politicians around this time and with them they brought the values and policies that would be the final nail in the New Deal’s coffin. There was no longer support for collective bargaining and unions and there were tax cuts accompanied by cuts in social spending. These policies were all undertaken in order to lower business costs and create a true free market. There was also widespread deregulation and privatization. From this time onward inequality has reached new heights. Amongst the OECD countries America is only less unequal than Mexico, Turkey, and Chile after taxes and transfers by the GINI index 2 measure of inequality. 3 So that is a condensed history of inequality in America. Inequality is on the rise and America is among the most unequal developed countries or, as Thomas Piketty put it, ‘(inequality of labour income in America) is probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large.’ 4 Now that it has been established that inequality has increased dramatically over the last 40 years and is looking unlikely to decrease without government intervention, it is important to understand the implications of inequality and the problems it causes in order to address these problems directly as well as inequality itself. Sustained inequality can be very discouraging for those in the bottom percentiles of income distribution because their work is rewarded unfairly in comparison to workers in other income percentiles. Production workers’ wages have stagnated for an entire generation while the top earners are enjoying nearly half of all of the country’s growth 5 and paying relatively little tax. Many of the activities that the top earners engage in such as predatory lending and sub-prime mortgage lending are detrimental to the poor but highly profitable for the rich and unsurprisingly inequality got markedly worse in the run up to the 2008 recession. 6 Moreover, as inequality increases to a certain point, consumption begins to decrease because those with the higher incomes tend to save a larger proportion of income while those on lower incomes consume all of their pay. This can cause a large drag in demand. This occurred in America to a varying extent from the 80s onwards, however easing of credit standards, leading to cheaper, more plentiful borrowing, propped up consumption. This created a financial services sector that was trying to capitalize on the desperate demand for credit from consumers and the desperation for short-term speculative returns from those looking to move up the income ladder at any cost, which, to nobody’s surprise, hugely increased debt in the economy. This ‘let them eat credit’ strategy temporarily subdues the symptoms of sustained high levels of inequality but it also creates an economy reliant on credit and vulnerable to external shocks. The extent to which banks were lending enormous amounts of money to private equity companies and then packaging the debt up in complicated financial products containing various kinds of ‘toxic debt’ simply to allow a continuation of the borrowing binge was at least in part helped by the deregulation and easing of credit standards of the 80s onwards. This combination of businesses and consumers borrowing money at unsustainable levels means that when there are shocks to the economy, as in the credit crunch of 2008, not only do the banks collapse but so does consumer spending because the credit that was funding their consumption is no longer available. This may well have been a contributing factor to the depth of the 2008 recession. Perhaps most importantly, inequality endangers democracy. Economic inequality breeds political inequality because those with the money will have the means to make a significant impact on public policy. This leads to a class of America’s wealthiest citizens, scared of a strong government and distribution of income and wealth, using their money to influence politicians into policies that favour them, thus exasperating the initial inequality. As a result government policy caters for a small portion of the population, namely those who can afford preferential treatment. In recent studies, it was found that policies supported by 20% of affluent Americans have about a 20% chance of being adopted, while policies favoured by 80% of affluent Americans are adopted around 50% of the time. Contrastingly, the support or opposition of the poor or middle class has little to no effect on the likelihood of the
2 http://data.worldbank.org/indicator/SI.POV.GINI 3 http://en.wikipedia.org/wiki/List_of_countries_by_income_equality - Gini_coefficient.2C_after_taxes_and_transfers 4 http://scalar.usc.edu/works/growing-apart-a-political-history-of-american-inequality/index 5 http://fabiusmaximus.com/2013/12/16/income-wealth-political-inequality-60246/ 6 http://scalar.usc.edu/works/growing-apart-a-political-history-of-american-inequality/index
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