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America is heading in the wrong direction economically, and there are only two ways out.  The polarization of the rich and poor is accelerating in a way that imperils economic growth.  Mitt Romney's candidacy for president has only highlighted an already pressing issue; he earns more in a year than 99% of Americans will earn in a lifetime of work, especially if their wages continue to stagnate.  Inequality is a threat to all our livelihoods - what can we do about it?

It's well known that the income of the median American household, adjusted for changes in prices, is the same today as it was two decades ago.  Most households get the majority of their income from wages - not capital gains, like the Romney household.  In other words, most Americans are primarily owners of labor, not capital.  Not surprisingly, the share of our nation's income that has gone to owners of labor has been dropping since the 1980s.

Because owners of labor tend to earn less than owners of capital, income inequality has been on the rise.  The Gini coefficient, a common index of inequality, has risen steadily in the United States from about 0.35 in the late 1960s to 0.44 in 2010, according to the Census Bureau.  In four decades, we went from the same level of inequality as the United Kingdom to the same level of inequality as Uganda.

With rising inequality comes the risk that economic opportunity will be denied to talented, hardworking people who happen to lack the connections or resources of the wealthy.  This is a threat to economic growth, because all the ideas and potential of those people will be wasted.  As a result, inequality can eventually reduce incomes for the rich, who need economic growth to receive higher returns on their capital, as well as for the poor.  It's one reason why feudalistic countries dominated by small elites tend to have lower incomes than countries with strong middle classes.

There are only two ways to avoid this long-term economic catastrophe.  One is to improve the bargaining power of owners of labor.  De-unionization and the growing availability of offshore labor have taken away much of workers' power to negotiate for a higher share of national income.  Yet neither of these trends would be easy to stop or reverse.  Organized labor has been trying for decades to restore unionization without much success, and the global economy will only become more integrated.

It would be much easier to change the tax system.  Owners of capital may have the upper hand in bargaining, but we can compensate for that through redistribution.  Our goal in making the tax system more progressive should be to ensure equal economic opportunity for all Americans.  If the children of the wealthy don't have to worry about food, shelter, health care, and safety as they try to get ahead, then neither should the children of the poor.  Only under these conditions will we realize our economy's full potential for growth.

Not surprisingly, Romney says he opposes this kind of redistribution.  In fact, his support of Paul Ryan's budget proposal suggests that he wants to go in the opposite direction, making it even easier for owners of capital to avoid future taxes.  Romney apparently does not appreciate the enormous risk that rising inequality poses to the economy - the same economy that made him rich.

But it's not too late to see the light.  Instead of being self-righteous about his tax returns, he should release them and say, "I'm the problem with our tax system, and I'm going to fix it, so my kids and their kids can succeed the way I did."  The rest of the nation's kids would thank him, too.

* Mitt Romney earned $21.6 million in 2010.  To accumulate that amount over the course of a 40-year working life (in today's dollars), you'd have to earn more than $500,000 every year.  According to the Internal Revenue Service's Statistics of Income, 99.5% of Americans had an adjusted gross income of less than $500,000 in 2009, the most recent year for which data are available.
** There's more on how the Ryan budget would affect America's economic future in my new eBook, SABOTAGE: How the Republican Party Crippled America's Economic Recovery.

Originally posted to danielaltman on Fri Aug 17, 2012 at 06:39 AM PDT.

Also republished by Income Inequality Kos.

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