Rep. Chris Stewart is right. No one wants to live under kind of socialism embraced by the former Soviet Union, Venezuela or North Korea. But if socialism is gaining in popularity, perhaps it is because capitalism is not working as promised.
Perhaps people are tired of stagnant incomes, lack of affordable health care and billions in tax cuts for corporate America while the rest of us receive pittances. On the other hand, socialism appears to be working quite well — if you’re wealthy.
As economist Emmanuel Saez points out, virtually all the increase in real income during the recovery from the Great Recession up to 2010 went to the top 1 percent of households. In 2008, the largest banks in the United States received more than $700 billion to recapitalize their balance sheets, courtesy of U.S. taxpayers. The U.S. government rescued American International Group from bankruptcy, enabling it to pay off Goldman Sachs $14 billion, again courtesy of U.S. taxpayers.
In 2009, the Federal Reserve initiated the purchase of U.S. treasury bonds and mortgaged-backed securities by, in effect, printing money. The resulting increase in stock prices mostly benefited the top 20 percent of households, which owns 87 percent of the wealth in this country. In contrast, the bottom 60 percent of households own 5.2 percent of the wealth (2016 Survey of Consumer Finances), down from 7.55 percent in 2004.
In 2012, the top 20 percent of households received 51 percent of the income, the top 5 percent received 22.3 percent. In contrast, the bottom 60 percent of households received 26 percent. The bottom 20 percent received 3.2 percent.
During World War II, the top marginal tax rate in the United States was approximately 90 percent. In the 1970s, the top rate was reduced to between 70 percent and 78 percent. In 1982, President Reagan reduced the rate to 50 percent, subsequently dropping it further in the mid-1980s. In contrast, the lowest marginal tax rate hovered around 20 percent during the World War II through the 1950s. Since then, it too has been reduced, but by a much lower amount.
The rise in inequality roughly matches the reductions in the top marginal tax rate. Presidents Reagan, G.W. Bush and Trump promised that if we cut taxes to rich, we would all benefit. Things have not quite worked out that way.
Despite declines in the unemployment rate and modest increases in income, the share of gross domestic product accruing to employees has not increased. In 1970, Federal Reserve Economic Data indicates that in 1970 employee compensation was 51.3 percent of GDP. By 2018, employee’s share of GDP had fallen to 43 percent of GDP. Over the same time period, corporate profits increased from 5.17 percent of GDP to 9.4 percent, an 80 percent increase.
In 1974, the bottom quintile received 4.3 percent of household income. In 2012, the bottom quintile received 3.23 percent. For the past 40 years, productivity has increased 180 percent, while compensation has increased 80 percent, with the difference enriching corporate America.
In 2005, the Republican Congress passed the Medicare Prescription Drug Bill, expanding the benefits to those over 65. The bill, written by the pharmaceutical industry, included a guarantee that the government would not negotiate prices. Profits to the pharmaceutical industry soared. Since then, the prices of many prescription drugs have soared, an example of how the pharmaceutical industry uses free markets to extort money from the government, insurance companies and the rest of us.
The oil industry received special tax breaks unavailable to other industries. Farmers in the Midwest received billions in subsides, Trump’s payoff to farmers hurt by the tariffs. As billionaire investor Warren Buffet concedes, “There has been class warfare going on for the last 20 years and my class has won.”
People just want a fair shake. They don’t want to go bankrupt if they get sick. They don’t want to mortgage the house to buy prescription drugs. They want to earn enough income to care for their families, buy decent food, and give their kids a decent education. Is that too much to ask?
John Watkins | Westminster College
John P. Watkins is a professor of economics at Westminster College, Salt Lake City.