The Grand Illusion
Way back in the middle of the seventeen hundreds, the French philosopher Jean Jacques Rousseau came up with the idea of “the social contact.” The simplified concept is that government represents a tacit contract between the people effectively to be governed and behave in order to escape the “natural state” [which Rousseau tacitly admits never existed, but that’s another story].
One of the interesting facets of his concept was that the social contract tended to break down if the income inequality between the rich and the poor became too great, which in fact is exactly what happened with the French Revolution several decades later in the last years of the century, and after Rousseau’s death. In point of fact, it’s rather interesting to note that in the more than 300 years since Rousseau made that observation, there have been more than a few revolutions and a great deal of social unrest in times of great income inequality.
At present, the United States is in one of those periods. According to Rousseau, the popularity of either Bernie Sanders or Donald Trump should scarcely be surprising, given that income inequality in the United States has now surpassed the income inequality of the previous period of greatest inequality in the 1890s, which was, of course, the time during which William Jennings Bryan ran for President as a fundamentalist/pro-silver/anti-big-money Democrat. After three years of economic depression, in 1896, Bryan carried 22 of the 45 states at that time and took almost 47% of the vote, despite being outspent by a five to one margin by McKinley.
Today, what is interesting is that the “establishments” of both major U.S. political parties are being challenged by those within the respective parties who feel economically and/or politically threatened or disenfranchised by the current political system. And, no matter how the next election turns out, the problem of income inequality isn’t about to disappear.
The greatest danger is, in fact, is if people think that the election resolves the problem, because then, nothing effective will be done, and most likely both income inequality and economic conditions will worsen.
Why?
It’s fairly simple. Right now, corporations and other institutions are literally sitting on close to a trillion dollars in uninvested dollars. These dollars are not invested because those holding them do not see a market for the goods or services that could be produced with them. The reason for this is that too many Americans are too poor to purchase anything but the basics. The idea that low taxes on high earners makes more money available to create jobs is, like a lot of simplistic “solutions,” half-right. It does make money available, but no one is going to use that “excess capital’ to create that many new jobs in the U.S. if a huge percentage of the population can’t afford the goods and services created by those jobs.
This is where a massive government-funded infrastructure development program would help, provided it’s designed right, and not merely a subsidy to the construction and technology industries. We have hundreds of thousands of unsafe and/or rapidly decaying bridges and tunnels, unsafe municipal drinking water systems, an air-traffic control system that verges on the obsolete and inefficient, a power grid that could be destroyed by a solar flare, thousands of miles of highways that are crumbling, national parks that have billions of dollars of delayed and deferred maintenance… and we do nothing about any of this, while nearly a trillion dollars of uninvested capital sit largely idle because unemployed or underemployed workers haven’t the money to buy anything except the extreme basics – if that.
Yet, as I’ve argued, and as have others, in the end, those ultra-high earners, the one tenth of one percent, could likely make even more money if they were taxed a bit more and those taxes put to work in improving infrastructure.
Will it happen?
I have my doubts. I suspect it won’t until the social unrest and economic stagnation become even worse, which they will, unless matters change in the mindset of the American political system. The problem is that, if matters get too much worse, we may face a revolution, rather than an evolution. I could be wrong, I’ll be the first to admit, but right now, the odds are in favor of pessimism.
Mr. Modesitt – Discuss, if you will, the idea of some sort of “flat tax” that has, albeit, been offered as one of those “quick fixes” that over simplifies the issues. But, at this point, if a real flat tax was offered that put an absolute bottom on all individuals and corporations…of a rather small percentage…say 5% and a absolute top…say of 10%…with the mobility between the two not income levels, but, rather, some of the deductions that so many hold so dear (e.g., mortgage interest, charitable deductions, capital reinvestment, etc.).
I know the idea is not new. And I think it has flaws, many flaws. It’s just that what we currently have is so bad, I don’t know that it may not improve the situation.
I’d appreciate your comments: is the math wrong and it wouldn’t bring in enough? Or, is it just impossible because of the political situation?
The economic analyses I’ve seen suggest that a “flat” income tax in the U.S. would have to be in excess of 20% to be “revenue neutral” in terms of personal income taxes. It would take a flat tax of at least 21 percent to collect as much in taxes as the federal government now spends, assuming excluding roughly $50,000 of income from taxes [for lower income taxpayers] and no other deductions at all [i.e., no mortgage or charitable deductions allowed]. Right now, I don’t see any tax plan succeeding that would eliminate all those deductions.
Thank you for the response.
The idea has a certain appeal…IF the math worked. I wondered if it was bogus and I thought you might have a more qualified summary opinion.
I enjoy your books and your blog. Thanks for continuing.
I agree with everything you’ve said here and I’m certainly not optimistic about things getting better.
The main hurdle I see is that the powers that be (i.e., corporations and the elected officials they essentially own) are too short-sighted to consider how doing something that ostensibly benefits the greater good (govt infrastructure project) would benefit them in the long term. For too long politicans and the elite .1% have this toxic symbiotic relationship where they fund a pols campaign and get them re-elected and then the govt prioritizes the corporate interests. So we have huge govt bailouts, even when companies are making stupid risky ventures or other things that ultimately harm our economy (sending our manufacturing jobs overseas).
And the corporations are very good at controlling us, to the point where they often turn us against eachother. They own the media that purports to keep us informed. And many poor / middle class people are concerned with our tax dollars going to “handouts” to the poor in the form of welfare, food stamps, WIC, etc. when we should be far more concerned about the handouts to the wealthy (i.e., corporate welfare).
What we’d need to fix this is complete overhaul of our electoral process / campaign financing… and give candidates free air time so that it doesn’t cost a small fortune to get elected and give “third party” candidates a realistic chance of being elected. Of course, our corporate owned Ds and Rs aren’t going to vote for their own demise… So I don’t expect things to change any time soon.
@Dave. Your third paragraph rings a loud bell here in the UK where we are subjected to subtle but relentless bias from the BBC and leading corporates in the lead up to our referendum on whether we remain a member of the EU.
I conducted a brief survey on BBC articles over a few days : every article I saw supporting the Leave campaign was accompanied by a rider from the Remain campaign whereas the reverse was not the case.
Vive la Grande Bretagne libre!(paraphrase of a certain Gen. de Gaulle in Quebec)
Investing the “held” trillion dollars in a needed infra-structure maintenance program would be of some help to the economy and our future nation, but I do not see how it will resolve the income disparity cause of the feeling of being disenfranchised. The income curve will be higher in the lower end but still peaked at the top 1-5% earners end, with the sag in the middle (i.e. not a bell shaped middle income dominant curve).
Infrastructure is just a symptom. Eliminate obstacles to upward mobility, and increase incentives, by making taxes regressive, phasing out assistance programs and any other option of surviving without self-improvement; and let no rioter survive to riot again. When there is no way to live without being more productive than a burden (barring voluntary and private assistance), the budget will balance, and people will be surprisingly motivated to perform even jobs they look down on, rather than starve or be shot. All necessary work will be done, and those that won’t participate, will instead be willing participants in their own demise.
Only insofar as rich people are like George Sorros, spending vast sums to encourage the anti-productive idiocy of socialism (or other obstacles to upward mobility), does their wealth have ANYTHING to do with anyone else’s poverty.
The pie gets larger when people work rather than being paid not to. It does not get smaller when the willfully unproductive are fed to the worms.
While I think income inequality is an important factor, I have to wonder at the impact of equality inequality. Even further, the fact that we’ve allowed the creation of “super citizens” in multi-national corporations that hold a citizen’s right to free speech while evading a citizen’s ability to be held accountable, such as through incarceration.