Inequality for All

Over the weekend I watched the film Inequality for All. The movie features former Labor Secretary Robert Reich, Silicon Valley Venture Capitalist Nick Hanaeur and former Conservative Senator Alan Simpson examining the current widening gap between the rich and poor in America, how it came to be, and when it has occurred in the past. They also discuss whether it is a bad thing for America in general and Democracy in particular.

A similar gap between rich and poor formed in the 1920s, just prior to the great depression. A chart of the top 10% richest Americans' share of the economy shows that the top 10% share rose throughout the 1920s to peak at over 50% just prior to the 1929 Stock Market Crash. That share fell steadily through the Great Depression and World War II to about 35% and remained flat at about 35% through the 1940s, 1950s and 1960s. However, it started rising again in the 1970s, until peaking again at about 50% just prior to the start of the Great Recession in 2008. (Source: Capital in the Twenty-First Century, Piketty and Goldhammer).

I have repeatedly heard it said that high marginal taxes inhibit jobs. In other words, if we want to create jobs, we need to cut taxes so that the "job creators" (the wealthy) are free to create jobs. Unfortunately, the facts show otherwise. During the 1940s, 1950s, and 1960s, when Income Inequality was low, and jobs were plentiful, the US had very high marginal tax rates. The following chart illustrates this:

A lot of things were going on after World War II that allowed for full employment in the United States. The US was the only developed country that had an intact economy. The arrangements at Bretton Woods, that put American Dollars into the role of the sole exchange currency, put the US Economy in a position of considerable advantage. The large numbers of union workers helped to give all American workers, union and non-union, a considerable degree of power in wage negotiations.

Finally, something I haven't heard talked about much is the degree to which Americans felt like they were all part of society. America had sent a considerable percentage of its population into the military to fight the war. Many workers had migrated to work in war-time industries, producing good for the war effort. Families worked in "Victory Gardens" to grow food to replace the shortfall from a shortage of farm workers and the purchase of farm goods for the military.

When America demobilized, a significant fraction of civilians were now veterans (see table below). Perhaps for some period of time, business felt an obligation to "take care" of its workers through good wages. Is it possible that Corporate America, in the post-WW II era, felt that being good corporate citizens towards workers was also an obligation besides maximizing profits?

Size of the military versus US Population:

Year	Army	Air Force1	Navy	Marines	Coast Guard2	Total	American Population	% Military
1939	189,839		125,202	19,432		334,473	130,879,718	0.25%
1940	269,023		160,997	28,345		458,365	132,122,446	0.35%
1941	1,462,315		284,427	54,359		1,801,101	133,402,471	1.35%
1942	3,075,608		640,570	142,613	56,716	3,915,507	134,859,553	2.90%
1943	6,994,472		1,741,750	308,523	151,167	9,195,912	136,739,353	6.73%
1944	7,994,750		2,981,365	475,604	171,749	11,621,468	138,397,345	8.40%
1945	8,267,958		3,380,817	474,680	85,783	12,209,238	139,928,165	8.73%
2001	480,801	353,571	338,671	184,574		1,385,116	285,081,556	0.49%
2007	519,471	337,312	338,671	184,574		1,380,082	301,230,367	0.46%
2011	565,463	333,370	325,123	201,157		1,468,364	311,593,589	0.47%

1. Prior to 1947, existed as the Army Air Corps. 2. Coast Guard listed only as wartime strength.

One of my favorite movies is the 1946 Academy Award Winner Best Years of Our Lives.Fredrich March plays Al Stephenson, the banker placed in charge of administering the GI Loan program in his old bank. At a dinner to honor his return, and promotion, Al gets drunk and talks about a loan application from a vet who wants to buy a farm, but who has no collateral for the loan. Al tells the story of how, during the war, he was ordered to take a hill. " 'But sir, I can't take that hill, I have no collateral.' So I didn't take the hill, and we lost the war." He goes on to tell his bosses, the senior bank officials, that the vets have collateral, their war experiences, and that the bank is going to make the loans based on the vets experience.

One question in my mind, is this: How long will the current level of inequality remain before movements like the Tea Party and Occupy Wall Street recognize the true source of the wealth inequality and seek to overturn it? Will the top 1% make some effort to rebalance the gap before they are force to do so?