The great inequity

The gulf between the rich and the poor widens in the United States, and the Obama administration re-endorses the no-tax regime.

We stand in the rain in a long line Waiting at Ford Highland Park. For work.

Philip Levine, What Work Is, 1991.

IN August, the quietest of months, the United States' Library of Congress selected Philip Levine to be the nation's poet laureate. Born in 1928 in the industrial heartland of Detroit, Michigan, Levine writes poems to celebrate the American working class. No longer is Detroit the centre of working-class culture and life, as the factories of the major automobile manufacturers prefer to rely upon robots and workers outside the U.S. to produce their cars. The foreclosure of homes denudes Detroit of the physical infrastructure of the working-class life that Levine documented, and the shuttered factories evoke the 1933 murals of Diego Rivera that now decorate the Detroit Institute of Arts. When Rivera's murals were shown to the public, Detroit News wanted them destroyed, arguing that they were a slander to American workingmen. It turns out that the murals, and the poetry of Levine, remain, and it is the working class that has been destroyed. Nothing but nostalgia for an age gone by is suggested by Levine's selection as poet laureate.

In 2005, Citigroup's Ajay Kapur and his team (Niall Macleod and Narendra Singh) published a little-known report on the problem of inequality in the U.S. The Citigroup analysts pointed out that the U.S. economy suffered a severe structural imbalance. The richest 1 per cent of households earned as much as the bottom 60 per cent per annum, and they held as much wealth as the bottom 90 per cent of the population. These data were already well known to those who had been writing for at least a decade about this yawning gulf of income and wealth.

But coming from the Citigroup analysts the data should have raised at least one or two eyebrows. It did not do so. Most people seemed very blase about such data, even as the Citigroup report was released in October, during the period when the aftermath of Hurricane Katrina (August) raised serious questions about the social consequences of inequality.

Kapur and his team remained sanguine about the effects of inequality. What had been produced by this gap was a plutonomy, where economic growth is powered by and largely consumed by the wealthy few. The rich would not only be the engines of the economy, but also its consumers. The rest seemed to matter very little. Because the economy had essentially become co-terminus with the rich, if the rich were doing fine, the economy would be fine. The prognosis floundered as the credit crisis of 2007 overwhelmed economic activity. The economy went into a tailspin, with foreclosures being rampant and joblessness chronic.

The official unemployment rate is now 9.1 per cent, but if you add on those who can only find part-time work and those who have given up looking for work the figure rises to 16.1 per cent (25.1 million people). Federal tax money continues to be siphoned off to pay for wars in Droneland (from Libya to Afghanistan), and a lax tax policy against this very rich class means that little remains for either social welfare or stimulus from below.

The earth is being held up by the muscular arms of its entrepreneur-plutocrats, the Citigroup Report cheerily pointed out. By 2007, the arms were not so muscular. Two years later, in the middle of the recession, the top 25 hedge-fund managers took home $25 billion. A Pew Research Centre study found that during the credit crunch, the wealthy lost 12 per cent of their assets, while the middle class lost 23 per cent of their assets. Inequality widened as a result of the recent economic turmoil, with the government doing nothing to narrow it and the muscular arms more interested in their own well-being than in that of the rest of the population.

By habit, government policy favours the 1 per cent. In the credit crisis, the George Bush and Barack Obama administrations hastened to bolster the anxiety of the propertied: the stimulus built scaffoldings for the financial sector and the manufacturing sector but did almost nothing for the assets of the faltering middle class. Pressure to undo the Bush-era tax cuts built up, and then it was released by obdurate government policy. These tax cuts utterly favoured the 1 per cent.

In 1992, the Internal Revenue Service (the main tax body) began to collect and analyse data from the top 400 Americans who reported the largest income. The aggregate taxable income for these 400 people in 1992 was $16.9 billion, and they paid out federal taxes at 29.2 per cent. By 2008, the top 400 earned $90.9 billion, but paid taxes at a rate of 21.5 per cent. Income that is earned via investments is taxed at 15 per cent and estate taxes are almost non-existent. The absence of any discussion on raising taxes or even of strengthening the tax code means that there is no political will to act on the revenue side.

The idea of raising taxes is loathsome to large numbers of Americans, even though the beneficiaries of low taxes comprise only 1 per cent of the population. The American Right built its political agenda on a no-tax policy, arguing that it is private enterprise rather than government spending that makes the economy grow. This position was bolstered in the 1980s through the racist idea that the government taxes the white middle class to coddle the non-white working class or underclass. By the 1990s, the American Right found a willing partner in the neoliberal administration of Bill Clinton, who was eager to push for a balanced budget on the backs of the poor (Clinton hit hard against social welfare, but took little from an increasingly gluttonous elite or from the military-industrial sector).

No American politician is able to run successfully on a platform that highlights the need to increase taxes. This is despite the political cover provided by billionaires such as Warren Buffett (chairman of the investment giant Berkshire Hathaway), who recently wrote, My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice.

The debate over the budget and the debt ceiling rests on the failure of the political class to entertain any change on the revenue side. The worst offenders are the Republicans. As the New York Times put it in an editorial on August 15, Even a tincture of new revenue, though mixed with huge cuts in government spending, would be too much for the modern Republican Party. Between the Republicans and the neoliberal Democrats, the debate is about how much to cut from the budget, not how to raise more revenue to still the galloping federal debt (now at the $14.4 trillion mark). The most sacrosanct elements of the social welfare state remain the medical programmes (Medicare and Medicaid) and the pension programme (Social Security). Obama indicated that he was willing to consider reform on these, despite unease in his own party.

The Republicans wanted no tax rises, but massive austerity measures for the bulk of the population. This would be political suicide in any country but the U.S., largely because of the remarkable ideological consensus crafted by the American Right and the neoliberal leaders of the Democratic Party. It was the Republicans' stubbornness and the Democrats' lack of ability to fight them that spooked Standard & Poor's, which downgraded U.S. Treasury Bonds from AAA to AA+, for the first time in U.S. history.

It also jolted the Chinese government, which holds $1.1 trillion in U.S. securities. Beijing warned the U.S. to cure its addiction to debt and asked it to live within its means. Neither Beijing nor S&P weighed in to ask for tax rises; they seemed to indicate that the way forward was austerity, precisely what the political class is eager to induce. The question is no longer whether to move to an austerity regime; it is, rather, how deep should the cuts go, and if they are too deep, would that affect the ability of the U.S. to grow out of the recession.

The debt deal between Obama and Republican leader John Boehner allowed for cuts of $21 billion out of a budget of $3.7 trillion, with a promise that more cuts would be forthcoming through a Committee of Twelve (members of Congress). Boehner said that his side got 98 per cent of what I wanted. The 2 per cent that remained was the fragile protection of Medicare, Medicaid and Social Security. Former Defence Secretary Robert Gates had indicated over the past year that cuts in the military infrastructure should be on the table. Obama's new Defence Secretary, Leon Panetta, told the press a few days after the debt crisis deal that military cuts were not to be considered and that the government should consider reform of Medicare, Medicaid and Social Security, in other words, giving Boehner and the Republicans everything that they wanted.

The great victory for Obama was that the Republicans allowed the debate over the debt ceiling and the budget to be shelved until after the 2012 election season. In the intervening period, the Committee of Twelve will deliberate on more cuts. The knives are sharp, and 99 per cent of the population better beware of the outcome.

Behind the bluster of the debt ceiling debate, the International Monetary Fund (IMF) released a study that compared the economic crises of 1929 and 2007. Much distinguishes 1929 from 2007, but what unites the two are the outrageous levels of inequality (both in terms of income and household-to-debt ratios). In both cases, the middle class shrunk and the poor despaired.

Philip Levine's poems reflect the resilience of the working class as it came out of 1929, propelled largely by the massive state investment in infrastructure and in military production. No such investments are on the horizon now. All talk is about austerity. High inequality in these conditions will make consumption and demand anaemic, which will suppress long-term growth. These are the social coordinates that produced the riots of London. Such mayhem is the future for America.