Traveling The Narrow Road

In part 1 of this series on inequality, I proposed that an abnormally high level of income and wealth inequality is a sign of a dangerously sick economy.
If this is true, then a presidential candidate’s position on inequality is of utmost importance. However, if a candidate doesn’t fully understand why inequality is important or what causes it, or is just using the issue to gain political traction, then it is doubtful that his or her solution will improve the situation and in all likelihood will make it worse.  Of course, those who don’t believe inequality is a legitimate issue will not offer any solution.  It’s still early in the campaign, but a perusal of all the candidate’s websites reveals some obvious contrasts in their positions on this issue.

Bernie Sanders On Inequality

Bernie Sanders has made inequality the cornerstone issue of his campaign calling wealth and income inequality the greatest moral, economic and political issue of our time.  Citing stagnant middle class income, the worst inequality among developed nations, and a disproportionate percentage of new income going to the top one percent, he concludes that over the past 30 years there has been, in the U.S., a very large transfer of wealth from the middle class and the poor to the already wealthy.

Sanders is very thorough, explaining in detail his proposals to reverse ever-increasing inequality in our nation. Increased regulation of the markets, breaking up too-big-to-fail financial institutions, campaign finance reform, and reversing trade policies are among his solutions.

Having identified and proposed solutions for some real deficiencies in our economic system it is unfortunate that he doesn’t quit there. Not content to stop the bleeding and allow the patient to heal, he wants to spend more money (lots more money) on programs, financed by taxing the rich, to create more jobs and more opportunity.

Real wealth is created by producing something; not by transferring it from one person to another. The problem with Sanders’ proposals as a whole is that they substitute one form of wealth transfer for another. We don’t have the money to pay for his proposals and neither do the rich, at least not for long.

Think of it this way, if the rich are getting wealthy at the expense of the middle class and the working poor (and many are) and if Sanders’ proposals fail to stop the transfer of wealth from the middle class to the rich, then how is re-distributing money from the rich back to the people from whence it came going to help? Where in this process of circulating money does anything actually get produced?   On the other hand, if Sanders’ proposals succeed and the spigot of wealth transfers from the middle class to the rich is turned off, where will the government get the money to redistribute to the non-rich?

Oh, I forgot. They’ll just print it.

It seems to me that advocates of big government prefer to treat symptoms because if they cured the disease we wouldn’t need their “medicine” any longer. Consistent with this line of thinking, Sanders proposes increased taxes for the wealthy and Wall Street speculators, raising the federal minimum wage, youth jobs programs, free college tuition, raising the cap on social security taxable income, guaranteed health care, requiring 12 weeks of paid family leave, and free childcare. His “Rebuild America Act” would spend a trillion dollars over five years to rebuild our highways, railways, air traffic control system, shipping infrastructure, dams, drinking water, internet, and power grid. Sanders claims this legislation will create 13 million decent-paying jobs.

Sanders’ “Rebuild America Act” might be acceptable if we had the money to spend on it. We don’t. Does good infrastructure enable people to make more productive use of their time? Definitely. But we cannot, as a nation, spend ourselves into prosperity though we have tried to do so for decades. The party is over; the tab is due.

Sanders wants to prevent our economy from being controlled by a minority comprised of wealthy people and make sure that everyone that works 40 hours/week makes enough money to live on.  He wants to reverse what he considers the root causes of inequality – corporations shifting profits and jobs overseas to avoid U.S. income tax, trade policies that drive down wages and destroy American jobs and decreased worker rights. In short, he wants to shift the balance of power back towards the worker and away from owners of capital.

But this introduces the topic of globalization, a topic I will only allude to in this series on inequality, but one of utmost importance if we are to understand the economic difficulties facing the United States.

Hillary Clinton On Inequality

Hillary Clinton believes stagnant income for hard-working Americans is the greatest economic challenge of our time. Clinton believes that the best way to raise workers’ wages is to invest in infrastructure, clean energy, and scientific and medical research.

A telling comment is her stated goal to have businesses compete over workers, yet nowhere in her economic plan displayed on her website does she mention globalization or international trade. We don’t operate in a vacuum so, unless she takes global trade into account, this is a goal she cannot attain.

Perhaps Clinton expects all new jobs to be related to the research she wants to invest in with all the new jobs going to college graduates who, under her New College Compact, will no longer have to borrow to pay tuition.  I wonder if the students will somehow know which degrees to pursue to qualify for the jobs she hopes to create.  One of the biggest problems with the current student loan program is that many students choose a field of study that, upon graduation, provides too low of an income to pay back student debt in a reasonable amount of time, if at all.  Her plans to make college affordable and re-finance existing student loans would be paid for by making the wealthy pay their fair share of taxes.

Clinton wants to “unleash small business growth” by making capital more accessible, providing tax relief, cutting red tape and helping businesses bring their goods to market. It’s hard to evaluate this statement without more detail. By what means will the government make capital more accessible and by what means will they help businesses bring their goods to market? She, like Sanders, champions paid leave and affordable child care, yet inexplicably states that providing these programs with their added costs are crucial to our competitiveness and growth. When did increased costs of running a business ever make it more competitive?

Inequality is a big issue with Clinton who wants tax incentives for companies that share profits with workers.  This concern for how to distribute income between labor and capital owners is consistent with her goal to increase the power of workers so that businesses compete for them.  She correctly, I think, implies that traditionally, U.S. workers have shared in the rewards of production to a greater degree than workers in other nations, and she wants a return to that standard.

When it comes to her profit-sharing idea, I believe her basic premise is flawed. She seems to attribute stagnant wages to employers who are just not willing to share their profits with the people who played such a major role in their creation. This particular image of greedy employers requires the assumption that investment in our economy always goes towards producing goods and services when, in fact, vast sums of money pour into asset bubbles, a practice that doesn’t make the economic pie larger, but instead, only ensures that those who participate get a larger piece of a shrinking pie.

To her credit, Clinton identifies two significant problems with our economy.  The first she calls “quarterly capitalism” in which investors seek short-term profits at the expense of long-term growth.  The second is the lack of accountability on Wall Street. Her solution to “quarterly capitalism” is to revamp the capital gains tax to reward long-term investment and address the inordinate influence of shareholders who focus on short-term profits.  A more effective solution would be to remove all the incentives that our government and the Federal Reserve provide that fuel the “quarterly capitalism” mentality.