Suppose we believe that in the United States today, reducing debt would be good for households, good for government, and good for the economy. It would make us all more secure by reducing the risk of future defaults and financial crises. Let’s use that as a starting point for economic reform, and see where it takes us.
Logically, there are two ways for a debtor to reduce debt: reducing spending or generating income. Before the Great Recession, the federal deficit ballooned both because of spending increases and tax cuts, and it can be reduced through either spending cuts or tax increases, or both. The wealthier portion of the population pays more of the income taxes, while the poorer portion of the population depends more heavily on government programs. Framing the issue solely as the need to cut spending places the burden of debt reduction especially on the poor. During the 2012 election campaign, the “Nuns on the Bus” and other progressive religious groups questioned the morality of throwing people off food stamps while advocating additional tax cuts for the wealthy.
Similarly, there are two ways of getting rid of subprime mortgage loans. One is to discourage people with low incomes from buying homes at all. The other is to raise wages so that more potential home buyers qualify for conventional financing. Two ways of reducing college loan debt are having fewer people go to college or giving them more outright grants to do so. There are always choices.
The point here is that one way of looking at the growth of debt–government debt, mortgage debt, student loan debt, credit card debt, etc.–is to see that borrowing money has been used as a substitute for making money, and lending money has been used as a substitute for paying money. The wealthy would rather lend money to government and earn interest than pay more taxes. Corporations would rather lend money to households than pay higher wages. Any discussion of debt reduction leads naturally to a discussion of who will then pay for what. Some expenditures are so wasteful that no one should pay for them, but that still leaves the question of how to fund the expenditures necessary to sustain our economy and meet the needs of our people.
A question of distributive justice
Those who advocate austerity need to ask on whom the burden of austerity should fall. Since 1979, two-thirds of all the income gains in the United States have gone to the richest 10% of the population, compared to only one-third in the previous three decades. Income gains have been especially dramatic for the top 1%, whose share of the national income went from 10% to 23.5% between 1979 and 2007. Their real after-tax income rose by 260%. Meanwhile, real wages and benefits for nonsupervisory workers, which had risen 75% between 1947 and 1973, rose less than 4% between 1979 and 2005. Household incomes rose a little more than wages (by 21% for the households in the middle quintile), but that was because households sent more workers into the labor force and worked more hours. (Statistics are from Faux 2012 and Hacker & Pierson 2010, and are adjusted for inflation.)
Besides working harder, the other way that households could raise their standard of living despite stagnating wages was to borrow more. That borrowing was heavily promoted by the booming financial services industry, as capital not being productively invested in manufacturing flowed toward other sources of profit. Many of the richest 1% who experienced fabulous income gains made their fortunes in financial services. But Hacker & Pierson write, “The inexorable increase in household debt was not sustainable without comparable income gains–and those gains did not occur.”
Since the rich got most of the benefits of the economic boom, it seems unfair that the poor should bear more of the burden of the economic bust. But that’s the direction that debt reduction and austerity seem to be taking. Hypothetically, asking the wealthy to share more of their wealth with ordinary workers (through higher wages) and government (through higher taxes) would be a way to reduce debt while sustaining consumption, economic output and employment.
However, conservatives raise both moral and economic objections to any share-the-wealth proposal. As they see it, the wealthy are morally entitled to their incomes as long as they earned them legally. They use their wealth largely to invest in job-creating enterprises for the benefit of all. Also, higher wages would increase the cost of production, raise prices, and reduce American competitiveness in world markets. From that perspective, high pay at the top is good, but high pay for the majority is not so good. If you question the increasingly unequal distribution of income, you are labeled a socialist. You want to steal from the “makers” to give to the “takers,” as Paul Ryan has put it.
Is economic polarization good for us?
Today, the United States is more economically polarized than it has been at any time since the Gilded Age. The richest fifth of the population receives more in after-tax income then everybody else combined. Is that kind of inequality good for the economy? Here I’ll draw heavily on Joseph Stiglitz’s book, The Price of Inequality.
As economists see it, inequalities of reward are a market mechanism that can help channel resources toward the most productive uses. “Build a better mousetrap and the world will beat a path to your door.” As Stiglitz points out, that implies that the market should generate inequalities but also limit them. Skills or products that are in high demand but short supply should command a higher price, but in a free market that price differential should come down as more economic actors acquire those skills or produce those products. Extreme, persistent and growing inequality may be a sign of economic rigidities and inefficiencies. One indicator of increasing rigidity is that economic mobility–the probability of changing one’s economic position–has been declining as income inequality has been increasing.
Stiglitz reports that in recent US history, the economy has actually grown more in periods of relative equality than in periods of relative inequality. He also cites studies by the International Monetary Fund that find a positive association between greater equality and sustained economic growth. That makes it troubling that the United States now has less economic equality and economic mobility than most developed countries, especially when compared to Europe.
Gross differences in economic power can lead to the overvaluation of contributions at the top and the undervaluation of contributions at the bottom. A textbook case of the first is the successful marketing of overvalued financial products by Wall Street investment firms, especially because the executives of those firms continued to award themselves large bonuses even after their products almost brought down the banking system. The problem is not confined to exotic derivatives that only a few sophisticated investors bought. Many retail financial companies market confusing products whose profitability exceeds the value for consumers and investors. The decline of traditional guaranteed-benefit pensions has forced more workers to fund their retirement through 401(k) plans, whose returns are less predictable and more vulnerable to erosion by excessive and hidden fees. A complex economy offers many opportunities to make money by taking advantage of people rather than giving them fair value.
At the lower end of the economic pyramid, workers have trouble developing the human capital they need to compete in today’s economy. Companies often prefer to invest more in plants and equipment, which they own, than in human capital, which they employ but do not own. Why spend a lot to educate or train one’s workers, if they are free to go to work for someone else? Businesses complain that they can’t find enough skilled workers, but they would like someone else to teach the skills. Creating a healthy and well-educated workforce is not something that private capital alone does very well; it’s a job for the whole society.
Sociologist Arne Kalleberg has analyzed the increasing polarization of American work in Good Jobs, Bad Jobs. Some of the reasons for the changing organization of work are global competition, the information revolution, and the shift from manufacturing to services. US companies aren’t going to employ as many low-skill machine tenders as they used to. However, societies and their work organizations still have choices to make. As they try to improve their global competitiveness, they don’t necessarily have to take what has been called the “low road” of just cutting labor costs. They can take the “high road” of investing in quality labor to produce quality products. For example, child care workers in the United States are often low-wage workers, but they don’t have to be. Some countries have upgraded those jobs by setting higher standards of quality, raising the pay for qualified workers, and supporting them publicly with tax dollars. Is that just taking from the rich to give to the poor, or is it a legitimate way of channeling economic resources toward human capital investments that otherwise won’t occur?
What kind of economy are we trying to create? Are we trying to become more like China, boosting exports by holding down consumption for most of the people? Or are we trying to create a new economy for the twenty-first century, investing in qualified workers who produce quality goods and services and share the benefits of their own rising productivity. The second route may be harder, but isn’t it morally preferable?
Directing moral concern
Moral concern about recent economic developments leads back to the old question of what is the good society. One answer informed by economics is that it is a society that helps its citizens become economically productive and obtain a fair share of the rewards of their productivity. The United States is having trouble on both counts: Too many of our citizens are failing to acquire the skills they need to be productive, and workers who are productively employed are not seeing their wages keep pace with their rising productivity.
Who then should we blame? The obvious villains of the financial crisis, such as lenders who made loans without regard to the creditworthiness of borrowers, remain culpable. But macroeconomics encourages us to think bigger, taking into account economic conditions and policies both in the United States and abroad. Lurking behind the Great Recession is the gross economic inequality that turned so many of the wealthy into aggressive lenders and so many ordinary people into excessive borrowers.
Conservative and progressive moral perspectives
Does that mean that a moral perspective informed by macroeconomics has to be a progressive one, a vision emphasizing greater equality and social justice? I would say yes, partly, but not exclusively. Conservatives have an economic morality too, with its own strong sense of right and wrong. That’s why economic debates have such powerful moral subtexts and often become so heated and polarizing.
Conservative economic morality is a morality of work, competition, individual responsibility and property rights. People are separate, competing individuals, each person responsible to work for his or her own success. Each is entitled to keep the fruits of that success. Taking from the haves to give to the have-nots turns the moral order upside down, removing incentive by punishing success and rewarding failure. When it is morally framed in that way, the story of economics is mainly the story of how the competitive market economy produces prosperity for all if it is allowed to operate freely. The laissez-faire economy free of government interference is the basic model.
Progressive economic morality places more emphasis on cooperation, shared responsibility and social justice. Developing a productive human being requires a lot of social inputs–a lot of people working together. Those who are fortunate enough to have received many benefits–education, wealth, good parenting, and yes, good government–should be willing to give something back. The haves should help create opportunities for others to have. From this perspective, economic prosperity and democratic governance go hand in hand. The dominant model is a democratic political economy that regulates the use of private property for the public good.
If both of these have some moral and practical validity–and I think they do–then why favor one over the other? Since the “Reagan Revolution” around 1980, the conservative philosophy has dominated American economics and politics. The result has been a very distorted and unsustainable economic system, favoring the few at the expense of the many. Even the most enthusiastic supporters of capitalism should acknowledge that this is not how capitalism is supposed to work. During the Cold War, defenders of American capitalism could cite the substantial income gains being experienced by the American working class. How ironic that we “won” the Cold War and then lost our way economically! The argument for a progressive vision today is that it is sorely needed to correct the imbalance.
James S. Hacker and Paul Pierson call today’s economy a “winner-take-all” economy. That’s the title of the first chapter of their book Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class. The system is like the conservatives’ model economy corrupted by steroids, with muscular and well-armed financial Rambos monopolizing the wealth, disavowing any responsibility for the rest of us, and defining democratic government as the enemy. Their political minions resort to increasingly desperate measures–like making it harder to vote, eliminating all restrictions on big money in politics, and filibustering nearly every bill proposed by the Senate’s Democratic majority–to hold onto power without actually serving most of the people.
Blaming rich people indiscriminately for our problems would not be fair, since some wealthy individuals have also become concerned about the direction things have been taking. Warren Buffet has famously complained that he pays taxes at a lower rate than his secretary. We need to direct our moral concern primarily at the economic and political policies that hurt people, while recognizing that individuals differ both in their support for those policies and their ability to influence them. Influential supporters of conservative policy have had things pretty much their way for the last three decades. Now it’s time for progressives to be heard in the debate over our national choices.