An election when inequity is at a historic high

The policy prescriptions of Republicans, Romney and Ryan, will lead to a more divided society

The presidential election offers Americans a real choice, one with potentially large consequences. The future course of inequality and what, if anything, to do about it is one of many issues on which the candidates have profound differences that have not been adequately debated. Mitt Romney has been explicit: We should talk about inequality only behind closed doors. But American inequality has become so extreme, as The Economist reported in a recent special series, that it is adversely affecting our economy. Inequality, in other words, is no longer just a moral issue.

Perhaps this helps explain why the issue of poverty should suddenly appear as part of the Romney-Ryan makeover: now they’re compassionate conservatives. Paul D Ryan’s speech on Wednesday in Cleveland might lead one to conclude that the Republican nominees are genuinely concerned about poverty, and perhaps they are.

But the numbers in the Ryan budget are far more revealing than any of the candidate’s speeches. Ryan’s proposed budget would gut programmes that serve those at the bottom end of the economic ladder while enriching those at the top with tax cuts.

The macroeconomic consequences of the Romney-Ryan economic programme would be devastating: It would slow growth and increase unemployment while decreasing the protection of government safety nets just as Americans would need them more. And that’s not even counting the Romney-Ryan approach to health care. They have criticised the president’s reforms but have said nothing about how or whether they would ensure universal access to doctors, nurses and medicine.

Inequality in America is at a historic high. It is greater here than it is in any other advanced country, and it is rising. Our widening equality gap is not purely the result of market forces – far from it, as the experience of other advanced countries subject to the same forces shows. Government policies – or their lack – played a big role in creating and maintaining these inequities.

Inequality in incomes

Inequality in “market incomes” – what individuals receive independently of any government transfers – has increased as a result of ineffective enforcement of business competition laws, inadequate financial regulation, deficiency in corporate governance laws and “corporate welfare” – huge corporate subsidies that reached new heights in the Bush administration.

It is disturbing how little Romney and Ryan have done to distance themselves from the economic policies of the Bush administration, which not only led to poor economic performance but also to so much inequality. Understandably, perhaps, Romney has not explained why individuals in the hedge fund and private equity fund business should enjoy a loophole in the tax law that allows them to pay just 15 per cent taxes on their earnings, while ordinary workers pay a far higher rate.

The 14 per cent rate Romney reportedly paid on his income last year is well below that of Americans of comparable incomes who created a real business or made real innovations that transform our economy. Tax havens like the Cayman Islands facilitate another level of tax avoidance. We can be sure that the money is not in the Cayman Islands just because it grows faster in the bright sunshine there.

Our government does less to correct these inequalities than it did in the past – and less than other countries do. And as disparities in market incomes have increased, the government’s effort to correct them have diminished.

It’s not just a matter of redistribution, as some suggest, but a matter of ensuring that those at the top pay their fair share of taxes. Putting all this together isn’t the politics of envy. It’s about cold, hard economics. Tax avoidance and low tax rates on capital gains – and the inequality they amplify – weaken our economy and distort the way in which we allocate resources. They lead to underinvestments in infrastructure, technology and education.

The Romney campaign, however, has justified its failure to deal directly with inequality by deploying a handful of myths.

Here are a few of the most important:
The cost of these myths goes far beyond the damage to our economy. The fabric of our society and democracy is suffering. While we may be disappointed at how little of the money at the top goes into real investments in America, we should be concerned about how much goes into political investments, from which the very rich expect, and have received, high returns.

These political investments corrupt our democracy: It’s becoming more like one dollar, one vote than one person, one vote. Political inequality leads to economic inequality, which leads in turn to more political inequality, in a vicious spiral undermining our economy and our democracy.

Recognising all this is not class warfare. It is simply acknowledging the realities of life in the United States. President Barack Obama has at least touched on key elements: His education policies will enhance opportunity. His tax proposals will do a little bit about the extremes at the top. His jobs and investment programmes will expand growth now and in the future, and they will be of enormous benefit to those in the middle.

Romney and Ryan have tried a hard tack to the centre in their rhetoric in recent weeks. But let no one be deceived: Their tax policies will lead to more inequality, the continued hollowing out of the middle and more poverty at the bottom. Worst of all, their policies would lead to a more divided society, one that endangers our future – our economy, democracy and sense of national identity.

(The writer is a Nobel laureate in economics, a professor at Columbia University and the author, most recently, of ‘The Price of Inequality: How Today’s Divided Society Endangers Our Future.’)