This article oringally appeared in the Fall 2011 edition of the Fairhaven Free Press. It explores interpretations of the term “class warfare” and focuses on the growing gap of income inequality in America.
“The eternal lie I’ve told
About the pyramids of gold
I’ve got you hooked at every turn
Your money’s left to burn.”
–“El Dorado” by Iron Maiden
It’s no secret that economic recovery in the U.S. has been a slow process punctuated with controversy and outrage. When President Barack Obama outlined his plan to spur job creation, Republicans balked at the idea. Rep. Paul Ryan, R-Wisc., claimed the proposal would hurt corporations and wealthy Americans, which would discourage job growth.
“It looks like the president wants to move down the class warfare path,” he said on Fox News.
What is “class warfare,” and how has it been used in political rhetoric? How is it related to other issues that have contributed to the national economic crisis, including cutting taxes for the rich, stagnant social mobility, the shrinking middle class, the home mortgage debacle and the drastically increased redistribution of income from the poor to the wealthy?
The most current and greatest outcry against this economic disparity comes from the Occupy Wall Street protests. The slogan of the movement, “we are 99 percent,” is worth keeping in mind when looking at the graph. The nonpartisan Economic Policy Institute released this data at the end of October and it shows the extreme concentration of wealth into, not just the top 1 percent of the population, but also the top 0.1 percent.
Just a couple weeks after that article was published, the Pew Research Center discovered that previous Americans are 47 times richer than younger generations. This general fact has always been true, because older adults have more time to establish income and save money, but the size of the gap is significant. In 1984, the difference of the average net worth of people 65 and older and for people younger than 35 was $108,936. In 2009, the difference between the same age groups increased to $166,832.
This disparity is unprecedented and the report blames changes in the labor and housing markets. As Paul Taylor, vice president of the Pew Research Center, said of the data: “We don’t know how the story ends but we know how the story is beginning.”
Class warfare and jobs
A few days after Ryan commented that Obama was encouraging class warfare, the president fired back during a speech to promote the American Jobs Act.
“The only class warfare I’ve seen is the battle that’s been waged against the middle class in this country for a decade,” he said.
Amid the numerous discussions about America’s economic turmoil, it seems talk of class warfare keeps surfacing. CBS News reported that Mitt Romney, a Republican presidential candidate, called the Occupy Wall Street protests class warfare. The phrase has also appeared in political discourse in recent years.
The late Howard Zinn, author of “A People’s History of the United States,” gave a speech in October 2000 to support Ralph Nader for president. Zinn insisted class warfare has been present since the founding of this nation.
“[When] the wealthy White men known as our Founding Fathers fashioned a Constitution designed to prevent more rebellion, to maintain control of the country by slave owners, merchants, manufacturers and Western expansionists, that was class warfare,” he said.
After George W. Bush was declared the winner of the 2000 election, he proposed cutting taxes for the richest 1 percent of Americans, who would receive, on average, a cut of $60,000, according to an article by Patrick Martin posted on the World Socialist website in March 2001. Meanwhile, 88 percent of taxpayers would see their taxes slashed by only $1,600. As he toured the country to support the plan, Bush countered attacks on his budget proposal, claiming such denouncements were class warfare against the rich.
“Class warfare has been the policy of the American ruling elite for more than two decades, during which working class incomes have declined and the share of U.S. national wealth in the hands of the top 1 percent has doubled,” Martin wrote.
He suggested in the beginning of his article that the White House was trying to rush through the tax cut legislation, which had been set in motion less than two months after Bush took office, before most Americans understood what was going on.
Some conservative commentators even noted that talk of class warfare was distracting from the core debate about the tax cuts, which if Martin was correct, could have been part of Bush’s strategy.
“Most Americans still regard success as something to be admired—and sought after—rather than as something to be envied,” Daniel Mitchell wrote for The Heritage Foundation in March 2001. “But to allow all Americans to reach for success, we must remove the barriers to upward mobility that clutter our tax code.”
The belief held by many who supported the Bush tax cuts is that reducing taxes on the rich would encourage more Americans to push harder to get to the top. The idea is central to the infamous “trickle-down theory,” that those with greater wealth will donate their money to philanthropic purposes and share their success with others. Taxing the rich, Mitchell argued, would discourage the drive to gain more wealth and lead to economic stagnation.
“The last thing we should do is mimic Europe’s welfare states, which have been economically crippled for years by wealth-redistribution policies,” he wrote. “The United States is prosperous in large part because it avoids class warfare.”
The media watchdog organization FAIR reported that during the past decade, most major news outlets discussed class warfare by linking the term to actions of non-wealthy Americans. Radley Glasser and Steve Rendall explain the results of the FAIR study in an article on the organization’s website.
“In all outlets combined, the phrase was almost 18 times more likely to describe bottom-up action—rhetoric or policy decisions perceived as benefiting the poor or lower classes—than it was to describe top-down action (90 percent vs. 5 percent of occurrences),” they wrote.
Warren Buffet, chairman and CEO of Berkshire Hathaway, wrote a letter to Congress that was published by The New York Times demanding that taxes should be raised on wealthy Americans like himself. The letter put Buffet in the middle of the debate about job creation, with Obama even proposing the “Buffet Rule” that would make it necessary for wealthy Americans to at least be taxed the same rate as the middle class citizens, according to the president’s website. When Ryan mentions class warfare, he is talking about the bottom-up perspective, but Buffet thinks it is the other way around.
In 2003, during an interview on the ABC news show “Nightline,” the host, Ted Koppel, raised the issue of how taxing wealthy Americans could be characterized as class warfare.
“Well, I’ll tell you, if it’s class warfare, my class is winning,” Buffet said.
Neither side seems to deny that class warfare exists, but the argument is focused on identifying who the victims are. If the rich are suffering from class warfare, it hasn’t reduced their earnings
Wealthy job creators
The state of the U.S. economy has increased demand for more jobs and many Republicans have insisted that wealthy members of society can provide them. Mona Charen advocated for the idea in a column posted on the National Review website.
“I’m for the rich because they create the dynamism and energy of a growing economy,” she wrote. “The rich create businesses and hire people.”
Charen mentioned that a wealthy person hired her for her first job. In addition to the rich, she supports people who want to become rich, but acknowledged that opportunities to do so are disappearing.
Ryan also noted in a YouTube clip posted on hyscience.com the importance of lowering taxes on wealthy Americans and businesses in order to stay competitive with foreign markets. He claimed it would ease financial burdens on entrepreneurs in the U.S., maintain equal opportunity for employment and encourage upward mobility.
Hart Hodges, an economics professor at Western Washington University, noted that increasing taxes on the wealthy might not help economic recovery as much as some people think.
“The most basic thing in economics is when you lower the price of something it becomes relatively more attractive, when you raise the price of something it becomes relatively less attractive,” Hodges said.
He added that one method a person can use to avoid paying larger taxes on earned income is to find a way to earn less and live off of capital and dividends. In addition to the concern that taxing wealthy members of society would lead to economic stagnation, Hodges pointed out the consequences that might affect people in occupations that require a lot of money and education, such as doctors.
If people are discouraged from pursuing a career in the medical field because of the economic drawbacks, there may be fewer doctors who haven’t received as much training. The key is to raise taxes carefully so they don’t alienate people from filling those jobs, Hodges said.
Not everyone is convinced that the rich and corporations are creating enough jobs, if they are creating jobs at all. Offering tax credits as incentives for big businesses to hire domestically is a popular idea, one that has taken form as a bipartisan bill in the Senate, according to Andrew Zajac and Steven Sloan of Bloomberg Businessweek.
The bill, theoretically, would encourage corporations to funnel offshore profits, which total about $1.4 trillion, into the U.S. economy by giving them a tax rate of 8.75 percent. The top corporate tax is currently 35 percent.
“The rate on repatriated profits would drop to 5.25 percent if a company’s payroll expanded during 2012,” Zajac and Sloan wrote. To qualify for the lower rate, a corporation would have to increase its workforce by at least 10 percent.
Similar attempts to energize the economy in recent years have caused a lot of mistrust toward this style of job growth encouragement.
In 2004, Congress approved repatriation legislation for overseas profits from domestic corporations. An article by Floyd Norris from The New York Times explained what happened to most of the money that became available from the Homeland Investment Act. The legislation granted a one-time offer to corporations that had profits stored outside the nation: if big businesses brought those profits home to spur job growth and invested in creating infrastructure, they would pay a dramatically lower tax rate on those finances. It was a golden opportunity for corporations to give merit to Republican rhetoric that big businesses are job creators.
The Homeland Investment Act prohibited the use of the money for the purposes of raising dividends and purchasing shares, because such actions would recycle the finances into corporate control. Many corporations took advantage of the tax holiday and $299 billion poured in from overseas accounts.
“About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends,” Norris wrote.
He added that some corporations were aware of the looming tax holiday and began using foreign subsidiaries that year to exploit the repatriation.
The proposed bipartisan bill for a similar tax holiday, which is backed by groups of multinational companies such as the WIN America Coalition, faces tough scrutiny in its current form. Senate Majority Leader Harry Reid said the legislation would need to be bundled with infrastructure programs if it has any chance of passing the Senate.
On the business side of job creation, a common goal Republicans have pursued is the need to reduce regulations, which might deter companies from investing their money in the U.S., according to an article by Lawrence Mishel for the Economic Policy Institute. Sen. Susan Collins, R-Maine, introduced a bill to place a moratorium on all new job regulation.
“Businesses, our nation’s job creators and the engine of any lasting economic growth, have been saying for some time that the lack of jobs is largely due to a climate of uncertainty, most notably the uncertainty and cost created by new federal regulations,” Collins said.
Mishel blasted the so-called “uncertainty” argument, because the approach affects job creation whether it is from a wealthy source or otherwise. By delaying regulation standards, Collins and other Republicans are actually causing economic uncertainty, because businesses don’t know what regulations will require when they are imposed, Mishel wrote.
Mobility in America
Both Mitchell and Ryan point out the need to preserve upward mobility in order to strengthen the nation’s economy. A 2005 article in The Economist took issue with the whole ideal of social mobility and how it has become less likely that a poor person can make their way up the ladder and become rich.
Roughly 35 years ago, the average annual salary of the top 100 CEOs in America was $1.3 million, which was 39 times that of the average worker, The Economist reported. Now, the disparity has widened to a ratio of 1,000-to-1. Mitchell claimed that lower tax rates do benefit the rich to some extent, but the poor and the middle class are the ones who can take advantage of the breaks and seek more opportunities for themselves and their families. Some see the disparity as an opportunity and if they cross it, they will attain financial security.
Hodges said he doesn’t know how to justify the large salaries and bonuses CEOs receive, because it simply doesn’t make sense for them to earn that much money. Niall O’Murchu, a professor and coordinator for the Law, Diversity and Justice program at Fairhaven College, discussed the relationship between wages and skills of corporate CEOs.
“Some economists believe that the chief executives are making brilliant decisions to make lots of money and they’ve got such rare talents that they’re worth that money to the companies,” O’Murchu said. “Some political economists believe that these chief executives are bilking the shareholders, because they’re in a position of power.”
He added that the increasing concentration of wealth in the top 0.1 percent of the population should cause CEO’s pay rates to be reexamined and compared to the skills they bring to their businesses.
“There are a lot more highly-educated people with new, useful skills who have not seen anything like the stratospheric growth in their compensation,” O’Murchu said.
The Economist found most economists agree that recent decades have seen stagnation for social mobility while income inequality has continued to increase. Gary Solon, an economics professor at the University of Michigan, found that social mobility might be better in other countries. It is hard to accurately measure, but evidence suggests Germany, Sweden, Finland and Canada are all competitive when it comes to social mobility success rates.
Competition could also be part of the reason for growing social stratification. Upward mobility has worked for elite Americans who learn about the importance of getting into the best schools from a young age, according to The Economist. A decade may go by before they are required to prepare for gaining access to the top universities in the country. By the time they enter higher education, they likely have their career figured out (if it wasn’t already when they first entered school) and the competition continues.
Education is a perfect model to assess social stratification. Poorer members of society have no choice but to send their children to schools that are rated and run by superficial data. Linking teacher salaries to student performance is an example of data that harms everyone involved. Students who have trouble with schoolwork and need extra help do not receive it because teachers are forced to make sure students who are learning continue to succeed if the teachers want to keep their jobs.
The outlook for low-income students to succeed in higher education is bleak, too. The Economist explained that Pell grants are the main source of funding for poorer students, but money for the grants is being shuffled to other financial aid programs. Though the article is from 2005, this October a student at a town hall meeting in Wisconsin asked Ryan why he proposed cutting 15 percent of the total Pell grant award. Ryan responded by explaining that the Pell grant program is not sustainable, it encourages universities to raise tuition and it can’t be paid for.
“Ryan justified the GOP’s desire to cut the highly-necessary Pell grant program by claiming that it costs too much; but the GOP’s budget provides huge tax breaks for the wealthy and corporations which dwarf the cost of preserving the grants,” Travis Waldron and Pat Garofalo wrote in an article for the ThinkProgress website.
Middle class woes
The problems facing the U.S. economy are so extreme, some think it would be best to adopt multiple approaches to addressing the crises. In an article for The Atlantic, Don Peck explained how different tactics can be used to make sure the economy is growing and that more people can share the success of such growth. Changing the perspective on the U.S. economy is key to protecting the middle class, which has been made vulnerable by a number of economic and social factors.
Peck began his article by discussing a 2005 report from three Citigroup analysts who examined the growth of the nation’s economy. At the time, the analysts found that members of the richest 1 percent the U.S. population were responsible for all the significant financial activity in the country. This concentrated wealth gave those who possessed it greater influence in the nation and that wealth increased annually, according to the report. The analysts divided the U.S. population into “the rich and the rest,” even though they knew it was a generalization.
The division has some merit, Peck argued, citing a Gallup poll that indicates recovery from the recent recessions has been fueled by those with more wealth.
“[From] May 2009 to May 2011, daily consumer spending rose by 16 percent among Americans earning more than $90,000 a year; among all other Americans, spending was completely flat,” he wrote.
Another issue that has hit middle-class families particularly hard was the collapse of the housing market, which will be discussed in greater detail shortly. In that crisis, the stock market rebounded and eased economic burdens on wealthy investors. Middle-class families who rely on the investment value of their homes have been adversely affected by the recession, Peck wrote. A Pew Research poll from 2010 showed that, since the recession began, the wealth of the middle class had decreased by 23 percent compared to 12 percent for wealthier classes.
Peck also mentioned how the corporations have bounced back quickly and continue to benefit from the recession by setting up accounts offshore and keeping wages and expenses low to ensure higher returns. Wealthy members of society are able to weather the storm of economic turmoil, according to Anthony Atkinson, an economist from Oxford University. He studied recessions in other countries and found that the consequences differed significantly between the middle and upper classes.
“[The] middle class suffered depressed income for a long time after the crisis, while the top 1 percent were able to protect themselves—using their cash reserves to buy up assets very cheaply once the market crashed and emerging from crisis with a significantly higher share of assets and income than they’d had before,” Peck wrote.
He also noted that the nonprofessional middle class has suffered because of the economic plight of men who work blue-collar jobs. Michael Greenstone, an MIT economist, reported that the median income those men earned has declined since 1973 by 32 percent. Lawrence Katz, a Harvard economist, discussed significant changes in the labor market that have occurred in the past three decades. Employer interest has increased for creative, analytical and interpersonal skills and men without college degrees continue to have a hard time learning these talents.
Katz explained men from previous generations could find work in manufacturing and construction, but that isn’t a likely option for young men today. Peck reported that, in 2009, men concentrated in a few major job categories.
“They did, however, consolidate their hold on manufacturing—those dwindling jobs, along with jobs in construction, transportation and utilities, were more heavily dominated by men in 2009 than they’d been nine years earlier,” he wrote.
Men hold only one in four jobs in the health and education sectors. Those sectors added roughly 4 million jobs during the previous decade, while many male-dominated markets reported losses. The problem goes beyond the U.S. As other wealthy nations have moved away from industrial-age manufacturing and have invested more in innovation, men are having more trouble finding work. As a greater number of employers place an emphasis on “people skills,” more women are filling those vacancies, according to Bruce Weinberg, an Ohio State University economist.
O’Murchu suggested the shift is not as simple as innovative jobs overshadowing manufacturing.
“It doesn’t explain how much more inequality has risen in the United States,” O’Murchu said.
American politics have affected the nation’s economy much more than the skills-based technological change. The severity of the wealth disparity, the structure of the tax code and the declining power of labor unions are all connected to legislative activity of the past 30 years, O’Murchu said.
He added that the political system in this nation has been slow to respond to the innovation boom and the predominant reaction has been to facilitate the success of innovative business with deregulation. This has contributed to income inequality, because the concentration of wealth cannot be spread across the economy if corporations aren’t mandated to do so.
One of Peck’s conclusions is a greater number of Americans will have to accept jobs that require fewer skills and pay lower wages. It is exactly what many people seem to be doing. According to the National Employment Law Project, 75 percent of the job growth in 2010 came from industries and sectors that paid less that $15 an hour. The trick, Peck wrote, will be to try to add benefits and securities that will make these traditionally low-end jobs more like middle-class occupations.
Bailouts: banks and the housing market
In 2008, President George W. Bush signed the Troubled Asset Relief Program (TARP) into law. It was designed to shield major banks and businesses from bankruptcy and it required $700 billion from the government. It gave rise to two pejorative terms: “bailout” and “too big to fail.” One of the goals of TARP was to encourage banks to lend so citizens could have the means to make large purchases, such as new homes.
The expected increase of lending never happened, which has become a significant roadblock to economic recovery. In September, the Federal Reserve tried to encourage people to borrow money by announcing Operation Twist, according to an article by Annalyn Censky on CNN’s website. The goal of the proposal was to lower interest rates and make the process of lending more affordable.
Operation Twist faced skeptics in the mortgage industry who said interest rates have been slashed repeatedly but it hasn’t spurred growth. Greg McBride, a senior financial analyst for Bankrate.com, reported his opposition to the Federal Reserve’s plan in Censky’s article.
“Low rates can only do so much,” he said. “Operation Twist will not prompt banks to make loans they’re not comfortable making. It won’t prompt people to buy houses if they’re worried about a job loss, and it won’t help homeowners refinance mortgages if they’re already unable to qualify.”
Censky added that people would have to prove their credibility to take advantage of Operation Twist.
The housing crisis began in 2003 when fixed-rate mortgages fell to the lowest they had ever been. According to an article by Jeff Faux for the Economic Policy Institute, realtors and bankers discovered how they could take advantage of this by targeting members of the middle class and the working poor.
Deregulation reduced the qualifications necessary to buy a house, according to an article on stockmarketinvestors.com. New loans were introduced that allowed people to sign up for mortgages without needing to provide proof of income. Home loan standards shrank until all a subprime borrower needed was a decent credit score to move into their own home.
Supporters of the rampant lending spree, which became known as “the housing bubble,” thought that the falling home prices would continue to descend and even if mortgage holders couldn’t afford to pay, they could refinance their home to cover the cost. Faux wrote that as the demand for housing continued, the plunging costs for houses reversed and people began defaulting on their mortgages faster than they had signed up for them.
“[It] is not the squeeze on homeowners that is giving our central bankers nightmares,” Faux wrote. “It is the blowback of housing deflation on the country’s massively overleveraged financial markets, which has seriously constricted the flow of credit—the lifeblood of the world’s largest debtor economy.”
About 22 percent of homeowners who are already struggling with their mortgages would not qualify for the benefits and that doesn’t include the number of jobless people, who would also be denied lower interest rates.
Businesses are also withholding from investing because of the economic climate. Mike Schenk, vice president of economics for the Credit Union National Association, noted that even though some businesses have money, it is hard to convince them to invest, because they don’t want to lose the finances they have.
“Most corporations are already sitting on piles of cash,” Schenk said. “And those that aren’t will find it difficult to sell internally the idea of investing more in an environment where demand just isn’t there.”
At the same time the Federal Reserve introduced Operation Twist, Jacob Goldstein of NPR reported that U.S. corporations are holding more than $2 trillion. The major reason for this is the doubt associated with the recession, but Goldstein also pointed out the shrinking role of manufacturing is a change some businesses are still adjusting to.
“[The] U.S. economy has shifted away from heavy industry and toward companies that rely more heavily on R&D and intellectual property,” he wrote.
He added that large factories could be used for investment purposes to help companies expand. When those factories are abandoned, the collateral value is lost. Businesses have also reduced inventory and money shows up as cash rather than as goods.
Plenty of banks and businesses took advantage of TARP, but the money has not been repaid, essentially because of the risks associated with moving the money into the economy. Banks don’t want to lend to the unemployed or people with poor credit and people don’t want to take out loans and deal with volatile interest rates that might make the loans impossible to pay off. Contrary to Charen’s vision, as long as wealthy Americans and businesses continue to hold their money, they will not help the economy grow.
In their book, “Winner-Take-All Politics,” Jacob Hacker and Paul Pierson discuss something called, “the big zero.” They predict it will be the name history gives to the first decade of the new millennium. From an economic perspective the first 10 years of it were wasted.
“Even the most optimistic estimates suggested it would take years to recover from the hemorrhaging of jobs and incomes triggered by the collapse,” they wrote.
Some of the economic recovery is already evident. Recent data show the number of Americans filing for unemployment fell for the first time in seven months, according to an article in The Washington Post from Nov. 17. In the middle of October, PBS reported that home building increased during the month of September by the largest margin in the past 17 months.
While this is good news, little progress has been made that directly challenges existing systems that support income inequality. Will efforts to reform the tax code and redistribute the wealth always be mired by discussions of class warfare? Where does that leave our most vulnerable citizens, such as the elderly, people who can’t work or children? What will happen to the 99 percent of Americans if greater percentages of wealth are perpetually flowing to the richest members of our society?