(What’s Left of) Our Economy: It’s Not Just Inequality

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carried interest, family formation, Federal Reserve, housing, Immigration, inequality, lobbying, median income, millennials, offshoring, private equity, quantitative easing, recession, stock buybacks, tax loopholes, Trade, wages, {What's Left of) Our Economy

Folks at the Social Contract‘s Writers’ Workshop seemed so pleased with my talk on sources of inequality in the U.S. that it seemed worth sharing on RealityChek. Here goes.

Inequality clearly has been a major preoccupation of Americans this year, especially in the chattering classes. The most talked-about economics book in recent memory focused on the subject (Thomas Piketty’s Capital in in the Twenty-First Century). And although some polling evidence indicates that Main Street-ers are more concerned with jumpstarting economic growth than with reducing the rich-poor gap, politicians such as President Obama and likely presidential contender Hillary Clinton have called narrowing the gap a major national priority.

But for all the attention the subject has received, two important points are still generally overlooked. First, inequality is far from America’s leading income-related challenge nowadays. After adjusting for inflation, the median incomes of Americans aren’t simply falling behind those of the top one percent or however the affluent are labeled. They’re falling, period.

In other words, the vast majority of Americans have gotten poorer in absolute terms according to the broadest measure of economic well-being (which includes benefits, rental and investment income, and other earnings as well as wages and salaries). Moreover, this decline didn’t start during the financial crisis and Great Recession. It dates back 25 years. And it’s continued into the recovery. At least as striking, although the nation has suffered worse economic times in its history, never before has such income deterioration lasted so long.

As never before, then, Americans are confronted with the question, “Why is a national economy developed and organized in the first place if not to help most people improve their lives?” An economy in which living standards are falling for the majority for more than two decades is an economy that can only be labeled a failure.

But not only is America’s income problem worse than widely recognized (at least by the powers-that-be). The roots of this problem are more numerous and widespread than commonly supposed. And those inequality engines that have been identified look even stronger, and work in a greater number of ways, than originally thought.

For example, critics of U.S. trade policy have long argued that recent American trade deals and related policy decisions have worsened income inequality by providing too many incentives for businesses to ship lucrative middle class jobs overseas. But it’s increasingly clear that jobs don’t actually need to be exported for these policies to drive down worker incomes. Simply making the offshoring option widely available to employers has surely curbed employees’ wage demands, much less willingness to strike.

Open Borders-style immigration policies, it should be equally clear, have pressured incomes on the bottom rungs of the U.S. economic ladder by flooding their job markets with millions of poorly skilled and educated foreign-born competitors. But such policies also fuel inequality, as I wrote in Fortune this summer, by increasing the demand for public services whose costs the rich can often evade or limit by their ability to exploit tax loopholes.

But the list of inequality engines hardly stops there. For example, even aside from immigration issues, tax loopholes tend to benefit the wealthy disproportionately because they reflect the kind of lobbying power that less wealthy Americans can rarely mobilize. One prime example: how private equity fund partners have persuaded Washington to tax the vast bulk of their earnings at the low long-term capital gains rate rather than at the much higher income rate.

And speaking of American finance, let’s not forget how regulations encourage publicly held companies to use debt to buy back enormous amounts of their own stock. These purchases of course boost stock prices and massively benefit top executives – who often are compensated with stock or paid based on share performance. But they can often harm non-managerial workers because they further divorce corporate financial performance from the vigor of the real economy whose fortunes they once depended on. Thus they tend to undercut business’ actual and perceived stakes in broadly based and shared national prosperity.

Once the equity markets began recovering in spring of 2009, largely due to cost-cutting that super-charged profits despite ongoing economic malaise, CEOs and their boards unquestionably realized that their company’s fates were no longer closely connected to those of their customers. And when investors began worrying about the sustainability of such bottom-line growth, the buyback spree enabled Corporate America to persist with customer- and worker-light strategies.

Macro-economic forces are also helping to weaken wages and incomes for huge percentages of the American people. On top of the recession’s impact on the entire economy, it’s been widely noted that it and the historically weak recovery have taken an especially heavy toll on younger Americans. Forced to postpone family formation and first-time home-buying, the typical millennial will face unprecedented obstacles to amassing the kind of nest egg that has underlay middle class and working class prosperity for decades.

Finally, just as stock buybacks have loosened the relationship between Corporate America and the rest of the economy, the Federal Reserve’s quantitative easing measures have loosened the relationship between those who do and don’t own capital, and inevitably fostered neglect of the latter. The main purpose of the Fed’s bond-buying has been to lower the returns on safe assets like treasury bills to induce investors to abandon them for riskier, higher-yielding assets with greater potential to quicken economic growth.

The growth effects have disappointed even the Fed, it’s just been learned. But QE has been a roaring success in boosting asset prices across the board, and thus immensely enriching those who owned them already or were capable of buying them.

My audience at the Writers’ Workshop consisted mainly of activists who have worked long and hard on the remarkably successful campaign to prevent a dramatic and disastrous loosening of controls over American immigration flows. I ended by congratulating them on their ability to resist the combined forces of Big Business, organized labor, the White House, the leaders of both major political parties, and Big Media – and by telling them how fervently I hoped that their counterparts working to dismantle other engines of income deterioration would get their acts together as effectively.