Bruce Judson on the Societal Dangers of Income Inequality

Dec 8, 2011Bryce Covert

money-justice-scalesI got the chance to talk with Bruce Judson, who has been writing the "Restoring Capitalism" column and whose comprehensive plan for reversing the rise in economic inequality will be published as an e-book, Making Capitalism Work for the 99%: A Manifesto, this week. We talked about his work before the financial crisis that examined the startling rise of income inequality in the U.S., how it can lead to social unrest and instability, and what course we must take to correct these trends.

Bryce Covert: You talked about the societal dangers of growing income inequality in your 2009 book It Could Happen Here before it was on the national agenda. What made you pay attention to the trend?

Bruce Judson: I started discussing the book with Harper Collins in 2007. At that time, a number of prominent people were also very concerned about it, including Paul Krugman, Robert Reich, Elizabeth Warren, and Roosevelt Institute Chief Economist Joseph Stiglitz. They all said it was dangerous for our democracy. But I kept wondering why. What happens next? So I started my own research.

In the book, I took a historic perspective on what happens when extreme inequality arises in a society. It describes a series of steps, or a narrative, for how growing economic inequality can ultimately lead a democracy to implode. The book argued that if economic inequality in America continued unchecked, it would lead to a dysfunctional economy, even greater political polarization, ultimately political paralysis, anger and mistrust throughout the society, protests, and eventually reform or some type of political instability.

Sadly, each of the stages of misery seems to be happening like dominoes falling. And I am convinced the Occupy movement reflects the coalescing of the deep and unfortunate anger that pervades our society as a result.

BC: What historical trends stood out as most similar to our situation?

BJ: I was terrified by the similarities between our society and the era of the Great Depression. As a nation, we were moving toward levels of economic inequality we had not seen since the financial crash of the late 1920s. My reading of history, of events surrounding the New Deal era and the Depression, is that excess inequality tended to be associated with high speculation and a lack of appropriate constraints on the financial industry.

In essence, I came to believe growing economic inequality was intimately linked to economic catastrophe, which would be so great that it would tear our social fabric.

BC: Why is inequality so destabilizing and dangerous?

BJ: There are very few things in America that are taboo. But one thing we never, ever talk about is the potential for political instability in the U.S. We're taught as children that we had one great revolution. We take the stability of our democracy for granted.

But economic inequality is very dangerous, and the reason is that in our society wealth and power go together. As wealth becomes substantial, it starts to use its political power to ensure its hegemony and mucks up the important, competitive elements that make capitalism work. Over time, what was formally a vibrant economy with efficient markets becomes an inefficient, dysfunctional one.

Here's a recent example. The New York Times wrote that Wall Street does not want a transparent market for swaps and that Washington politicians were listening to its demands. The reason for the opposition is that, in effect, traders make more money by keeping "prices in the shadows." A transparent market means that you have the equivalent of a stock exchange, where all participants can see the prices of recent trades. That's all it means.

It's hard for me to see how this would even be a serious discussion if the financial industry did not have political influence. Is there any public interest in a market that is opaque, rather than transparent?

BC: What does inequality mean for the middle class, which is the foundation of our country's economy?

BJ: Early America lacked the class barriers then prevalent in Europe: Everyone mixed with each other. This led the more fortunate to have empathy and a visceral understanding for the problems of the less fortunate. As economic inequality has increased, we see far less mixing among people at different income levels. Now everyone has less of a sense that they are part of one large community and that we have a responsibility to each other.

Political theorists, going back to Aristotle, have all concluded that a vibrant middle class is essential for a vibrant democracy. The members of the middle class hope to move up, so they want mobility to remain a desirable option, but they also fear moving down, so they are more likely to support a social safety net. In essence, the middle is the group that ensures stability as a barrier to legislative extremes that unduly reward the wealthy or harm the poor.

Unfortunately, inequality that chips away at the middle class can lead to violence. There was violence that occurred in the Depression, with riots in the Midwest. People also started to take the law into their own hands. In penny auctions, after your farm was foreclosed on, you showed up at the courthouse with all of your friends -- farmers who had their rifles with them -- and took over the bidding and bought back your farm for penny. As income inequality increases, the dispossessed may start to feel they have been treated unfairly and things can get ugly.

BC: Your work also predicted revolution. What's your current take?

BJ: The book did not predict revolution. The book said that if we allow income inequality to continue growing unchecked, then we would face a high risk of political instability or revolution. We discussed earlier how the book detailed a series of stages, or a narrative, for how growing economic inequality can lead to social upheaval. Unfortunately the narrative I detailed seems to be happening.

My best estimate is we have now passed through 60 percent of the narrative. A lot needs to happen before the risk of political instability becomes a reality. I am hopeful that with inequality now on the national agenda, we will see the reforms needed.

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BC: You've lately been focused on the dysfunctional aspects of our economy, particularly housing. What are their implications?

BJ: My take on much of the dysfunction in our economy today is that we have lost sight of what I call "actual capitalism." Instead, we have a strange system that people have variously described as crony capitalism, socialism for the rich, and corporatism. This shift is destabilizing our economic system as well as our democracy.

The housing crisis is even more significant because of its potential impact on our social fabric. Foreclosure can be one of life's most traumatic events. The 14 million people expected to face foreclosure will have lost their down payment, their dignity, their sense of belonging to a community, and their way of life. Do policy-makers seriously believe we can foreclose on one-quarter of all the mortgages in the nation without any social backlash?

This is a national tragedy. It is also a potentially dangerous brew. It would be natural for many of these millions of people, who are reading about bank malfeasance and enormous salaries in the financial sector, to conclude that they unfairly lost their homes so that a privileged few could realize enormous incomes and remain above the law. What happens to that anger? How will all of the children in these families believe in the American Dream?

What is striking to me is the lack of energy or creativity that has been applied to the problem. To fix our economy and society, we need to prioritize keeping homeowners in possession of their homes. This was one of the main goals of the New Deal, and as a result all kinds of valuable, creative financial mechanisms were created. The 30-year mortgage was effectively invented as part of the New Deal (at the time mortgages typically ran only five years), and the Federal Housing Administration was created in 1934. We absolutely can develop innovative solutions. But we have allowed a dangerous sense of complacency and inevitability to take over.

BC: Does the emergence of the Occupy Wall Street movement make you more or less hopeful for the nation's future?

BJ: It absolutely makes me hopeful that we will start to see some meaningful reforms. The Occupy movement is casting a bright and unforgiving light on some of the unacceptable practices in our society that, sadly, have become commonplace.

I believe the Occupy movement is not going away. The reason it grew so quickly is that it was the flashpoint for the country's anger and widespread feelings of unfairness. It's almost inevitable that in some way it will expand to include people who feel they've been unfairly foreclosed on, the record numbers of Americans experiencing long-term unemployment, and many of the unemployed in general who feel they've been cheated out of the opportunity to work - mainstream America.

The danger is that if the Occupy movement does not succeed, and nothing takes its place, we will move further along the narrative I described.

BC: We are heading into the presidential election season. What kind of leadership will be needed to reverse growing income inequality?

BJ: In Senator Jim Web's terrific book A Time to Fight, he noted that no aristocracy in history has given up its power willingly. Unfortunately, I believe that to change course will require a knockdown drag-out fight. And it's not going to be about consensus. It's going to require political leaders with courage who stand up and fight for what is right.

We certainly saw the need for this kind of conflict in the era of the New Deal. FDR was called a "traitor to his class." During his reelection campaign, he spoke at Madison Square Garden and said that never had the forces of "organized money" been "so united against one candidate" and "They are unanimous in their hate for me -- and I welcome their hatred." This kind of language gives you a sense of the antagonism that arose when Roosevelt worked to reverse extreme economic inequality.

BC: What action do we need to take to reverse these trends?

BJ: My comprehensive thinking on these issues, and how they could be addressed with specific policies, is in the new book, Making Capitalism Work for the 99%: A Manifesto.

Economic inequality has been building for over thirty years. It's so pervasive in our society that no single policy, such as a change in tax rates, will fix it. We need to recognize that reversing this trend will require a determined, systematic approach somewhat like the New Deal.

I think we need to act in four areas:

First, we must return to actual capitalism. This means accountability, the rule of law, fair and competitive markets, compensation, appropriate to the value created for society (by getting rid of many special privileges and protections now given to the financial sector), and several other reforms. If we recreate such a system, we will also see the return of an economic system that is far more conducive to job creation.

Second, we have to talk about tax policy. The capital gains rate is at the lowest point since World War II, and the carried interest rule seems like an unfair privilege.

Right now, 75 percent of all equity trading in the nation is high-speed, meaning computer-driven, activity. This type of massive speculation and arbitrage has little, if any, societal value. The proposed federal transaction tax would help address this. It would raise several hundred billion dollars in tax revenues over the next decade and to some extent tamp down on trading designed to take advantage of minute price variations by making it unprofitable.

Third, we've got to be far more creative in developing policies to keep people as owners of their homes. This must be a priority.

Fourth, we need to return to individual states the right to protect their citizens in economic matters. One missed check on the failure of the federal government in allowing the financial crisis to happen could have been state regulators. The Financial Crisis Inquiry Commission found that they tried, but were prohibited from, protecting their citizens because of federal preemption.

Of course there is one overriding issue here. Economic inequality is dangerous because wealth leads to political power. To accomplish a systematic reform agenda, we must eliminate the influence of money in politics; if that prevents all of this, then these ideas are all irrelevant.

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