Throwing workers off the cliff

Posted: 31 December 2012 in Uncategorized
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The other day, when I was interviewed by BBC Radio about the fiscal cliff, I explained that politicians in Washington were engaged in an unserious discussion with serious consequences. And they weren’t even discussing the real economic problems facing the country.

Those problems, I suggested, are poverty, unemployment, and inequality. And they’re going to get worse if we jump off the cliff, the fact is workers have already been thrown off the cliff. And that’s one of the reasons the fiscal situation of the United States is even on the agenda.

Let me explain. What mainstream economists and politicians refuse to even acknowledge, let alone analyze with any seriousness, is the relationship between inequality and the federal budget deficit. There are at least three different parts of that relationship.

First, much of the current deficit has been caused by the crash of 2007-08 and the subsequent slow rate of economic growth, which have led to a decrease in government revenues and an increase in expenditures. And that economic crisis, as I have explained many times on this blog, can be directly tied to the growing inequality in the U.S. economy over the course of the past three decades. The capital share has been rising and the labor share has been failing, a trend that fueled the real estate and financial bubbles that finally burst in the fall of 2008. And that rise in the profit-wage ratio has only continued in recent years, in the midst of the Second Great Depression, as wages have stagnated and corporate profits soared.

Second, growing inequality is directly tied to the problems being faced by the Social Security program. As the Congressional Budget Office recognizes in its most recent projections, growing inequality means that the “taxable share of earnings declines because more earnings are above the maximum amount that is taxed for Social Security.” And the CBO expects that trend to continue to increase in the next few decades.

Third, inequality has created a radical shift in the Democratic Party, toward demanding tax cuts for workers and others (earning up to $400,000 a year). My view is that Obama and other Democratic politicians are proposing an extension of those tax cuts precisely because workers’ wages have been stagnant for such a long time, even while the capital share has been growing. But in allowing workers to keep a larger share of their take-home pay, they are also creating a situation that deprives the federal government of additional tax revenues.

I’m sure there are other connections I’ve missed. My only point is that inequality has played an important role in creating the current stalemate over the federal budget—and that’s because workers have already been thrown off the cliff.

  1. Michael B. Calyn says:

    Reblogged this on Ye Olde Soapbox.

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