Last night Professor Jeffery Sachs gave a great lecture at the London School of Economics on the long-term structural crisis facing the US. For 30 years successive governments have implemented policies aimed at making life easier for the 1% of top earners by reducing top rate taxes. These people only pay 35% tax on income while wealthy hedge fund managers can escape with only 15% income tax due to a loop hole called tax on carried interest.
The result has been a reduction in government to dangerously low levels and a widening poverty wealth gap in the world’s biggest economy. The real wage of the median male US worker has remained the same over the last 40 years while real economic growth has steadily grown. These gains have largely gone instead to the top 1%.
The structural break from real median income growth to no real median income growth happened at the time of a great shift in the global economic environment. In 1971, the Bretton Woods system of monetary management whereby dollars were convertible into gold ended and the US dollar became a fiat currency. Throughout the 1970s, crises and uncertainty were prevalent with oil shocks and rising inflation.
However, Sachs blames the Reagan government for implementing policies from 1981 to counter these problems which have only benefited the wealthy over the last 30 years such as deregulation and cutting taxes on the rich from 70% to 35%.
The scary thing is that the difference between the two political parties is miniscule. Democrat Presidents in the intervening years have done little to reverse this trend. Today, the Democrats call for a small increase by just a few percentage points while the Republicans, of course, are wholly against any increase.
The Democrats seem to understand that a rise in tax on the wealthy is fair and necessary but compared to the pre-Reagan era, the increase they are proposing is far too small and will lead to a continued eroding away of government not to mention continued widening of the poverty-wealth gap.
Although it may not always be a popular cause, the role of government in economic growth and the well-being of a country’s citizens is undeniably important. The private sector needs to be supported by the public sector with well-run institutions to ensure that the wild west doesn’t return. To ensure that the financial sector is properly regulated so that the occurrence of bank crises are less likely, to ensure that industry does not ignore the facts of a deteriorating global climate and to ensure that the next generation have access to schools to enable them to achieve a high level of education, just to name a few. Data shows that a higher level of education translates into a better chance of a higher income and a better prepared workforce to face the challenges of globalization.
The worry for the US is that falling investment in public institutions is accelerating the fall of US economic strength and leading to a growing squeeze on those on middle and lower incomes.
Another aspect to Sachs’ argument is the corruption within government. The legality of lobbying Senators and Congressmen only makes it harder for policies that benefit the wider population rather than the few to be implemented and the presence of insider trading within Congress is another dangerous revelation.
In short, major changes to US governance is needed to ensure that long-term prosperity for the US majority rather than the minority is achieved in the future together with a realization that not all tax rises are bad.