to locate on the basis not of global efficiency but of tax competition; while it’s understandable why corporations like this, since tax competition increases their after-tax profits, it distorts the global economy and undermines the ability to impose fair taxation on capital. The United States is in a position, for instance, to tax corporations that operate in the United States on the full basis of the profits they derive from their sales in the United States, regardless of where their production occurs.
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