The Problem
Over the last three decades the share of wealth owned by the richest 0.1% of families in the US has risen from 7% to 22%. There are approximately 160,000 families in this cohort and their wealth amounts to at least $20 million per household. In this same time, the wealth of the top 0.1% has risen 5.3% annually while remaining stagnant for the bottom 90%. Leading economist Emmanuel Saez calculates that half of the United States’ aggregate wealth collection over the past three decades is in the hands of the top 0.1% of our population (Saez, Zuchman).
Evidence
Since the mid 1970s, our government has passed a series of laws that provide incentives to flood the stock market with funds; however, 96% of capital gains are now found in the hands of millionaires. In repealing the Glass Stegal act, allowing banks to become national and go public, and rolling back of Dodd Frank, the government has created an economy centered around capital gains, stock buybacks, and wealth accumulation for the top 0.1%, which has resulted in the in extreme wealth inequality that we see today (Reich Lecture 3).
Additionally, this legislation has resulted in the expansion of stock options as a form of CEO compensation. In 1965 CEOs at big companies earned on average twenty times as much as their typical employee; CEOs today earn about two hundred and seventy times as much, and across that time span executive pay has risen seventy-six percent (Stewart). Moreover, with the tax cuts that you recently passed, we have seen a surge in stock buybacks as opposed to investment in R&D, further perpetuating our wealth inequality (Surowiecki).
Criteria
- Value of Democracy- Does increasing wealth inequality support the foundations of the US democracy?
- Efficiency- Are we maximizing the utility of GDP for every individual in our country?
Analysis
Founded with the Value of Democracy at the forefront, the United States assumed that the middle class would remain prosperous, allowing capitalism and democracy to positively interact and coexist in order to fuel a successful society. Sitarman argues that our functioning constitutional republic, which is seeing a shrinking of the formerly thriving middle class, is currently at stake. Pointing to the lessons of ancient history, Sitarman claims that economic inequality inevitably leads to political inequality and, as a result, instability, class warfare, and constitutional revolution. With 22% of our wealth in 0.1% of the country’s hands, we are undercutting the middle class and will, in turn, undercut our democracy (Reich Lecture 1).
Some may critique this argument by asserting that a thriving middle class is in fact not necessary for a democracy to prosper. There are several constitutions throughout history that instituted democracy and existed with mass inequality through a class system. However, political philosophers have time and again argued that there can only be a stable society when economic inequality is built into the constitution through institutions, or when a constitution is grounded in a strong, large, and accessible middle class (Sitarman). Our constitution was founded upon the assumption that there will exist a strong middle class and did not incorporate wealth inequality as an inevitable factor. Therefore, as our middle class becomes weaker, so will our democracy.
Efficiently utilizing our resources to maximize either the aggregate or individual utilities of our citizens allows our economy to flourish. Increasing capital gains wealth does not correlate with an increase in production or GDP because the revenue that is generated is not circulated throughout the economy. By allowing companies to engage in stock buybacks, paying CEOs with stocks, and accumulating capital gains wealth among the top .01%, we are not allowing money to circulate through consumption or investment in R&D (Reich Lecture 3).These mechanisms increase overall wealth but they do not allow us to efficiently utilize our resources in order to maximize utility.
A critic of this argument may suggest that the wealthy will utilize their capital gains wealth and reinvest it in our economy, subsequently increasing GDP and maximizing utility. Efficiently utilizing our countries wealth would mean investing in research and development and engaging in consumption so that the wealth that is currently being held can instead circulate and reach individuals within different wealth brackets. Basic economics tells us that a dollar in a poor person’s hand goes much further than that in a rich person’s hand (Daedalus). Essentially, the middle class will spend a larger proportion of their wealth on consumption, fueling the economy, while the wealthy will save or invest their dollar in capital gains—perpetuating the problem at hand.
Recommendation
Due to a series of laws passed throughout the past four decades, wealth has accumulated in the hands of the top 0.1%, resulting in immense wealth inequality. We must acknowledge that this condensation of wealth will hinder our democracy and our ability to efficiently utilize our resources in order to maximize the aggregate and individual utilities of our citizens. I recommend that you begin to alleviate this problem by acknowledging that wealth inequality is a problem plaguing our nation.
