The Distribution of National Income

February 20, 2017

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The Washington Center for Equitable Growth has issued a new, very informative report on income inequality. Its authors, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, are trying to improve on the way economists have measured inequality in the past:

One major problem is the disconnect between maceoeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income while the study of inequality relies on individual or household income, survey and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60 percent of the national income recorded in the national accounts, with this gap increasing over the past several decades.

Why is there such a discrepancy between the national income accounting and the personal reporting? The main reason is that when people report their income on a survey or a tax return, they are thinking of income actually received in cash. But some forms of national income accrue to individuals whether they see cash from them or not. Employers contribute to workers’ pension plans or subsidize their health insurance. Corporations make money on behalf of shareholders that they retain for investment rather than distribute as dividends. This report aims to apportion the entire national income among individuals. It tries to account for all forms of compensation for workers and all returns on capital assets, whether taken in cash or not.

For purposes of analysis and discussion, the researchers divided the US population into three broad groups, the top tenth, the next two-fifths, and the bottom half. The unit of analysis was the adult individual 20 or older. Most of the analysis split marital income equally between spouses, for example assigning each of them $40,000 if one earned $50,000 and the other $30,000. That makes sense if couples are sharing their purchasing power. The authors also did a separate analysis of gender inequality using individual earnings. There they found that overall, men had 1.75 times as much work income as women, without controlling for hours worked or types of jobs. That ratio has been falling steadily since the 1960s, when it was over 3.00.

Pre-tax income

To appreciate the degree of income inequality the researchers found, consider the familiar analogy of dividing a pie. Imagine that you bake a large pie for a party of ten, dividing it into ten equal slices. But the first guest to dig in takes five slices! The next four guests take one slice each, leaving only one slice to be divided among the remaining five diners. In percentage terms, one-tenth of the people got 50% of the pie, the next two-fifths got 40%, and the remaining half got only 10%.

The real numbers for 2014 (the last year reported) are not far from that. The top tenth got 47.0% of the national income; the next two-fifths got 40.5%, and the bottom half got 12.5%. The average (mean) income for the groups was $304,000 per person for the top 10%, $65,400 for the next 40%, and $16,200 for the bottom 50%. (If some of the numbers sound large, remember that income is being defined very inclusively.)

One advantage of these particular dividing points is that they clearly distinguish between one group whose share of national income is roughly proportional to its size (the two-fifths) and two groups whose share is either disproportionately large (the top tenth) or small (the bottom half).

In addition to the enormous differences in shares, the three groups differed in how much of their income they derived from returns on capital as opposed to their own labor. The top tenth got 43.0% of their income from capital, compared to 17.9% for the next two-fifths and 5.1% for the bottom half. Ironically, in a country that prides itself on its work ethic, the most meager rewards go to those who have to rely the most on their labor.

Trends in inequality

In order to study trends over time, the researchers compared two 34-year periods, 1946-1980 and 1980-2014. The first period includes the postwar economic boom. The second period begins with the year Ronald Reagan was elected president, although I don’t know how much that affected its selection as a dividing point. The authors do suggest that changes in public policy were at least partly responsible for the increase in inequality that has occurred since 1980.

The period after World War II was a time of rapid economic growth and broad-based increases in income. Pre-tax income (adjusted for inflation) increased 79% for the top tenth, 105% for the next two-fifths, and 102% for the bottom half over those 34 years. Because the increase was less for the top tenth than the other groups, the distribution became a little more egalitarian. The share of national income going to the top tenth declined from 37.2% to 34.2%.

The period since 1980 has been a time of both slower economic growth and very unevenly distributed gains. Pre-tax income increased 121% for the top tenth, 42% for the next two-fifths, and only 1% (!) for the bottom half. The rich got richer and the poor got left behind. As a result, the distribution of national income became noticeably less egalitarian. The share of the top tenth rose from 34.2% to 47.0%, but the share of the lower half dropped from 19.9% to 12.5%. That top share is similar to what rich people were getting back in the 1920s, before the Great Depression. Over the course of the past century, income inequality has gone down but then gone back up. At the highest levels of income, the return to inequality has been even more dramatic. Average income for the top 1% increased only 47% during the postwar era, lagging well behind general economic growth; but it rose 205% after 1980, far exceeding general growth. For the top 0.01%, where the average income is over $28 million, the increase has been 454%.

Although global trends such as outsourcing and automation have produced gains for capital at the expense of workers, the authors point out that not all countries have experienced the same extremes of inequality as the United States has. Although economic growth has been slower in France, the lower half of the French population has shared in the national growth as the American lower half has not. As a result, “While the bottom 50 percent of incomes were 11 percent lower in France than in the United States in 1980, they are now 16 percent higher.” America’s self-image as a unique land of opportunity is no longer secure.

Income redistribution?

Pre-tax income does not tell the whole story, however. The taxation of income provides some potential for redistribution, as those with higher incomes are taxed in order to provide some benefits to those with lower incomes. In my next post, I will discuss the report’s comparison of pre- and post-tax income to see how taxes and government benefits are distributed, and what effect they have on income inequality.

To be continued


Global Inequality (part 3)

August 8, 2016

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This final post on Branko Milanovic’s Global Inequality will focus on the future prospects he sees for reducing economic inequality in the world. He discusses three kinds of inequality: inequality among countries, inequality within poorer countries, and inequality within richer countries, especially the United States.

Inequality among countries

Milanovic expects the median incomes of countries to continue to converge as the economies of poorer countries continue to grow faster than those of richer countries. However, he expects this convergence to be limited in several ways. Currently “it is only Asian countries that have been catching up with the rich world.” Progress has been much slower in other parts of the world, especially Africa. And although growth in China accounts for a lot of the global convergence in incomes, this may not always be the case. In a few years, China may be so far above average that further development there may increase global inequality rather than reduce it. Then continued convergence will depend on what other countries do.

Although the narrowing gap between rich and poor countries is encouraging, it is occurring so slowly that “one cannot expect global inequality to be reduced by more than one-fifteenth of its current level” over the next twenty years.

Inequality within poorer countries

Milanovic suggests that countries like China are passing through a phase of the first Kuznets wave that more developed countries experienced at least a century ago. They are experiencing a familiar pattern in which industrialization initially increases opportunities for the few, and only later for the many, as discussed in the previous post. Although the data are somewhat sketchy, Milanovic sees signs that economic inequality has peaked in China and is beginning to subside. Mass education and a reduced supply of cheap, unskilled labor would be among the reasons for the transition.

On the other hand, many poor countries are still in an even earlier phase of the transition, in which inequality is increasing because the benefits of economic development have yet to be experienced by large portions of their populations.

Inequality within richer countries

I found Milanovic’s views on this topic a bit confusing. On the one hand, he maintains that information technology and globalization have initiated a new Kuznets wave of economic change, in which inequality is rising again but will ultimately fall. To make that case, he needs reasons for the fall as well as the rise. Otherwise, he cannot distinguish his theory from more pessimistic assessments like Piketty’s Capital in the Twenty-first Century, which sees rising inequality as a fundamental feature of capitalism. However, when Milanovic tries to identify mechanisms by which inequality might fall, he expresses little confidence that they will work any time soon.

Milanovic identifies five “benign forces” that could theoretically reduce inequality:

  1. Political changes could result in higher and more progressive taxation. However, the global mobility of capital makes it easier for the wealthy to escape taxation. In addition, many citizens of modest means have trouble supporting higher taxes, even when that might be in their own best interest.
  2. The widening wage gap between more and less educated workers could be narrowed by improvements in the quantity and quality of education. However, Milanovic has trouble imagining that average years of education could rise above thirteen. He also thinks that improvements in the quality of education “face natural limits, given by the aptitude and interest of students to excel in whatever they choose to do.” Some would object that if better education were more widely available, more students would rise to the occasion.
  3. As the technological revolution proceeds, innovations that originally profited the few can be more widely adopted. On the other hand, the ownership of capital has become more concentrated lately, so the control of profitable innovations remains largely in the hands of a few.
  4. As wages rise in poorer countries, workers in richer countries should face less competition from foreign low-wage labor. However, it could be a long time before poor countries outside of China and a few other Asian countries experience much wage growth.
  5. Technological progress could raise the productivity of low-skill workers specifically. But this would go against the historical experience of capitalism, in which technological change normally boosts the income of the more skilled over the less skilled.

I found the last point especially troublesome, since it seems to me to undercut one of the strongest reasons for a Kuznets curve in the first place. Surely the mass-production technologies of the twentieth century helped bring many blue-collar workers into the middle class by boosting their productivity, raising their wages, and making former luxuries like automobiles more affordable. If we are looking for mechanisms for reducing inequality in the new wave of change, shouldn’t we be looking for a new productivity revolution along the lines suggested by Rifkin’s The Zero Marginal Cost Society or Paul Mason’s Postcapitalism? Milanovic  doesn’t anticipate anything that radical, but maybe the falling inequality phase of the alleged Kuznets curve won’t work without some fairly dramatic change. Ironically, Milanovic begins his chapter on future inequality by criticizing previous attempts at prediction for assuming too much continuity from the present to the future.

The United States: A “perfect storm of rising inequality”?

Milanovic is especially pessimistic about reducing inequality in the United States. He provides five reasons he expects the rise in inequality to continue:

  1. The share of national income going to capital rather than labor will remain high, especially since businesses find it economical to replace labor with machinery.
  2. The income from capital will remain highly concentrated.
  3. The people with the highest incomes will also be the ones who can save and invest the most, so the same people will be getting most of the benefits from both labor income and capital income.
  4. These labor-rich and capital-rich individuals will also tend to marry each other, so that wealth and income are even more concentrated for households than they are for individuals.
  5. The rich will use their political power to support policies that protect their economic interests at the expense of those of the middle class and the poor.

Milanovic concludes:

It is hard to see where any forces might come from that could counter rising income inequality in the United States….Forces promoting offsetting policies such as more widespread education, a higher minimum wage, and more generous welfare benefits seem weak compared with the almost elemental forces that favor greater inequality.

By this time, the reader who has followed the argument from the beginning may be wondering what happened to the original idea of the Kuznets curve, with its rise and fall of inequality. Well, “the second Kuznets curve will have to repeat the behavior of the first if inequality is to decline again. But it is doubtful whether this second decline will be accomplished by the same mechanisms as those that reduced inequality in the twentieth century….” What mechanisms Milanovic does suggest are mostly political, especially changes in tax policies and improvements in public education, changes that seem unlikely in the light of his previous remarks. The reliance on political rather than economic mechanisms sounds more like Piketty than Kuznets.

To summarize, Milanovic starts with a Kuznets theory emphasizing economic reasons why inequality first rises and then falls. He does broaden it by suggesting that extreme inequality generates malign forces like violent conflicts that can destroy the wealth of some and create opportunity for others. Yet he ends with a pessimism that economic forces will reduce inequality either benignly or malignly. This leaves it an open question whether what we are living through is a second Kuznets wave at all. If it isn’t, then the first Kuznets curve was a unique historical event from which we cannot generalize, and the book’s theoretical framework falls apart.

In general, I found the book’s data very informative and its interpretations thought provoking. But in the end I found its theoretical position on the central question of falling inequality too ambiguous to be convincing.


Global Inequality (part 2)

August 4, 2016

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The Kuznets curve

Milanovic’s interpretation of global trends in inequality relies heavily on a modified version of an idea proposed by Simon Kuznets in the 1950s. Kuznets observed a rise and fall pattern in inequality within industrializing countries. In a graph plotting inequality against per-capita national income, the pattern appears as a curve in the shape of an inverted U. This suggests that as industrialization increases national output and average income, the benefits flow first to the few, and only later to the many. Limited prosperity widens the gap between rich and poor, but then more widespread prosperity narrows it.

Consider the United States at its peak of economic inequality around the end of the nineteenth century. Industrialization has created a wealthy class of industrialists and a very small middle class of well educated workers. Meanwhile, massive numbers of workers displaced by the decline of farm jobs have poured into the cities, keeping wages low for those without capital or urban skills. Then consider the country fifty years later. Population growth has slowed along with urbanization, since urban families have fewer children than farm families. (The postwar baby boom will change that temporarily, but that is more of a response than an impediment to widespread prosperity.) Education and skill levels have risen. Assembly-line technology has boosted worker productivity, helping to justify higher wages; and perhaps requiring higher wages because businesses need consumers to buy their mass-produced products. Workers have mobilized both in the workplace and in the political sphere to fight for better wages, better working conditions, and a social safety net. A large middle class, a hallmark of general prosperity, has emerged.

Many economists once accepted the Kuznets curve as a fairly good description of trends in inequality, generalizable to many industrializing nations. However, since the 1980s, the downswing in inequality has come to an end in many rich countries. “The indubitable increase in inequality in the United States, the United Kingdom, and even in some fairly egalitarian countries like Sweden and Germany, is simply incompatible with the Kuznets hypothesis.”

Recent thinking about inequality is less confident that any long-term decline in inequality must or will occur. One popular theory says that the future of inequality depends on the outcome of a “race between education and what is known as skill-biased technological progress (that is, technological change that favors high-skilled workers).” Inequality could decline if less skilled workers can acquire skills quickly enough, but there is no guarantee that will happen. In Capital in the Twenty-First Century, Thomas Piketty is especially pessimistic. He sees rising inequality as the historical norm, because the rate of return on capital tends to exceed the general rate of income growth. The twentieth-century decline in inequality in the US and other developed countries was due to a special set of circumstances that need not be continued or repeated. Only radical political action, such as higher taxes on wealth, can counteract the economic forces favoring inequality.

Multiple Kuznets waves

Milanovic’s main contribution to this discussion is the suggestion that the Kuznets curve associated with industrialization is not the only such curve. Fluctuations in inequality have occurred in repeated waves over the past 500 years. Milanovic regards the most recent rise in inequality as just the upswing phase of a new Kuznets wave, which will eventually have its downswing phase as well. That means that the Kuznets curve remains relevant to our understanding of the present, since it does not just describe a one-time, historically unique feature of industrialization.

Milanovic see Kuznets waves even in preindustrial times, although his description of them makes me wonder whether Kuznets himself would recognize them. “Before the Industrial Revolution, when mean income was stagnant, there was no relationship between mean income level and the level of inequality. Wages and inequality were driven up or down by idiosyncratic events such as epidemics, new discoveries…, invasions, and wars.” For example, a widespread epidemic might raise wages by making labor more scarce, but the gains would be wiped out in Malthusian fashion as population growth resumed.

Notice that this focus on idiosyncratic events removes two key elements of the original theory. For Kuznets, the rise and fall pattern of inequality was tied to mean income level, and the rise came before the fall. Without those elements, about all that remains is the observation that inequality fluctuates in either direction for many different reasons, which no one doubts. Calling the fluctuations “Kuznets waves” creates the impression of having a general theory of waves with some application to today’s economy. But if preindustrial fluctuations are merely idiosyncratic–or as Milanovic says, “Changes in inequality versus mean income are irregular in preindustrial societies but shift into regular cycles in industrial and postindustrial societies”–then we have only the one completed Kuznets cycle of the industrial era on which to base the claim that there are regular cycles at all. We may be at the beginning of a second regular cycle, but how would we know? The possibility that the industrial Kuznets wave is the only Kuznets wave is harder to dismiss. I don’t think that Milanovic ever entirely overcomes this difficulty, as much as I would like him to!

The industrial wave of inequality

Milanovic’s description of rising inequality during the early stages of industrialization follows Kuznets pretty closely. “As Kuznets argued, it is the structural movement, the transfer of labor from the low-income, low-inequality agricultural sector to the higher-income, higher-inequality industrial sector (and concomitantly, from rural to urban areas) that increases income inequality.”

For the later downswing in inequality, Milanovic’s contribution is to consider “benign” factors and more “malign” factors in combination. Benign reasons for more widespread prosperity include those I mentioned earlier, such as greater access to education and skills, technology-based productivity gains, and political mobilization for industrial workers.  For the malign factors, he draws on the work of Piketty, who argues that “the two world wars not only led to higher taxes but also destroyed property and reduced large fortunes.” Unlike Piketty, however, Milanovic sees the malign factors as consequences of economic developments, including inequality itself. The conditions leading to World War I included “very high income and wealth inequality, high savings of the upper classes, insufficient domestic aggregate demand, and the need of capitalists to find profitable uses for surplus savings outside their own country.” The result was nationalist rivalries, imperialism, colonialism, and ultimately war. The moral of the story: “A very high inequality eventually becomes unsustainable, but it does not go down by itself; rather, it generates processes, like wars, social strife, and revolutions, that lower it.”

In summary, Milanovic remains faithful to the main thrust of the Kuznets argument, that rising inequality eventually reaches some sort of limit, but he has a broader view of the mechanisms by which inequality then declines.

A postindustrial wave?

Milanovic believes that the emergence of a global information society is a development comparable in its significance to the Industrial Revolution. Therefore it has its own Kuznets curve of rising, then falling, inequality, but we have seen only the rising phase so far. As in the early phases of industrialization, the economic benefits have been going primarily to the few.  We can expect this to change only if we share Milanovic’s confidence that the general logic of the Kuznets wave applies: Inequality cannot increase without encountering some kind of limit.

Here is Milanovic’s description of the new inequality:

The 1980s ushered in a new (second) technological revolution, characterized by remarkable changes in information technology, globalization, and the rising importance of heterogeneous jobs in the service sector. This revolution, like the Industrial Revolution of the early nineteenth century, widened income disparities. The increase in inequality happened in part because the new technologies strongly rewarded more highly skilled labor; drove up the share of, and the return to, capital; and increasingly opened the economies of rich countries to competition from China and India…. The structure of demand, and thus of jobs, moved toward services, which in turn were staffed by less qualified and worse-paid labor. On the other hand, some service sector jobs, as in finance, were extremely highly paid. This widened wage, and ultimately income, distribution.

While in the earlier era it was the shift from agriculture to manufacturing that created wealth for some and subsistence wages for others, now it is the shift from manufacturing to services.  Not only are many service jobs too low-skill and low-productivity to pay a good wage, but service workers are hard to organize because they are widely dispersed in small work units.

What remains to be seen is whether the latest increase in inequality can be reversed by more egalitarian trends, as in the classic Kuznets curve, or if it will turn out to be irreversible. Milanovic prefers the first alternative, and I want to believe him. But when he tries to identify mechanisms that would restore greater equality today, his arguments get a bit tentative and half-hearted. This will be the subject for the last post.

Continued


Global Inequality

August 3, 2016

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Branko Milanovic. Global Inequality: A New Approach for the Age of Globalization. Cambridge: Harvard University Press, 2016.

Branko Milanovic is a Serbian-American economist specializing in economic development and inequality. His global perspective on inequality goes beyond the familiar idea that gaps in wealth and income always seem to be widening. There is some truth to that, but it is far from the whole truth.

Who is gaining from globalization?

Economists are in a much better position to talk about global income now that they have some decent global data. Milanovic’s data come from “more than 600 household surveys covering about 120 countries and more than 90 percent of the world’s population over the period 1988-2011.”

He uses the data to construct a remarkable chart, in which he plots percentiles of income on the horizontal axis and cumulative percentage growth in income on the vertical axis. The chart then shows which percentiles from poorest to richest have benefited the most in this period of globalization. The poorest people on earth, such as most Africans, have seen almost no improvement. However, the people in the middle of the distribution, from the 20th to the 70th percentiles, have experienced over 40% growth in income.

Who are these people? They are not the middle class in rich countries like the United States; they would be above the 70th percentile. They are the emerging middle class in rapidly developing countries. Ninety percent of them live in Asia, especially China, India, Thailand, Vietnam and Indonesia. They are not yet as rich as our middle class, but they are moving rapidly in that direction. In about three decades, the Chinese are expected to be as rich as citizens of the average European Union country.

Above the 70th percentile of global income, the recent gains in income rapidly fall off, reaching zero for people at the 80th percentile! (Remember that means zero gain, not zero income.) Who are they? They are mostly the lower middle classes within the richest countries, people who have been relatively well off historically but are not currently gaining from globalization. Think of the less-educated American blue-collar workers who are now in competition with foreign labor and haven’t seen wage gains in decades.

Above the 90th percentile of global income, income gains rapidly rise again, with a gain of over 60% at the top of the distribution. This group is the global 1%, the richest people on earth. Half of them are in the United States, and the other half are mostly from Europe and Japan. Together they receive 29% of the world’s entire income and control 46% of its wealth. They include the world’s billionaires, 1,426 individuals who together own twice as much as all the people of Africa.

For those of us who would welcome a reduction in economic inequality, globalization brings good news as well as bad news. The good news is some decline in inequality among countries, as the benefits of economic development spread to the developing world, especially Asia. The bad news is twofold. In the world as a whole, some countries remain stuck in poverty. And within the most developed countries, the benefits of globalization are going almost entirely to the upper class, at least so far.

Historical trends in inequality

Now let’s put these recent trends in historical perspective. How much of this is new, and how much of it have we seen before? The answer depends on which aspect of inequality we consider.

Milanovic makes a simple but important logical distinction: “Global inequality, that is, income inequality among the citizens of the world, can be formally considered as the sum of all national inequalities plus the sum of all gaps in mean incomes among countries.” This is just standard statistical logic: Whenever a population is divided into subgroups, the total variation within the population is the sum of the between-group variance and the within-group variance. In this case, the subgroups are countries. Milanovic refers to the between-country differences as “location-based inequality” and the within-country differences as “class-based inequality.”

The two kinds of inequality have developed differently in different historical periods:

  1. In the early 1800s, only about 20% of the total inequality in the world was due to location; far more was due to class differences within countries. But over the course of the century, as the industrial economy took shape, location-based inequality increased because the countries that industrialized first became much richer than the rest of the world. At the same time, the class divide within the industrializing countries got worse.
  2. From about the 1920s to the 1970s, country differences in income reached a peak, accounting for about 70% of all global inequality. However, class differences diminished as the middle class grew within the richer countries. The world seemed divided into largely prosperous Americans and Europeans and mostly poor Africans, Asians and Latin Americans.
  3. In the most recent period so far, globalization has reversed both twentieth-century trends. Country differences have started to decline, because growth has accelerated in Asia while decelerating in Europe and North America. But at the same time, internal inequality has increased in many rich countries, especially the US, UK and Italy. The middle class has been shrinking and the rich have been getting richer.

To put it simply, the recent decline in inequality among countries is new in the industrial era. The recent increase in inequality within wealthy countries is not quite as new, but it’s a return to something last seen in the nineteenth and early twentieth centuries.

Next we will turn to Milanovic’s attempt to make sense out of these developments and anticipate where the two components of global inequality may go next.

Continued


Rewriting the Rules of the American Economy (part 3)

March 11, 2016

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Stiglitz and his co-authors argue that “the rules shaping our current economy were informed by an economic orthodoxy that we now know is incorrect and outdated,” namely, the “supply-side” economics that became fashionable during the Reagan-Bush era. They see that as an underlying cause of many of our recent economic problems, especially the concentration of economic benefits at the top. In the last part of the book, they make a number of recommendations for rewriting those rules. I will summarize them only very briefly here, since there are too many to discuss in any detail.

The recommendations include many familiar proposals that progressives will find more acceptable than will conservatives. I don’t think they can be dismissed as a “knee-jerk liberal” agenda, however, since there is a clearly stated rationale for the whole package based on the authors’ institutionalist understanding of how the economy works. Thus the recommendations have two main objectives: (1) “to tame rent-seeking behaviors that unduly reward those at the top while raising costs for the rest and reducing the efficiency and stability of the U.S. economy,” and (2) “to restore the rules and institutions that ensure security and opportunity for the middle class.”

Taming the top

The first goal here is to make markets more competitive. Limit corporate domination of certain markets by reforming intellectual property rights and giving government more freedom to bargain with pharmaceutical companies over drug prices. Strike a better balance between creditor and debtor rights by expanding bankruptcy laws to cover homeowners and students. Structure trade agreements so that companies can compete globally, but not in a race to the bottom where the most business goes to the worst employers. Require companies exporting to the US to have their labor practices certified by an organization such as the International Labor Organization.

Second, fix the financial sector to prevent abuses such as predatory lending and market manipulation, and to encourage useful financial services such as financing small business, education and housing. Require big banks to develop plans showing how they could liquidate assets in bankruptcy without clobbering the whole economy, and break them up if they cannot do so. Increase regulation and transparency in areas such as offshore banking and hedge funds, and more strictly enforce financial rules. Reduce the fees charged by credit and debit cards, which “do not reflect the cost of services provided but rather a monopoly rent on the country’s networked payments infrastructure.” Reform Federal Reserve governance to reduce conflicts of interest and keep the Fed from being dominated by the largest financial interests.

Third, increase incentives for long-term business growth, rather than rewarding executives so extravagantly for short-term increases in share value. Stop giving dividends and capital gains such favored tax treatment, and use the tax code to reward companies that keep the ratio of CEO pay to median worker pay within bounds. Discourage short-term trading by means of a transactions tax and a longer holding period for long-term capital gains tax treatment. Put workers on corporate boards. Require all retirement account managers to act in the long-run interest of account holders.

Fourth, make the tax and transfer system fairer and more progressive. Raise the tax rate at the top. Tax all forms of income at the same rate, since tax breaks on capital income don’t actually appear to increase investment. (This is not to be confused with proposals for a flat tax that would tax all income levels at the same rate; that usually means another big tax cut for the wealthy.) Stop taxing corporations when they take profits earned abroad and invest them in the US, but do tax them on whatever portion of profits they earn from activities here.

Growing the middle

The first goal here is to create more jobs by making public investments in such areas as infrastructure and public transportation. The authors also recommend placing the emphasis of monetary policy on reducing unemployment, but with interest rates already so low, I don’t see a whole lot of potential there.

Second, increase the power of workers. Strictly enforce the right of workers to bargain collectively, and hold employers who outsource and subcontract jobs more responsible for worker treatment. Give public contracts only to companies that have high labor standards and strong antidiscrimination policies. Raise both the minimum wage and the income threshold for mandatory overtime pay (currently, only the 11% of salaried workers earning less than $455 a week qualify).

Third, give people more access to labor markets and opportunities for advancement. Reduce the size of the prison population. Put more immigrants on a path to citizenship, rather than leaving them in the more exploitable position of undocumented alien or guest worker. Make it easier to balance family and work responsibilities by subsidizing childcare, legislating paid family leave and sick leave, and protecting women’s access to reproductive health services.

Fourth, expand economic security and opportunity in general. Start with early childhood by providing universal preschool and other child benefits. Make higher education more affordable by increasing public financing and restructuring student loans. Continue to move toward more universal and affordable health care by adding a public option (Medicare for all) to health insurance choices. Create a similar public option for housing lending. Set up a savings bank through the postal system to provide banking services to the “unbanked or underbanked,” giving them some protection from predatory lending. Expand Social Security to offer an option for additional annuity benefits, giving people an alternative to products of questionable cost effectiveness from financial firms.

The standard reaction to many of these proposals is that the country cannot afford them. But who knows what we could have afforded if we hadn’t given up trillions of dollars of revenue on tax cuts that were supposed to bring us widespread prosperity but didn’t, or wars that were supposed to make us safer but didn’t. The United States remains a wealthy country, but we could do a lot more to channel our resources into the most productive areas. Surely putting more money into good child care, education, health care, infrastructure, and decent wages would be at least as cost effective as what we’ve been doing. One example: “For an extra $50,000 taxed on every $1 million of a wealthy individual’s income [a tax increase of only 5%], the United States could make all public college education free and fund universal pre-K.”

Progressive economic reforms cannot succeed if political inequality is just as extreme as economic inequality. In theory, majority rules, but maybe not if a powerful minority can dominate the airwaves or induce politicians to pass restrictive voting laws. So the authors also advocate campaign finance reform and some measures to make voting as easy as possible, such as automatic voter registration, voting by mail, elections on weekends or national holidays, and online voting.

Given the many ways that voters are divided, those measures may not be enough to produce a progressive coalition either. Many working-class whites who might well benefit from more progressive economic policies nevertheless vote Republican, in the hope of being saved from higher taxes, immigrant competition for jobs, affirmative action, affronts to their religious beliefs, confiscation of their guns, or some other real or imagined misfortune. As the share of the national income going to the working class declines, many lose confidence in their party’s establishment, but even then they may not support constructive institutional reforms. Instead they may rally behind a candidate who gives voice to their frustrations and directs their anger toward immigrants, racial minorities and foreigners.

Well I seem to be drifting from economics to politics. The next book I discuss will deal specifically with progressive coalition building.