The Rich and the Rest of Us: Gross Inequality Versus Democracy

The Rich and the Rest of Us: Gross Inequality Versus Democracy

Stephen H. Unger
January 13, 2009

Independent thinkers and just plain folks from all over the political spectrum are outraged by the funneling of hundreds of billions of dollars of public funds into the coffers of big corporations. The amounts seem to vary directly with the degree of incompetence and dishonesty of the managers of those corporations. We are told by the same economic pundits who failed to foresee and warn against the recent series of economic disasters that, if we don't rescue these floundering corporations, millions of Americans will lose their jobs, that if we don't feed these monsters, they will die and their rotting bodies will poison our economy.

Apart from being a fine occasion to blow off steam, this is a good time to examine some of the social generators that have produced this mess. Is it mere chance that the congress, with minimal discussion, went to the rescue of banks, insurance companies and automobile companies, never even discussing alternative ways to bolster the economy, for example, by helping deluded borrowers rather than deceptive lenders? Or by helping people whose livelihoods are in jeopardy, instead of corporations responsible for the problems?

I suggest that the fundamental cause of the problems and of the grotesque nature of the responses to them is the fact that we live in a society where money dominates, and is disproportionately concentrated in the hands of a very small segment of the population. It is that segment, the big stockholders and the high-level corporate managers whose interests are protected by our "democratic" government.

Gross inequality of income and wealth has two sides: a small number of people are very rich, and a large number of people are either poor or one bad break away from becoming poor. This economic inequality is both a cause and consequence of a similar inequality in political power. Below, I first discuss the rich and the poor, then the connection with politics, and then some conceivable remedies.

The Deserving(?) Rich

The rich that I have in mind are not people who are merely "comfortable" financially, but rather those with assets measured in tens of millions of dollars. How do people get to be that rich? One way is via exceptional ability in business, or outstanding talent in some sport or performing art. But talent is not enough. There are plenty of very able musicians, actors, and would-be entrepreneurs or business executives who never get the opportunity to utilize their abilities in ways that lead to wealth. In order to make the big bucks, determination, desire, and a degree of ruthlessness, are necessary in addition to talent.

The most essential element is luck. The ultimate in good luck is, inheritance, the way most super-rich people get that way.. We often hear of people who became wealthy by virtue of some dramatic business coup or technological innovation, or as a result of celebrity on the stage or a baseball diamond. The inheritance of vast fortunes, a far more common occurrence, is not usually considered newsworthy. Even in cases where a person initiated or developed a hugely successful business, it is often the case that an essential part of this process depended on inherited seed money.

Yet another common path to great riches is not usually made public. This is where illegal or morally questionable business practices are employed, for example obtaining government contracts thru political influence or outright corruption. What we are more likely to hear about occasionally are failed efforts of this type. Successful shady efforts are, by definition, generally not visible, altho we do sometimes learn about them when it is too late for remedial action.

How People Get and Stay Poor

The easiest, most popular, route to poverty is via birth into an impoverished family. Being subject to racial or ethnic prejudice facilitates residence in the economic wasteland. Despite all the Horatio Alger stories, transitions from poverty to riches were never easy or common, and seem to be becoming more difficult and less common. In the past, people from impoverished backgrounds were able to get factory jobs, starting perhaps as sweepers or on loading platforms, then rising to assembly line jobs, then to mechanics, foremen, etc. This ladder out of poverty is disappearing with the factories.

Another key factor that enabled children of poor parents to escape poverty in the past was education. Fifty or a hundred years ago, a decent education was available to a poor person, via good elementary schools, many excellent public high schools, and even first-rate colleges, such as the City College of New York. It was possible to work during the day and attend classes in the evening, with no tuition charges. In our current, more affluent, society, many public schools have been allowed to decay, and tuition-free colleges are history.

The virtual demise of labor unions has largely blocked another exit from poverty. Coupled with the reduction in the minimum wage that has occurred over the past several decades, this makes it still harder for poor people to provide their children with the means to improve their status.

Despite these obstacles, there continue to be individuals who overcome terrible family backgrounds and battle their way out of poverty into the middle class, or even into the ranks of the very rich. But such exceptional people are rare indeed.

Of course it is undeniable that some portion of those at the bottom part of the income scale are there, at least in part, because of laziness, incompetence, and generally weak characters. But how many people with these traits who happen to be born into wealthy families wind up living in poverty?

We are now seeing increasing numbers of people moving down the economic ladder. As good manufacturing jobs are exported, skilled machinists, technicians, and factory managers at various levels find themselves forced to work as store clerks, or in fast food restaurants, or as security guards. Due to the lack of affordable medical insurance, accidents or illness now constitute additional common mechanisms for downward mobility.

What Happened to the Fruits of Increased Productivity?

Technological progress has greatly increased our ability to produce goods and services. The benefits of this progress have not been flowing to the population as a whole. Productivity has increased by roughly 120% since 1970 [1], while median household income (in real dollars) has increased by less than 25% [2]. This despite the fact that it was during this period that it became common to have two wage-earners in a family. If child-care costs incurred by working mothers were taken into account, income for those at the lower levels would be proportionately even smaller.

In contrast, the very rich, who collect most of the stock dividends and capital gains, and high level managers (overlapping groups) have prospered hugely. The income of those in the top 1% has risen sharply. In 2006, they received about 20% of the national income. The share of the top 0.1% rose even faster, to abut 9% of total income. Both proportions are larger than at any time since 1928 [3]. Here is another indicator of how well those at the top have been doing. In 1986, Forbes Magazine listed 26 American billionaires. In 2008, their list grew to over 400. Still another sign that those at the top are receiving an increasing share of our productivity growth is the ratio of corporate CEO income to income of the average employee in the same company. This ratio used to be in the neighborhood of forty. It is now commonly in the neighborhood of four hundred. Let's look at this a bit more closely.

We are told that such high remuneration is necessary to obtain and retain the services of these immensely able and hard working leaders. We must assume from this explanation that, for some reason, a shortage of such people has developed, which explains their soaring income. However, the linkage between cost and performance of US CEOs has been brought into question by the recent series of disasters involving so many major corporations. For example, one must wonder about the $15 million compensation in 2007 of GM CEO Rick Wagoner, just prior to that company's plea for federal aid to avert bankruptcy. Or what about the $87 million payments to John A. Thain in 2007? He leads Merrill Lynch, which lost billions of dollars recently. Imagine the terrible plight of Merrill Lynch had their leader been someone willing to work for only $1 million per year!

Another interesting set of numbers pertains to the 400 people listed by Fortune Magazine as reporting the highest adjusted gross incomes for 2005 (tax exempt and some other income not included). Minimum reported income for this group was $100 million, and the average exceeded $213 million. Their federal tax bills averaged under 19%, as compared with the average income-tax rate for all returns filed of a little under 13%. Much of the income of the 400 was in capital gains, taxed at 15%.

What Big Bucks Can Buy

The essence of a democracy is that political power is exercised via reason and voting, with all citizens having equal voting rights. People should be able to enter the political arena and have an opportunity to be evaluated by the public on the basis of their character, competence, and positions on significant issues. But we are getting further and further away from satisfying this ideal.

Election campaigns for House of Representatives seats cost millions of dollars, for the Senate, tens of millions of dollars, and for the presidency hundreds of millions of dollars [4]. We have reached a stage where nobody is considered to be a plausible candidate for any significant elective government office who is not either wealthy enough to finance a very expensive political campaign, or who has access to people who can do this. We see increasing numbers of high positions, such as NYC Mayor, NJ Governor, California Senator, held by super-rich people. In 1992, Ross Perot, was able to get on the ballot as a presidential candidate of an "independent" party, and may have influenced the outcome of the election. He spent over $60 million of his own money on the campaign. Not only are political offices filled on this basis, but the outcomes of campaigns for referendum issues are also determined by the amount of money poured into them by corporations and wealthy people.

Apart from campaign expenditures, money determines how political campaigns are covered by the media. The main source of information about issues and candidates is the mass media, controlled by big corporations and by very wealthy people. After elections, it is those who financed the campaigns and who are the potential financiers for the next campaign who have the most influence on those elected.

But paying election expenses is not the only way that the very rich control governments. Money can be used in numerous ways to influence politicians, appointed officials, and military officers. The crudest is by simple clandestine cash payments. More sophisticated ways of delivering money include transfers into Cayman Island bank accounts, or purchasing property from the subject at a very high price, or selling property to the subject at a very low price, or providing inside information that can lead to very profitable stock market transactions. Money can also be channelled via generous fees for speeches at business conferences. Opportunities can be offered for ground-floor investments in lucrative start-ups. Invitations to luxurious vacation resorts in exotic settings can be used to reward compliant people. A prestigious, well-paying, job can be promised to the subject after he or she leaves office. Such goodies can be delivered to family members as well as directly to the intended beneficiaries. To sum up, the number of ways that very wealthy people can convey benefits to others is unbounded.

To ensure that legislators are properly informed as to what positions they should take on various issues important to their benefactors, they are frequently briefed by well paid lobbyists. When hearings are held to work out the details of various regulations , e.g., those pertaining to hazardous substances, experts are hired to represent the positions of the big corporations that might be affected. Yet another way that big money is used for political ends is thru the financing of non-profit "think tanks", which generate material useful in influencing public opinion and which provide high quality employment for economists, political scientists, lawyers, and the like with the right attitudes on important issues.

What Can be Done About It?

We can reduce the role of money in elections by publicly funding election campaigns. The "Clean Elections" idea is for the state to provide campaign funds for candidates who collect some minimum number of small ($5-$10) contributions from voters, and who agree not to raise additional funds. The plan has been successfully operated for a number of years in Arizona and Maine, and was launched this past year in Connecticut. [5] There is proposed federal legislation to extend this idea to races for the US Senate [6]. Some related ideas are being promulgated by Lawrence Lessig [7].

If all elections in the US were covered by such legislation, the influence of big money would be somewhat reduced, thus improving the political climate. But more needs to be done. As pointed out above, super-rich people can always find ways to use money to exert excessive political power. We need to to develop mechanisms for holding wealth and income below the levels at which they can be used to exert major political influence. This doesn't mean that that everybody need have the same income and wealth, but rather that nobody should be so rich as to be able to spend huge sums of money to buy political power, and that everyone should have the resources necessary for at least minimal participation in politics. I won't try to specify numbers here, instead focusing on the general concept.

Both income and wealth must be addressed. The obvious way to deal with income is via a very steeply progressive income tax. The rate for the top income tax brackets during WWII and into the sixties, was between 91 and 94 percent. Since our economy flourished during this period, it is hard to argue that such high rates would be disastrous. There are, of course, good arguments, based on justice, for steeply graded progressive income taxes, but the focus here is only on the goal of capping income at the very highest end. So, whatever else might be decided about the income tax structure, the idea here is to hold top incomes below what would confer great political leverage. For example, we might decide that effectively restricting after-tax annual income to $1 million might not impose too great a hardship on anyone. This would be no deprivation at all for those super-rich people who treat moneymaking as a sport; they would still be able to exhibit their skills even tho they wouldn't get to keep most of the money.

Perhaps even more important is to limit wealth. A billionaire can, with no sacrifice, use tens of millions of dollars for political purposes, regardless of income. Restricting the accumulation of excess wealth by inheritance is one obvious need. And the most straightforward approach is via a steeply progressive inheritance tax. An additional mechanism would be a direct annual tax on wealth, starting at a very high threshold. Some other countries, including France, Norway, Switzerland, and India currently have annual wealth taxes, altho their principal objective is to collect money rather than to restrict the political use of money.

Of course real estate taxes are a form of wealth tax. These are levied at the local level and, to my knowledge, are never progressive. One could imagine changing over to progressive real estate taxes, which would have the added advantage of further reducing inequality by easing the burden on all but the wealthiest people.

Should proposals along the lines sketched above be seriously pursued in the political arena there would obviously be extremely well funded, ferocious resistance by the super-rich targets. In addition, I would anticipate angry outcries from many who are not particularly well off now, but who are convinced that they are destined to join the elite. There would also be well designed evasion tactics, both legal and illegal, employed to counter any tax laws beamed at the super-rich. These would surely include asset concealment and transfer to other countries. Counters to such tactics would have to be developed, e.g., strongly enforced laws giving major advantages to companies whose assets are all in the US. The biggest problem is that our current political apparatus is largely under the control of the very rich. What is needed is large-scale grass roots organizing. This is nowhere in sight, but things may change if the current economic crisis continues to deepen.


  1. Pew Research Center, , "Median Household Income: 1970-2006", Pew Research Center Report, January, 2009
  2. Michael Mandel, , "Long-term productivity", Business Week, September 14, 2009
  3. Chye-Ching Huang and Chad Stone, , "Income Concentration at Highest Level Since 1928, New Analysis Shows", Center on Budget and Policy Priorities Report, October 22, 2008
  4. Stephen H. Unger, "Money Talks, and Nominates--and Elects", Ends and Means Blog, April 10, 2007
  5. Cristina Francisco-McGuire, "Connecticut Defends Clean Elections Financing Program", Progressive States Network, August 19, 2010
  6. That's My Congress, Fair Elections Now Act Receives Hearing In Senate, That's My Congress, April 12 2011
  7. Mitch Wagner, "Lessig Advocates Technology Tools For Campaign Finance Reform", InformationWeek, March 6, 2008

Comments can be sent to me at unger(at)cs(dot)columbia(dot)edu

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