Corporate chieftains often claim that fixing the US economy requires signing new free trade deals, lowering government debt, and attracting lots of foreign investment. But a major new study has found that those things matter less than an economic driver that CEOs hate talking about: equality.
"Countries where income was more equally distributed tended to have longer growth spells," says economist Andrew Berg, whose study appears in the current issue of Finance & Development, the quarterly magazine of the International Monetary Fund. Comparing six major economic variables across the world's economies, Berg found that equality of incomes was the most important factor in preventing a major downturn. (See top chart.)
Andrew Berg & Jonathan Ostry
In their study, Berg and coauthor Jonathan Ostry were less interested in looking at how to spark economic growth than how to sustain it. "Getting growth going is not that difficult; it's keeping it going that is hard," Berg explains. For example, the bailouts and stimulus pulled the US economy out of recession but haven't been enough to fuel a steady recovery. Berg's research suggests that sky-high income inequality in the United States could be partly to blame.
So how important is equality? According to the study, making an economy's income distribution 10 percent more equitable prolongs its typical growth spell by 50 percent. In one case study, Berg looked at Latin America, which is historically much more economically stratified than emerging Asia and also has shorter periods of growth. He found that closing half of the inequality gap between Latin America and Asia would more than double the expected length of Latin America's growth spells. Increasing income inequality has the opposite effect: "We find that more inequality lowers growth," Berg says. (See bottom chart.)
Berg and Ostry aren't the first economists to suggest that income inequality can torpedo the economy. Marriner Eccles, the Depression-era chairman of the Federal Reserve (and an architect of the New Deal), blamed the Great Crash on the nation's wealth gap. "A giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth," Eccles recalled in his memoirs. "In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped."
Many economists believe a similar process has unfolded over the past decade. Median wages grew too little over the past 30 years to drive the kind of spending necessary to sustain the consumer economy. Instead, increasingly exotic forms of credit filled the gap, as the wealthy offered the middle class alluring credit card deals and variable-interest subprime loans. This allowed rich investors to keep making money and everyone else to feel like they were keeping up—until the whole system imploded.
Income inequality has other economic downsides. Research suggests that unequal societies have a harder time getting their citizens to support government spending because they believe that it will only benefit elites. A population where many lack access to health care, education, and bank loans can't contribute as much to the economy. And, of course, income inequality goes hand-in-hand with crippling political instability, as we've seen during the Arab Spring in Tunisia, Egypt, and Libya.
History shows that "sustainable reforms are only possible when the benefits are widely shared," Berg says. "We hope that we don't have to relearn that the hard way."
The rise of dark-money political groups has made it much harder to tell which big companies are throwing money at elections. Often, all we know is what corporations voluntarily disclose—a big reason why transparency is becoming one of the most important aspects of corporate citizenship. With that idea in mind, the Robert Zicklin Center for Corporate Integrity at Baruch College has ranked Fortune 100 companies based on how well they disclose their political activities. The results may surprise you. Highly transparent companies include hard-knuckled lobbying powerhouses such as Pfizer and Goldman Sachs. Highly opaque ones: Corporate do-gooders such as Berkshire Hathaway, Nike, and Google (though the authors hadn't seen this Google page).
If you're wondering what to make of this, the study found some fascinating trends. At the low end of corporate political engagement, companies tend to disclose more as they become more politically active. But as companies go from moderate to heavy involvement in politics, the trend reverses and politically active companies become increasingly opaque. Here's what this looks like on a graph, where the Baruch Index measures transparency (100=most transparent).
Robert Zicklin Center for Corporate Integrity
Okay, the graph isn't too transparent either. But here's what I think is going on: Companies that aren't involved in politics can seem opaque because they have nothing to disclose. Those with moderate political engagement disclose more on average because they want to let shareholders know that they're fighting for their interests. But those engaged in major political battles know that their heavy spending could tarnish their brands, so they find ways to hide what they're doing. In other words, political transparency comes with its own cost/benefit curve, which is basically what you see above.
Remember when Republicans still cared about climate change? Four years ago, GOP presidential candidate John McCain was proudly proclaiming that he'd cosponsored a bill to cap carbon emissions. But at this month's Republican debate in California, every presidential wannabe except Jon Huntsman denied that man-made climate change was a problem. And in another depressing sign of how far global warming has fallen off the political radar, hardly anyone on either side of the Solyndra tempest has argued that betting on the company was important for non-economic reasons. What happened here? In short, the climate change deniers won. Here's a handy chart of how they pulled it off.
On Saturday, the Obama administration unveiled the "Buffett Rule," a proposed tax on millionaires and billionaires named after celebrity investor Warren Buffett, who has long argued that the federal government should demand more of the wealthy. The millionaires tax is certain to become a major point of contention in the 2012 presidential campaign, and Republicans have wasted no time in heaping it with calumnies. Here are the six most popular conservative arguments against a progressive tax code, and why they're wrong:
It's class warfare!
Yeah right. Three decades of laissez-faire economic polices have allowed the rich to double their share of the national income while paying tax rates a fifth lower than before. The result, notes Kevin Drum, was "wage stagnation for everyone else, a massive financial collapse that ravaged the middle class, an enormous deficits that they'll be asked to pay off eventually." If the millionaires tax is the only blowback, the wealthy should count their blessings.
It's a tax on small business
"Don't forget that most small businesses file taxes as individuals," House Budget Committee Chairman Paul Ryan (R-Wis.) said on Fox News Sunday. "So when you are raising top tax rates, you are raising taxes on these job creators." Except when you aren't. ThinkProgress's Pat Garofalo points out that fewer than 2 percent of the nation's small businesses fall into either of the top two tax brackets. Plus, many of the small business filers in the upper brackets are merely investors who have nothing to do with running the business. And if small businesses don't want to pay taxes as individuals, they can file as corporations.
It reduces incentives to work and invest
Experience shows otherwise. As Nancy Folbre points out over at Economix, "average annual rates of growth in gross domestic product in the high tax era between 1950 and 1980 exceeded those of the last 30 years. Increases in the top tax rate under President Bill Clinton were followed by robust economic expansion."
The rich will leave the country
Good riddance, writes Don Peck in a recent Atlantic essay on how to save the middle class: "America remains a magnet for talent, for reasons that go beyond the tax code; and by international standards, none of the tax changes recommended here would create an excessive tax burden on high earners. If a few financiers choose to decamp for some small island-state in search of the smallest possible tax bill, we should wish them good luck."
During his decade in office, Texas Gov. Rick Perry has named Sarah Palin, Sean Hannity, Rush Limbaugh, and Glenn Beck as "honorary Texans." He may be the first Lone Star State governor to use the award to such brazen political ends, but he's sure not the first to use it to get attention. Here's the lowdown on 10 of the most interesting honorees.
Governor: Alan Shivers (D)
Honorary Texan: General George MacArthur (1951) Lowdown: The three-star general received the honor in Austin while on a tour to promote a stronger military stance against Korea. His son was named "Honorary Junior Texas Ranger." The general later led a parade in Houston attended by 500,000 people and visited Galveston, where he was to receive a Cadillac.
Governor: John Connally (D) Honorary Texans: 100th and 442nd US Army Regiments (1962) Lowdown: Composed of Japanese-American soldiers enlisted from WW II internment camps, these regiments suffered the highest casualty rates of any Army formations. Particularly severe were the 800 deaths sustained in rescuing the "Lost Battalion"—221 Texans trapped in eastern France.
Governor: Preston Smith (D) Honorary Texan: Shirley MacLaine (1972) Lowdown: Upon receiving her award, the actress-activist said, "Next time I'm in Texas, I hope I'm awarded this by Cissy Farenthold." Farenthold was the congresswoman who'd lost the Democratic nomination to Smith that spring.
Governor: Dolph Briscoe (D) Honorary Texan: Christi Worthington (circa 1976): Lowdown: Worthington's father, a Texan jeweler who'd relocated to Iowa, wrote his mother and asked her to send a bag of dirt so that his baby would be born on Texas soil. He then successfully petitioned the governor to make his daughter an honorary Texan.
Governor: Bill Clements (R) Honorary Texan: Deng Xioping (1979) Lowdown: A decade before the Chinese leader stood behind the massacre of pro-democracy protesters in Tiananmen Square, he was made an honorary Texan, given a cowboy hat, and treated to a rodeo and barbecue. Looking back on the affair, the Houston Chronicle wrote, "Herein lies a lesson for all Americans concerning the diplomatic conventions of civility and hospitality, and the harsh realities of totalitarian dictatorships."
Governor: Ann Richards (D) Honorary Texan: Bob Hope (1992) Lowdown: Richards handed the actor his certificate of Texan citizenship and said, "This entitles you to come to the mansion and see me anytime you want, honey."
Governor: George W. Bush (R) Honorary Texan: William Hague (1999) Lowdown: "I might be persuaded to wear the boots, but I'm certainly not going to wear the hat," the leader of Great Britain's Conservative Party said upon receiving the honor. Honorary Texan:Bob Dylan (1999) Lowdown: In 2009, after mentioning his Texas citizenship in an interview with the UK's Sunday Times, Dylan had this to say about Bush's legacy: "As far as blaming everything on the last president, think of it this way: the same folks who had held him in such high regard came to despise him. Isn't it funny that they're the very same people who once loved him? People are fickle. Their loyalty can turn at the drop of a hat."
Governor: Rick Perry Honorary Texan: Russell Crowe (2001) Lowdown: The Gladiator star received the award from Perry shortly before his band played Perry's daughter's 15th birthday party. Honorary Texan: Glenn Beck (2010) Lowdown: When Perry presented the award to the Fox News host at a "Taking Back America" rally at the Oil Palace in Tyler, Beck says he asked the governor, "Is there ever going to be a time when I'm going to need to use this as a passport?"