The New Republic, September 30, 1972
The association of poverty with progress is the great enigma of our times.
— Henry George (1880)
WHAT IS WEALTH, who gets it, and why? I write as a relatively privileged onlooker (privileged educationally and occupationally) who has lived only off paychecks, filed income tax returns for a decade, passed through booms and recessions (but not a Great Depression), and, as a journalist, seen poverty and riches. I have biases, and they are in favor of equality or, to put it another way, against the proposition that great extremes of wealth and privilege are desirable or inevitable. The question that seems paramount to me is this: why, despite wars on poverty, progressive income taxation, relatively high employment and widespread educational opportunity, does the American economy so stubbornly perpetuate inequality?
It is perhaps best to begin with our productive capacity. In barely three centuries we have constructed the world’s most magnificent GNP machine. It churns out food and clothing in abundance, a choking profusion of automobiles, a dazzling array of airships, spaceships and electronic brains, and mass-produced gadgetry of every description. The machine produces too much junk and not enough good housing; it has a tendency to underutilize existing plants and leave millions of potential workers idle. But for the sake of our inquiry, let’s leave aside these imperfections and ask not why it doesn’t produce better and more, but why it doesn’t distribute more fairly what it produces.
Studies back to the 1920s show that the richest fifth of the population has consistently received at least seven times as much annual income as the bottom fifth. The constancy of the ratio is what startles. It improved slightly during the Depression, when many rich lost their fortunes, and during World War II, when rigid price controls and an excess profits tax were imposed on a labor-starved economy. But since the end of World War II the GNP machine has returned to its old habits. Everyone’s income has risen, but at virtually the same rate.
The latest study (by MIT professors Lester Thurow and Robert Lucas, published last March by the Joint Economic Committee) shows that the lowest fifth of the population took home 5.6 percent of America’s before-tax earnings in 1969, while the top fifth garnered 41 percent.[i] In dollar terms, the average income of the top fifth of families in 1969 was $19,071 higher than that of the bottom fifth— a gap that was only $10,565 in 1947. Government taxation, which has a measurable redistributive effect in England and Sweden, does virtually nothing to improve the American before-tax distribution, primarily because the mild progressivity of federal income taxation is all but cancelled by the regressivity of payroll, sales and property taxes. It is as though a giant wedge were jammed in the GNP machine’s distributive mechanism: the machine spews out dollars to the rich, dimes to the poor.
WHY? The question cannot be answered without examining the different derivations of income: income from labor (salaries and wages), and income from wealth (dividends, interest, rent, royalties, capital gains). Everybody except the infirm or the disabled has the capacity to derive income from labor; but to derive income from wealth you must first own something.
The distribution of wealth has consistently been more inequitable than the distribution of income. In 1810, according to economist Robert Gallman, the top one percent of families owned 21 percent of America’s wealth. A century later, in 1915, the US Commission on Industrial Relations reported:
The ownership of wealth in the United States has become concentrated to a degree which is difficult to grasp. The “Rich,” two percent of the people, own 35 percent of the wealth. The “Middle Class,” 33 percent of the people, own 35 percent of the wealth. The “Poor,” 65 percent of the people, own five percent of the wealth. The actual concentration, however, has been carried much further than these figures indicate. The largest private fortune in the United States, estimated at one billion dollars, is equivalent to the aggregate wealth of 2,500,000 of those who are classed as “poor”.
Today’s rich, the top one percent, own roughly 25 percent of all personal and financial assets, according to James D. Smith of Pennsylvania State University — more than eight times the wealth owned by the bottom 50 percent. Again, except during the Depression and World War II, the relative concentration has stayed about the same or worsened.
Even these figures do not show us the whole picture, for the rich and the poor own different kinds of wealth. The great GNP machine has been moderately successful in distributing what might be called inert wealth — homes, automobiles, personal property which, far from producing income, are a drain on the sturdiest pocketbook. (Even here its success has not been phenomenal: 17 percent of families own no appreciable wealth at all, and another eight percent have a negative net worth — their debts exceed their assets.) Where the GNP machine has failed is in the distribution of income-producing wealth: stocks, bonds, real estate, etc. According to a study published earlier this year by the Sabre Foundation, the top one percent of wealth-holders in 1962 owned 72 percent of America’s corporate stock, 47 percent of out-standing bonds (including virtually all tax-exempt state and local bonds), 24 percent of notes and mort-gages, and 16 percent of all real estate (including residences, which is why this figure is relatively low).
Income, which derives from labor and wealth, is distributed unequally in part because some types of labor are better rewarded than others, but to a great degree because income-generating wealth is concentrated in the hands of a few. An analogy might be drawn to the nuclear fission process. The top five percent of American families, who own virtually all the productive wealth, are beneficiaries of a kind of monetary chain reaction. Their wealth splits and divides and multiplies all by itself. The rest of the population owns little else but its labor, and labor deteriorates rather than multiplies in earning capacity. Every so often a lucky labor-owner accumulates a critical mass of wealth and then he, too, can enjoy a monetary chain reaction. But because they are chronically in debt, or earning barely enough to survive, few laborers come near to possessing a critical mass.
David Ricardo, John Stuart Mill, Pierre Proudhon and of course Karl Marx gave considerable thought to this phenomenon. Marx contended that the root cause of inequality under capitalism was the appropriation by capital-owners of the surplus value created by labor. Henry George came to a different conclusion: he argued that poverty persisted in America because land-owners appropriated from labor and capital owners the fruits of material progress. Public opinion around the turn of the century, nurtured by Populist and Progressive spokesmen, generally accepted the notion that hardship for the many was at least partly attributable to the accumulation of vast fortunes by a few.
THEN a curious thing happened. In the 1920s, partly as a reaction to the Progressive era and partly as a result of World War I, business became America’s business, and any suspicion that some patriotic entrepreneur might be appropriating something from somebody else was considered to be in bad taste. There took hold the doctrine of the infinitely expansible pie: no sense fighting over the slices as long as the whole pie is getting bigger. The Depression of the 1930s reinforced this way of looking at the economy, though for different reasons. The prime task of the New Deal was to put people and capital to work making the pie. Production, not distribution, was the obsession, and so it remained during World War II.
Postwar liberals perpetuated this fixation on production; their great fear was that a new depression would put millions out of work. Except for rarae aves like Leon Keyserling, who argued that equitable income distribution was a prerequisite of stable growth, most liberal economists were content to jiggle the levers of fiscal and monetary policy, letting income trickle down as it might. Public debate centered around such short-range dilemmas as whether to raise aggregate taxes or lower them, loosen the money supply or tighten it. The distribution of wealth was accepted as an unalterable given.
By 1958 John, Kenneth Galbraith was able to proclaim in The Affluent Society: “It has become evident to conservatives and liberals alike that increasing aggregate output is an alternative to redistribution or even to the reduction of inequality. The oldest and most agitated of social issues, if not resolved, is at least largely in abeyance, and the disputants have concentrated their attention, instead, on the goal of increased productivity.”
Given an intellectual consensus that the distribution of wealth was a dead issue, it’s not surprising that a number of myths — many inherited from previous decades — took hold. Among the most popular were: profits are good for the poor; hard work can still get you rich; the poor are poor because they won’t work hard or can’t; by spending more on education the government can promote economic equality; widespread stock ownership has created a true “people’s capitalism”; antitrust laws are a barrier to excessive concentration of wealth.
John Kennedy believed the economic wellbeing of workers would be improved by granting tax breaks to capital-owners; whence the investment tax credit and other tax changes that did help stimulate growth but also distributed income upward rather than downward. Sargent Shriver believed that poverty could be eradicated by helping the poor overcome their personal inadequacies. He stated in 1971: “This program [the War on Poverty] was conceived of as a program not to distribute welfare, not to give handouts to people, but to give them the capacity to get themselves out of poverty….The object was to transform the poor people themselves so that they became able to stand on their own feet and earn their own living.”
Building on that philosophy, the poverty program emphasized early childhood education, vocational training and legal services. It was never a war on inequality of wealth or income, only on unequal access to the lowest paying jobs. Its principal beneficiaries, some have argued, were not the poor but the bureaucrats and social scientists who ministered to them, and the capital-owners (ITT, Litton Industries, RCA, et. al.) who won the anti-poverty government contracts. The same could be said of urban renewal: its major beneficiaries were not slum dwellers but land-owners and real estate developers.
Perhaps the most revered belief of liberals was that education could be an economic leveler. While it is true that education has helped many to improve their economic status (myself included), it is a logical fallacy to conclude that education can uplift everyone simultaneously. The labor market rewards those who are better educated than their fellows, not simply those who are educated. If large numbers of people get educated, as has happened in America since World War II, the result is better educated steel workers, journalists and drop-outs — not a more equitable distribution of income or wealth. Education is, in itself, a good thing, but it’s not an economic leveler.
THIS LEADS us back to our original question: why, despite prolonged prosperity and massive public investments in education, job training, etc., does our economy continue to distribute inequitably what it produces? The underlying causes of economic inequality, it seems to me, are related to the different derivations of income, their characteristics and manner of distribution.
Of the two fundamental sources of income in America — labor and wealth — the latter is by far superior. Think for a moment of the advantages of wealth. It is not subject to old age, illness and other human frailties. It can reproduce itself in five or 10 years (most corporate capital returns about 20 percent on equity before taxes) and even gets a subsidy, in the form of depreciation allowances, for doing so. It can reap profit from the efforts of others, whereas labor can only earn for itself. Through capitalization of anticipated gains, it can get paid for today and tomorrow, while labor gets paid only for today. It is inherently organized, whereas labor must struggle, often unsuccessfully, for the equivalent organizational strength. It has the upper hand in the marketplace, and, more often than not, first claim on government favors. And it has the one kind of power that really counts in America: the power to pass on to others (i.e., workers) the costs that others are trying to shift to you.[ii]
These advantages would be of little consequence were wealth as widely distributed as is labor. But this is not the case. Our economy has long remained such that the inferior source of income is spread among the many, while the superior source is concentrated among the few.
What we are left with is a diagnosis of the American economy that is not far from that made by the classical economists. Productive capacity steadily (sometimes not so steadily) grows, but the fruits of increased production are not equitably shared. These fruits have been, and continue to be, appropriated in disproportionate degree by a small minority. This minority may not consist solely of Marx’s capitalists or George’s land-owners, but it is a minority nonetheless. Its members are essentially the owners of productive wealth. Any genuine remedy for economic inequality in America must come to terms with that reality.
[i] I have quoted these statistics only because they are the most recent. Another study, published in 1971 by two US Census Bureau economists, Roger A. Herriot and Herman P. Miller, found that the lowest fifth of families and individuals received 3.0 percent of the income distributed in 1968, compared to 48.0 percent for the top fifth. That yields a ratio of 16 to 1. The difference between these and the MIT statistics derives from the broader definition of income used by Herriot and Miller: they include as income such things as realized capital gains, retained corporate earnings, imputed rental value of owner-occupied homes, and under-reported money income.
[ii] The efficiency with which corporations can pass on higher wages and corporate income taxes has long been a subject for debate among economists. It is probably extremely high in oligopolistic industries, lower in more competitive industries.