Capitalism and Western Civilization: Inequality

William H. Young

In Civics Lessons, Peter Wood identified the “radical hand in the bureaucratic glove” of the new mission for democratic engagement that the Obama administration and the Association of American Colleges and Universities assigned to higher education in A Crucible Moment (January 2012): “to eliminate persistent inequalities, especially those in the United States determined by income and race, in order to secure the country’s economic and civic future.” 

Charlotte Allen argues that “the sharp political focus on inequality, driven into the public mind by the Occupy movement and endorsed by President Obama…was born, not on the street, but on the campus.” (“The ‘Inequality’ Movement—A Campus Product,” Minding the Campus, March 21, 2012) She describes numerous university programs and courses that offer “Marxist and quasi-Marxist critiques of capitalism,” with “the core presumption is that there is something inherently wrong with all inequality,” and that “inequality is somehow the fault of those who do better in society.” 

Allen notes that nearly all of the university programs “promote scholarship whose origin is a single source: a 2003 article published in Harvard University’s Quarterly Journal of Economics by the French economist Thomas Piketty and Emmanuel Saez, an economics professor at the University of California, Berkeley.” In the article (“Income Inequality in the United States, 1913-1998”) the authors argue that since the 1970s, the earnings of the top 1 percent of Americans “began to soar relative to median wages.” 

Reflecting the work of Piketty and Saez, President Obama’s first federal budget showed (in Figure 9) that the share of income accruing to the top 1 percent of earners grew from 10 percent in 1980 to 23 percent in 2006. The budget states about that change: “While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not….There’s nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few.” (The White House, “Inheriting a Legacy of Misplaced Priorities,” A New Era of Responsibility: The 2010 Budget, Office of Management and Budget, 26 February 2009) 

But information in a 2012 paper by Saez corrects some false impressions created with the top 1 percent comparisons. (“Striking it Richer: The Evolution of Top Incomes in the United States…,” University of California, Berkeley, March 2, 2012) Saez uses all income reported on tax returns before individual income taxes. His paper shows that the previous peak share of income enjoyed by the top 1 percent of earners was 24 percent in 1928, which fell precipitously after the stock market crash of 1929—as it did, from 23 per cent to 18 percent, after the 2008‒2009 crash, since much of their income comes from capital investment in stocks. 

Saez’s data indicates that the share of income received by the top 1 percent was just below 10 percent between 1965 and 1982. The Dow Jones Industrial Average was flat over those seventeen years and fell sharply in real value because of high inflation (see my previous article, Finance). But that average grew by a factor of eleven between 1982 and 2006; greater wealth was generated by an unleashed capitalism, benefiting millions of Americans. Over that period, the share of income received by the top 1 percent grew by a factor of only 2.3. 

Saez acknowledges that “top earners today are not ‘rentiers’ deriving their incomes from past wealth but rather are ‘working rich,’ highly paid employees [and celebrity performers and athletes] or new entrepreneurs.” Much of their income was generated from the information-technology revolution and the globalization of financial and product markets. Almost two-thirds of the income of the top percentile went to the uppermost 0.1 percent. 

Saez’s data also shows the share of market income earned by tax filers just below the top 1 percent between 1980 and 2008. The share earned within the top 5 percent of filers rose from 13 percent to only 15 percent, while the share earned within the top 10 percent of filers remained flat at 11 percent. President Obama’s rhetoric about inequality vilifies “millionaires and billionaires” not paying their fair share, inciting resentment and envy. But he would raise taxes on those earning more than $200,000, within the top 5 percent that already pays 59 percent of income taxes—the professionals, managers, and business owners who drive the economy and society. 

In The Federalist, “Number 10,” James Madison called the rage for equality (fostering envy) “a wicked project” and self-destructive. The Piketty and Saez top 1 percent comparisons are the latest weapon in the “wicked project” of America’s far left. Commenting on Vice President Gore’s acceptance speech at the Democratic National Convention in August 2000 (“Al Gore and the ‘Wicked Project’,” National Review, September 25, 2000), Catholic philosopher Michael Novak wrote: 

Al Gore…is trying to erect his presidency on the shameful act of teaching resentment of ‘the rich and powerful’ to ‘working families’.…The ‘rich and powerful’ are the very people of daring, imagination, and talent the country will need if prosperity and invention are to continue as they have…If they are rich and powerful now, it’s because they created even greater wealth for others….His convention speech was the most Marxist tirade I have ever heard an American president or presidential nominee give….

George W. Bush has erred in calling this ‘class warfare.’ It is really the stirring of Universal Resentment, even where in Marx’s sense there are no ‘classes.’ This resentment is the terrible fuel behind the one vice that has destroyed all previous republics—not hatred, not violence, not luxury, not even moral decline, but envy. Envy tears down. Envy would rather punish and even destroy the rich than raise up the poor. Envy doesn’t mind keeping the poor, or at least fixing them in perpetual dependency. Envy holds others fast in its own predicament. The kind of solidarity it preaches is rooted not in love, but in a most destructive vice: rage against others….The Marxisant Democrats…their only incentive—their total preoccupation—is political power.

While higher taxation of extreme incomes among the top 1 percent (such as on carried interest) may be appropriate, ironically that produces relatively little revenue. And it does not address the far more important real issue—why middle- and lower-class household incomes have stagnated in a competitive global economy. The left often uses the 1970s, when union wages and influence were high, as a point of departure for its inequality comparisons. But in that period as well, economic productivity collapsed and inflation ravaged incomes, beginning the decline of the standard of living of working families (see my previous article, Productivity). Later reasons include lack of necessary education and critical skills; a shortage of highly skilled workers, driving up their incomes; social factors such as single-parenthood; household compositions; and low-wage illegal immigration. 

There is an aspect of the income tax code that does provide a way to reduce inequality—what are called tax exclusions, preferences, or expenditures. Exclusions for employer contributions for health insurance and pension contributions and earnings, and deductions for mortgage interest on owner-occupied homes and state and local taxes overwhelmingly increase income inequality. Limitation or elimination of such preferences (loopholes) and lower tax rates—which has been recommended by bipartisan budget commissions—would reduce inequality while also enhancing economic growth. 

A Crucible Moment’s new mission of democratic engagement is based on misleading comparisons of inequality and its causes. While some tax privileges of the plutocracy (noted above) need to be reined in, more “democratic engagement” will only exacerbate the deadlock of democracy within our republic that factions have already produced. The better course for the academy remains to improve education. 

Next week’s article will address social Darwinism.


This is one of a series of occasional articles applying the lessons of Western civilization to contemporary issues relevant to the academy.

The Honorable William H. Young was appointed by President George H. W. Bush to be Assistant Secretary for Nuclear Energy and served in that position from November 1989 to January 1993. He is the author of Ordering America: Fulfilling the Ideals of Western Civilization (2010) and Centering America: Resurrecting the Local Progressive Ideal (2002).

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