Is income inequality stalling the US economy?

New Haven, Connecticut – It occurs to me that no one is talking about the root cause of so much austerity in Europe – democratically elected governments have become in thrall to the demands of undemocratic banks.

I’m not an economist, but from what I can tell, governments borrowed a lot of money from banks to shore up their economies. To avoid paying too much interest, and to reassure lenders that they weren’t going to renege on the loans (bonds), governments cut spending and raised taxes on the people they were trying to protect from massive unemployment. Only the more they tried to save the patient, the more they ended up killing him. With more cuts came more unemployment, ad nauseum. It’s what you call a vicious downward cycle.

Turning that vicious cycle into a virtuous one would entail spending in a time of crisis, not cutting, the opposite of austerity. There’s nothing wrong with austerity in good times. But in bad, markets don’t stimulate demand on their own. The government must get involved. That or we can languish, as Paul Krugman has suggested, like Japan. Once the economy recovers – ie, tax receipts improve and the need for public services declines – then by all means cut cut cut. 

But we’re not talking about the core problem of austerity – that sovereign nations are in hock to private lenders. That, to me, seems to be a major problem that shouldn’t be uncritically accepted by the people whose job it is to discuss and solve major problems. 

Austerity in the US came in a different form. We passed a massive stimulus bill (40 per cent of which was a middle-class tax cut). But by last summer, the debate over budgets and deficits rose to a fevered pitch. Since then, we have been stuck on and off in phony debates over taxes (which are historically low), “entitlements” (which are not going broke), regulation (which is also weak) and debt (which is a canard). It all seems like an attempt to redirect our attention from measures that could help all of us to measures that would help only some of us – meaning debt and regulation and taxes are the obsessions of the rich, not the rest of us poor bastards trying to get on in life. Last week, President Obama and Republican challenger Mitt Romney were competing for the title of Mr Austerity. But it’s all campaign rhetoric, as it has been since this silly debate began. 

Even Republicans, most of whom have pledged to shrink government down to a size suitable for drowning in a bathtub, know increased spending is better for the economy in the short term. Last week, just in case the GOP’s radical wing continued resisting, our non-partisan congressional budget office released a frightening reminder.

Playing by the bankers’ rules

Last summer, Obama agreed to spending cuts equal to more than $607 billion (in domestic and defense spending) between fiscal years 2012 and 2013. Those are set to go into effect at the same time the Bush-era tax cuts are set to expire at year’s end. If that happens, the budget office said, we’re heading toward a “fiscal cliff”.  

“The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. With that economic feedback incorporated, the deficit will drop by $560 billion between fiscal years 2012 and 2013.”

In other words, if nothing is done, we’re going to experience what Europe is experiencing. And all of it is preventable, because all we have to do, in terms of economic policy, is straighten out our thinking about the recession. Businesses are not hiring because they are not selling, and they aren’t selling, because people are not buying, and they aren’t buying because they don’t have enough money, and they don’t have enough money, because they don’t have good jobs.

But we aren’t talking about that. And it’s maddening! It’s like the referee ruled before the game began that some topics, like public spending, are not creditable, illegitimate and just out of bounds. Spending like that makes bankers nervous. So the referees are the bankers. In finance, as in Las Vegas, the house always wins.

Why not invest in infrastructure?

If our leaders were focused on Americans instead of banks, it would be blindingly obvious that the best way to get the economy going again would be a huge public investments in energy, education and infrastructure. In a poll last year by the Rockefeller Foundation, just 6 per cent thought infrastructure wasn’t that important or important at all. We may be conflicted about “entitlements”, but we are practical enough to know the value of traffic lights.

A report by the Economic Policy Institute suggests that roads, bridges and wind mills would lead to good-paying jobs. EPI macroeconomist Josh Bivens says debt-financed public investments create jobs and are essentially self-financed. His new study details how federal spending on rail lines, green energy, and education would lead to higher productivity and higher living standards.

Bivens writes that public investment now has an effect on private-sector productivity, of a rate of as much as 45 per cent. Moreover, just $250 billion a year for a decade would boost GDP to 2.8 per cent by 2021 (it would be 0.9 per cent otherwise). And because money is so cheap right now, plus services are offered at such deep discounts, there’s no better time to invest. All that expense, like the best long-term investments, would pay for themselves eventually.

“The wealth of the United States is crucially dependent on public investments and public capital,” Bivens concludes in the EPI study. “Slashing government spending to achieve near-term deficit reduction in the name of ensuring that funds are available for private capital formation makes no sense if valuable public investments are sacrificed along the way.”

Inequality up, infrastructure down

It’s tempting to blame the Republicans. They have, after all, stated that their number one goal since 2008 has been unseating the president, even if schools spiral downward and bridges collapse. But that wouldn’t be an accurate portrayal of reality. The problem is systemic. 

According to a study by the Center for American Progress, there is a striking correlation between the decline of infrastructure and the rise of inequality over the past four decades. In other words, the more money going to the top income earners, the more the rest of us deal with potholes, decrepit bridges, rusting rail cars and the rest. 

As inequality has risen, the choice has come to be between raising taxes or revamping infrastructure. It’s a false choice, because obviously you can’t revamp anything that serves everyone without raising taxes proportional to everyone’s income. But the very, very rich don’t see it that way. As the study’s authors suggest, lower tax rates have always been among the “more cherished priorities of the rich”. Why pay when you don’t depend on public services? The rich can send their kids to private schools and take helicopters to work.

Sam Pizzigati, author of Too Much, a newsletter on economic inequality, said of the study: “Unequal societies – like the 21st century United States – have weak middle classes. That leaves Americans with a basic choice. We can press, on every front, for greater equality. Or spend more time looking out for potholes.”

Austerity is a great policy if you’re a banker. That way you get your money back sooner with interest. But that kind of economic policy doesn’t benefit the great masses of people who need government to be on their side now more than ever. If spending on infrastructure is the best way to create jobs, boost demand and heal the economy, why aren’t we doing that? Well, that would be greater equality. Evidently, this land of equality is unwilling, for now, to achieve that.

John Stoehr is a lecturer in political science at Yale and a frequent contributor to the American Prospect, the New Statesman, Reuters Opinion and the New York Daily News.