Runaway Inequality Is Ripping Us Apart

Instead of improving our standard of living, wealth is transferred to Wall Street via debt payments.Instead of improving our standard of living, wealth is transferred to Wall Street via debt payments. (Image: Wall Street via Shutterstock)When 85 individual people have more wealth than the bottom 50 percent of the population, it causes a ripple effect that has lasting implications for humanity. Les Leopold’s Runaway Inequality examines how income and wealth inequality affect critical issues like war, climate change and human rights, and what options exist for building a fair and just society. Order your copy today by making a donation to Truthout.

The following is the Truthout interview with Les Leopold, author of Runaway Inequality.

Mark Karlin: You created a phrase, “Better Business Climate,” that describes the pro-corporate juggernaut that we are experiencing in our economy. Can you explain what that term means in the context of your book?’

Les Leopold: That phrase, coined by labor economist Ken Peres, refers to what many have called Reaganomics, trickle-down economics or neoliberalism. Basically, it is a set of policies that took hold in the 1970s and 1980s that called for the deregulation of the economy, tax cuts (especially for the wealthy) and cutbacks in government social services so that more people would be hungry for work. Together these policies were to create a profits and investment boom to make all boats rise. Of course, it didn’t work out that way. The policies created an enormous boom for Wall Street and CEO incomes, while wage stagnation hit most of the rest of us.

How does this relate to what you call financial strip-mining?

The deregulation of Wall Street turned out to be the most critical policy within the Better Business Climate model. By removing most of the stringent New Deal controls, Wall Street moved forcefully into buying up corporations. They used enormous amounts of borrowed money to buy up thousands of corporations and then stuck those corporations with all the debt. They then paid themselves “special dividends” for pulling off the deal and incentivized the new CEOs to jack up the price of the stock so that the buyout artists could quickly cash in – pump and dump. The method of choice was to use nearly all the cash flow of the corporation to buy back its own shares, which increases its price, all things being equal. CEOs, not paid almost entirely with stock incentives, became overseers of the strip-mining operation.

Les Leopold. (Photo: The Labor Institute)Les Leopold. (Photo: The Labor Institute)To pay for the loans, the special dividends and the stock buy-back schemes, the financialized corporation squeezed its workers, shipped production abroad, sold off assets, cut back on R&D [research and development], and even used bankruptcy to further cut costs. As a result, upwards to 40 percent of all corporate profits were transferred to Wall Street through financial strip-mining (even though Wall Street accounts for only 5 percent of our jobs). The corporations were stuck with the enormous debt and the workers suffered stagnating wages, cuts in benefits and often the loss of their middle-class jobs. Manufacturing, especially in the Midwest, suffered enormously. New value was not created; rather it was shifted to Wall Street.

How does debt allow Wall Street to flourish without expanding jobs while at the same time increasing the financial burden on the middle class and poor?

Wall Street’s biggest product is debt. Through decades of deregulation, it has found ingenious ways to load up nearly every area of our society with mountains of it. Corporations now are so debt ridden that more than 30 percent of the cost of any item we buy goes to interest payments up and down the supply chain. In Germany, where finance is more strictly regulated, the corporate debt burden is less than half the size of ours. This is one reason why Germany has no trade deficit with China while ours is enormous. Our products carry the price load of all that Wall Street debt.

“Instead of improving our standard of living, wealth is transferred to Wall Street via debt payments.”

When mortgages and credit cards were deregulated, banks went on a rampage to load consumers up with debt. By 2005, household debt grew to 125 percent of household income as wave after wave of shyster and predatory mortgage scams allowed homeowners to get in over their heads. That couldn’t last and it didn’t. Hence the enormous crash of 2007 and 2008.

Now we have the indebted student. Rather than providing free higher education as we did for much of the post-World War II era, and as is the case in most of Europe today, we put the financial load on students and their families who now comprise a trillion-dollar student debt industry.

As the super-rich and large corporations use their power to reduce their tax payments (shifting money abroad, creating and deploying loopholes etc.), state and local governments are forced to go to Wall Street for financing. In Los Angeles, the fees paid to Wall Street each year to secure funds for infrastructure projects, are higher than the city’s entire road repair budget.

All of these debt trends rise along with inequality. Instead of improving our standard of living, wealth is transferred to Wall Street via debt payments.

On page 123 of your book, you list several economic trends associated with the “Better Business Climate” agenda that have been gaining force for decades. Can you focus on a couple of them?

The signature trend is runway inequality, hence the title of the book. In 1970, a top 100 CEO received $45 in income for every dollar received by the average worker. By 2013, it was an astronomical $829 to $1.

“If you’re super-rich, you live in a world far removed from our crumbling infrastructure and deteriorating schools.”

That trend line is matched almost exactly by a change in Wall Street incomes. Before 1980, there was virtually no difference between the average incomes of similar workers in the financial sector and the non-financial sector. After deregulation took hold, there was an enormous premium for working on Wall Street. Financial wages shot through the roof, while non-financial wages stagnated. At the same time, the top 1 percent saw their share of the national income rise from about 8 percent to more than 20 percent and their share of national wealth rise to over 40 percent.

In short, the policies of deregulation of finance fundamentally changed our society. The sense of upward mobility most of us shared during the post-World War II era was replaced by a rising economic oligarchy. Runaway inequality is ripping us apart. If you’re super-rich, you live in a world far removed from our crumbling infrastructure and deteriorating schools. They don’t use our health-care facilities or send their kids to our schools. Our sense of a shared community is splintering.

You make an incisive assertion that “jail is America’s jobs program.” Can you expand on that?

The prisoner trend line is one of the starkest and most troubling charts in the entire book. Simply put, we are now the largest police state in the entire world. We have the most prisoners and the highest percentage of prisoners. That trend corresponds precisely with the rise of runaway inequality. From 1920 to 1980, the prison population held stead, hardly varying from year to year. Then, it rose dramatically in lockstep with runaway inequality. Why?

Because prison literally replaced the war on poverty and other programs designed to attack the troubling problem of high rates of youth unemployment and minority unemployment in general. After 1980, we stopped experimenting with job training, public job creation and all manor of investments in eliminating poverty. That was a no-no within the Better Business Climate philosophy.

Now, the poor were told to get out there and work. And they did, except some of that entrepreneurial activity was deemed illegal (like Eric Garner selling loose cigarettes in Staten Island before he was arrested and killed). As a result, those at the bottom of the economic ladder, those far outside the financialized economy, those at the margins of life were swept up into the criminal justice system.

Because wealth is color-coded in America, the burden fell disproportionately on low-income people of color.

Another fascinating point about the mass incarceration system that you bring up is the relationship between gentrification of economically depressed neighborhoods – that are often racially marginalized – and an increase in “broken windows” and stop-and-frisk policing. Can you expand on that interrelationship?

Runaway inequality and the financialization of the economy made certain cities highly attractive to the super-rich. More and more financiers and corporate executives wanted to live in New York. Lobbyists flooded to Washington. And other cities to a lesser extent became magnets for the newly enriched. Developers quickly followed, seeking to create housing and services for the well-to-do.

But there was a problem. These same cities were the home to millions of lower-income residents who were being left behind by runaway inequality. “Crime in the streets” was unacceptable to those using their new wealth to buy property in marginal neighborhoods. As runaway inequality increased, so did gentrification and the friction between old and new residents. The new residents wanted more and more safety and they got it.

With the arrival of the more wealthy residents came new theories of police enforcement. With little or no evidence it was claimed that if the police rigorously enforced lifestyle crimes (drinking on the streets, panhandling, smoking a joint, selling loose cigarettes), major crime also would be reduced. They called it the “broken window theory” – those areas with fewer broken windows would have more community pride and less crime. Stop-and-frisk merely extended the theory. “Driving while Black” was one result – being pulled over for no reason other than your skin color. It was no longer safe to be of color in these gentrifying neighborhoods.

So rather than redevelop areas to create jobs and affordable housing for lower-income residents, they were moved out and many found themselves sucked up into the criminal justice system.

What do you say to those, even in the progressive movement, who focus almost exclusively on the return of the “golden days of the middle class” in the US. What about those in poverty? Are they destined to be a permanent byproduct of capitalism?

There are two important aspects of the “golden days” critique. It is true that the post-World War II boom created an enormous middle class with real increases in the standard of living for nearly every group in America. At the same time racism ran deeply throughout the country and life in America was extremely constrained for women. For gay, lesbian and transgender people, life was entirely closeted.

At the same time, even booming capitalism could not reach large pockets of poverty in Appalachia and in our inner cities.

Now here’s the tricky turn. I believed that because runaway inequality had not as yet set in, it was at least conceivable that public policy could address poverty. In northern Europe, where inequality is the lowest among all the developed nations, childhood poverty has almost been eradicated, whereas the US is nearly dead last. Because there is so much variation in inequality, health and poverty among developed, capitalist economies, it appears that capitalism can be constrained by conscious social democratic policies. It doesn’t have to be as unfair and destructive as it is in the US today.

America in large part gave up on social democracy when it drank the Better Business Climate Kool-Aid. (We’re still drinking it as the recent set of corporate tax cuts in Congress reveals.) We could move toward a more just society and basically eradicate poverty. But that requires that we build a mass movement to take on runaway inequality.

How do you define “military Keynesianism”?

Keynes understood that to keep an economy prospering required government intervention – especially government spending to spur investment, jobs and income growth. When the Better Business Climate model came in, its advocates claimed it would eliminate Keynesian policies by cutting back on government spending. But their dirty little secret was that they too relied on Keynesian government spending. Instead of having the government produce social goods like infrastructure, education and health care, they used government funds to beef up the military. President Reagan, who ushered in so much of the Better Business Climate policies, also presided over an enormous military buildup. And since 9/11, we’ve been in a perpetual war. We lead the world in military spending, more than the next six countries combined. Military Keynesianism are us.

What is the relationship between profiteering, hedge funds and charter schools?

This is one of the most obnoxious trends among the super-rich. Hedge fund moguls have set their sights on the hundreds of billions of taxpayer dollars that go to fund education at every level. Why shouldn’t some of that money go to super-rich investors through the privatization of education? Not only can they grab more money, but they seem to believe that they can do good at the same time. One hedge fund executive called charter schools the “civil rights movement of our time.”

Charter schools also are a wonderful solution for those who want to break the power of the teachers’ unions, one of the last bastions of union power in America. Even though the evidence shows almost no difference in outcomes between comparable charter and non-charter public schools, hedge fund money pours into charter schools.

At the same time these hedge funds take advantage of a special loophole that cuts their tax burden by billions of dollars each year (the totally useless carried interest loophole). That money could greatly improve school financing, especially in hard-pressed, low-income areas. So in effect the hedge funds are claiming to solve a problem that they are exacerbating by not paying their fair share of taxes.

But here’s the true litmus test: How many hedge fund managers would dare send their kids to a charter school?

You refer in your “Open Letter to New Movement Organizers” of the need to bring together silos of activism. How would that work from your perspective?

The progressive movement over the last generation has fractured into a series of issue-based organizations – thousands of them with really smart and committed staff. We have organizations that focus on immigration, race, gender, environment, labor and so on. Inevitably, those organization develop silos to allow them to secure the resources to survive. But tackling runaway inequality requires that these silos at the very least become more porous and link together around a broad-based, common agenda as the Populists did in the late 19th century.

To get from a fractured progressive landscape to a more unified one requires a common analysis of what’s wrong and a common agenda about what needs to change. The analysis needs to show how our many disparate issues are linked together by the financialization of the economy. We need to see that we can’t really make much progress on any of our issues unless we come together to tame runaway inequality.

Getting from here to there won’t be easy. But we’ve been pleasantly surprised by the reception we’re getting to the idea and to the common analysis presented in this book. (We’ve sold more than 25,000 copies to unions and community groups seeking to build such a movement.) I think progressives are hungry for a more unified approach. It’s too early to say what the movement forms and structures might look like. But the first step is coming to understand why we need a more coherent local, state and national movement.

That’s the fundamental purpose of the book and a partial answer to my son’s questions. Runaway inequality won’t go away by itself. We need to build a new mass movement to tame it. And that requires an army of educators to get the word out. At the end of workshops and talks, I ask how many of the participants would like to be trained to conduct economic education for their coworkers and communities. Nearly all the hands go up.

Runaway inequality is outrageous and getting more so by the day. But the willingness of more and more Americans to do something about it is growing. It’s up to us to build the sustained movement structures and educational programs to capture that willingness. That’s the path to economic justice in America.

What motivated you to write this book?

My son Chester during his freshman year at college did an internship in New York with community groups organizing fast-food workers around a $15 per hour minimum wage. After wondering through the city, he would come home to our leafy suburb, shocked by the number of homeless people he would see on New York’s streets. “How could that be?” he kept asking. “How could such a wealthy country allow that to happen? Why can’t our country afford to pay fast-food workers a decent wage? And how can so many people walk by all of this without acting?” This book is a partial answer to his penetrating questions.