Inequality and Democracy

GUEST: Eric Wanner
VTR: 11/09/2006

I’m Richard Heffner, your host on The Open Mind.

And twice before when the erudite President of the Russell Sage Foundation for the past twenty years, Dr. Eric Wanner, has been my guest, we’ve talked about one aspect or another of “Inequality in America.”

Well, last time I recalled the pleasure and pride with which in the early 1950’s I had so definitively written in the first edition of my Documentary History of the United States that “The Roosevelt Revolution” — FDR’s “New Deal” — had PERMANENTLY reversed the economic and social inequality that earlier had plagued laissez-faire, dog-eat-dog, Social Darwinian post Civil War Industrial America, and had finally in the Great Depression left one-third of our nations “ill-fed, ill-clothed, ill-housed.”

But I had been so incredibly wrong, hadn’t foreseen that in our very own times we would experience a veritable counter-revolution in which various New Deal social visions and even programs would seem to have become an endangered species … and inequality in our nation seem once again to reflect an ever-widening gap between rich and poor Americans, with all of its devastating consequences.

Well, without putting words in his mouth, I think it’s fair to note that Dr. Wanner didn’t demur. Instead, he analyzed the areas where and the reasons why this seems particularly to be the case, ranging from globalization to the incredible decline both of unionization and of political participation.

Which leads me to ask Dr. Wanner today just what light the 2006 mid-term elections may shed on the possibility of change … for better or worse.

WANNER: There’s a … the Dean of American Economists, Paul Samuelson, said that predictions are difficult, especially about the future. And I think one day after the election it would be very hard to hazard a coherent guess about what, what we’re going to do at the Federal level about inequality.

But maybe it would make sense to kind of review a little bit, politically, how we got to where we are … to think about where we might be going.

Over the last 30 years political scientists have shown quite conclusively that at the Federal level there’s been an increase in polarization between the two parties. If you put individual legislators, members of the House of Representatives on a Liberal to Conservative scale and you measure the overlap between the two parties, what you see is that the overlap has shrunk, just as inequality has been increasing, polarization at the Federal level has been increasing along with it.

And, some people have argued this makes it more difficult to legislate … sustain the kind of programs that you’re talking about to counteract market driven inequality.

So, for example, if polarization gives you gridlock, then if you’re trying to do something like up-date the minimum wage, which, as you know, has to be increased by vote of the Congress, it doesn’t automatically rise with inflation … it may be more difficult to get a constituency in the middle in order to be able to do that.

So one argument has been … inequality causes polarization; polarization causes gridlock which makes it more difficult to counteract inequality.

Now … we have great hopes, I suppose that these, these elections have increased sentiment … political will to try to counteract inequality. But I don’t think we know until we see what really has happened; it’s one thing to sort people by Democrat versus Republican. It’s another thing to figure out where they stand on redistribution.

HEFFNER: What do you mean “wait till we see what has happened?” And, again, I don’t mean exactly what the numbers are …

WANNER: (Laughter)

HEFFNER: … are you suggesting that you may not have that movement toward the center?

WANNER: Right. Another thing to say about this polarization is that it’s been an asymmetric polarization. That is the Republican Party demonstrably moved further the Right than the Democrat Party … Democratic Party moved to the Left …

HEFFNER: Please. Please.

WANNER: I, I made a slip. So what you had was a … two things. A polarization between the two parties and a general drift Right. Now the question will be, “Has this election stemmed the general drift Right and increased representation in the center?”

Have to admit a lot of, a lot of moderate Republicans did go down in this election, to be replaced by Democrats and it remains to be seen exactly where they stand on the Liberal/Conservative dimension.

HEFFNER: What’s your, what’s your sense of what could be done if, indeed, the polarization has been diminished to some extent.

WANNER: Okay. I think what we’re going to get right away is an increase in the minimum wage. The Democrats said they want to do that in the first hundred hours. And I would applaud that. But I don’t think we should stop there. Just to review. The minimum wage is now $5.15 an hour, the Federal minimum. Many state wages, minimum wages are already well above the Federal minimum. So in those states, there won’t be much effective an increase in the Federal minimum.

HEFFNER: May I …

WANNER: Yeah.

HEFFNER: … may I interrupt a moment. In the states where you say the minimum wage is considerably above the Federal wage, have there been any indications of trouble, of unintended consequences?

WANNER: That’s a very good question. And it’s a matter of still white hot dispute in economics about whether or not raising the minimum wage increases unemployment. Particularly unemployment amongst the youth and other low education workers whose, whose productivity may not, according to theory justify a higher wage.

We have supported a number of studies which look at some of these local increases in minimum wages, the increase in minimum way in San Francisco, we’re looking at one right now along the Indiana/Illinois border, where Illinois raised its minimum wage and Indiana didn’t.

And generally we find small, negligible disemployment affects, or not at all.

HEFFNER: But that is the argument … disemployment.

WANNER: That’s right. That’s the unintended consequence and that’s a straightforward product of … one interpretation of economic theory says that you would get that. As you raise the minimum wage certain workers who may not be employable at that higher wage will not get jobs, they’ll lose their jobs.

HEFFNER: Has that, historically, been the case? I know the fear, or the claim has been the case. But have the facts?

WANNER: It’s, it’s interesting … on my desk is about a 150 page review of all the, of all the evidence, one way or another and I think the most that one can claim is that there’s been a … there’s a small effect of large increases in the minimum wage.

So at one end of the continuum of this argument you might … there’s evidence that say a 10% increase in the minimum wage might lead to as much as three-quarters of a percentage point of increase in unemployment among youth workers, young workers.

HEFFNER: Right. Where would you go as you move one from changing the minimum wage?

WANNER: Okay. Because I think it’s important not to stop with, with just a minimum wage. For example, one thing we ought to do is increase the earned income tax credit.

HEFFNER: Explain that.

WANNER: Yes, everybody should know what the earned income tax credit is.

HEFFNER: And few people do.

WANNER: And few people do. The earned income tax credit is a refundable tax credit to working poor families, earning under a certain threshold income. So at the end of the tax year if you’ve earned less than a certain amount … there’s a sliding scale … you can file your tax return and actually get a refund on taxes you didn’t pay, basically.

Okay. So it’s a supplement to wages for working families. And it’s about a 30 billion dollar program. It was last increased in the early nineties, under Clinton. It’s probably the best thing that Clinton did by way of materially improving the lot of the working poor. And it hasn’t been increased since then and it deserves an increase.

HEFFNER: What is the nature of the increase? If more dollars are appropriated, how were they used? By expanding the coverage?

WANNER: Yes. You would expand the coverage … you would increase the supplement and you would expand the coverage. So you have to redesign the schedule and move it further up the income scale.

HEFFNER: What is it now? What has it been?

WANNER: Ah, it, it clicks in … it goes up to the Federal poverty line, basically, so it’s, it’s limited at the Federal poverty line. And you can move it above that because our poverty line is, is quite severe.

That is, a family living at the poverty line is … the material well-being of that family is, is very limited. And much lower, for example, than the poverty lines in Europe.

HEFFNER: Aha. Poverty line reflecting then not a determination of what should be … but a line to … explain that … because I don’t understand it, which is not so strange.

WANNER: A poverty line was … the US poverty line was developed in the early sixties. And it was basically a multiple of your food budget. So an economist named Molly Orshansky, who was in the Agriculture Department, developed a way simply of estimating the food budget for families of various sizes with different numbers of children and different numbers of adults … and then, as a rule of thumb, they took three times that budget as the poverty line.

So historically of course, over time there have been enormous changes in what families … other families have to spend by way of a multiple of their, of their food budget. But none of that has been reflected in the US poverty line.

HEFFNER: What is … where is … what is the role of rent? Of housing costs at a time when one reads constantly of increasing costs.

WANNER: Sure. And in areas where many of the poor live, such as the large cities, where there’s a great deal of inequality and rents get bid up, rents are an increasing fraction of all families income and particularly the income of the poor. So then the question is what, what housing subsidies are available? And local jurisdictions differ an enormous amount in terms of the amount of housing subsidy they make available. And the Federal Housing and Urban Development … HUD … provides also certain kinds of supplements for the poor. But altogether those could be certainly looked at as being more support at the bottom of the income distribution.

HEFFNER: I keep interrupting you …

WANNER: That’s okay.

HEFFNER: … tell me more about this agenda, this possible agenda.

WANNER: Well, maybe to, to explain the agenda we ought to go back and ask ourselves sort of what’s increasing inequality and why it’s increased. Not a long story, we’ll do a short review.

HEFFNER: Please.

WANNER: Because I think people should understand that what we want to do ought to be hooked to what we think has cause the increase in inequality.

And there are really three factors. One is increasing labor market inequality; that is increasing inequality in wages, particularly wage gains by college educated workers, high educated workers and wage … real wage losses by low educated workers. So one thing we really have to look at is how do we push up education at the bottom? Improve education at the bottom in order to, in order to compress this wage differential which has grown so much in our lifetime.

Just to give you a number … the college wage premium thirty years ago was on the order of 35%; now it’s close to 100%.

HEFFNER: A 100%?

WANNER: Yeah. So to give you some real numbers … a high school dropout now makes an average of $19,000 a year. A high school graduate makes an average of $26,000 a year and if you have four years of college, the average income is about $52,000. So that gives you some idea of what this differential is in real terms, in current dollars.

So, that’s one thing that we definitely have to look at … how to, how to improve our educational system and educational opportunity for workers who, if they don’t continue their education will suffer real wage penalties.

HEFFNER: Do I understand that in the last number of years money is available to help kids at the lower end of the economic ladder continue their education, aside from the question of the quality of public education to go to college, to get that bonus …

WANNER: Yeah.

HEFFNER: … that we have been putting less and less into helping them.

WANNER: It’s relatively less and less, so that if you look at the size of Pell Grants, the national …

HEFFNER: Right.

WANNER: … which is our national Federal expenditure to help disadvantaged students in post secondary education …that’s now about $9 billion dollars. But if you compare that to the tuition bill, it’s relatively less … a smaller fraction of the tuition bill than it was 25 years ago. That’s, that’s where there’s been an increasing shortfall between Pell Grants and tuition. And in part this is because of declining support for public post secondary education at the State level.

So as State budgets have become increasingly under pressure, in part because of declining Federal support to the States, they’ve squeezed their own education budgets and tuitions at State colleges and universities have increased relative to inflation and certainly relative to Pell Grants.

HEFFNER: I keep interrupting you as we go from one area to another …

WANNER: Interrupt away.

HEFFNER: … but what’s your next area where something could be done.

WANNER: Oh, you mentioned at the outset … let’s, let’s double back a little bit …

HEFFNER: Okay.

WANNER: … I think the long run … we ought to be thinking in the long run about improving educational opportunity and how to do that and making post secondary education more available to all, as a nation. And that’s a, that’s a major project, it’s not going to be solved by this Congress, but it’s something that the country really has to take on its back and realize it absolutely must do.

In the meantime, there are the kinds of things that we were talking about in the beginning of the conversation which is to push up wages at the bottom now.

We dealt with two ideas … one was the minimum wage. Two is the earned income tax credit. By the way, it’s worth mentioning that the two go together. If you just, if you just increase the refundable earned income tax credit, it’s possible that the subsidy would end up going to employers as opposed to ending up going to workers. That is …

HEFFNER: How so?

WANNER: Well, because as the Federal government makes a subsidy available to low wage workers …

HEFFNER: Ahh …

WANNER: … the wage that’s actually paid could be lowered. Okay.

HEFFNER: Or not increased.

WANNER: So, since you’re employing me and you understand I’m being subsidized you may offer me a lower wage. But if the minimum wage puts a floor under it, you can’t do that. Anyhow. So those two, those two things should … are certainly there.

Then, we should probably talk about unions. It’s, it’s a long and difficult and in some ways sad story. But another change in our lifetimes, from the time that which you wrote in the nineteen fifties optimistically about inequality … unionization rate was then about 30% … all private sector workers … about a third were unionized.

You want to guess what it is today? It’s about 8%. So unions are much less powerful than they were and this has enormous effects both directly on the ability of wages … of workers to negotiate with their employers. But also indirectly in terms of political education. Unions were an enormous source of information for people in the lower tiers of the income distribution about what their economic interests were and how to organize collectively in order to, in order to push those interests.

One thing that’s happened, again in our lifetime, is a decrease in political participation by individuals and families in the lower tiers of the income distribution and part of that can be traced to the decline of unionization.

HEFFNER: Is that an inevitable decline in terms of the changes and shiftings in the American economy?

WANNER: Yeah, you ask very good and hard questions. This again is, is a war that’s going on … a question about whether it’s inevitable or whether or not it’s been a result of political undermining of the kinds of institutional supports that helped the union movement grow from the thirties to the fifties, again, when you were writing.

Certainly there have been some natural forces which have weakened unions. So, the mobility of capital has increased. The ability to manufacture off shore. Most of the unions, the big unions were represented in the large industrial sectors …

HEFFNER: Right.

WANNER: … in the economy. Those sectors have shrunk. We’re largely a service economy now, not a manufacturing economy. So as manufacturing moved elsewhere the, the seat of the unions the sort of “redoubt” of the unions shrank. So that was certainly something that happened as a result of market forces.

Also capital mobility makes it possible for employers to credibly threaten to move manufacturing elsewhere if workers organize and press their wage demands. So …

HEFFNER: Does that lead you … does that lead you, yourself, to be particularly negative about the mobility of capital?

WANNER: Okay. It, it doesn’t. And I have to explain …

HEFFNER: It doesn’t.

WANNER: … why. At the same time that inequality has been going up, we’ve also become much wealthier as a country. And even though the upper tiers of the, of the income distribution have claimed larger and larger slices of the pie, we shouldn’t forget that the pie itself has grown enormously. So that again, back in the fifties when you wrote your book, the average income was … in today’s dollars … about $20,000. That is the average household income. Now it’s much closer to $50,000. So we’re a much, much richer economy per capita, per household than we were 55 years ago.

HEFFNER: Is that what explains the, the length of time it has taken to shift just a little bit in the political scene? That there isn’t as much need? That basically …

WANNER: Right.

HEFFNER: … we’re not all that bad off?

WANNER: That’s a very good point. Yes. Remember we talked earlier in the conversation about this Rightward drift …

HEFFNER: MmmHmm.

WANNER: … and one argument about the Rightward drift is that we’ve all gotten richer and feel less in need of social programs and therefore we don’t vote for redistribution downward in the income distribution. Absolutely.

HEFFNER: We all …now … do you mean that? We all have … is that the fact?

WANNER: Remember what’s happening. The lower tiers of the …households in the lower tiers of the income distribution are participating less than they did before. Okay?

Furthermore another point about them is that many of them are immigrants who can’t vote …

HEFFNER: Ah.

WANNER: Okay? So now, couple that with the idea that the average household in the US has gotten richer over the last 50 years and is looking pretty much as … towards itself … as its own source of security as opposed to the government and you get less and less political support for transfers from the “haves” to the “have-nots”.

HEFFNER: And we’re still the land of opportunity then.

WANNER: We’re still the land of opportunity. We should talk about that because I think that’s … that was the last place I was going to get to …

HEFFNER: Go ahead.

WANNER: But let me just double back to, to say that the pie did grow. Remember you asked me about the mobility of capital …

HEFFNER: Right.

WANNER: And so I said this politically incorrect thing about how I’m not against the mobility of capital. I think the mobility of capital causes all kinds of social upheavals and that as a society we should respond to those social upheavals and we should try to compensate the losers when capital moves and creates social disruptions. And we don’t do nearly enough of that. But I don’t think we should put big controls on capital mobility because after all, capital moving is moving to more productive, higher productivity investments which ultimately enrich us all. So there’s a consumer surplus that we all benefit from, from moving capital to its most effective uses. Some people get hurt. We should do more. We, the winners, should do more to compensate the people who get hurt and we don’t do that.

HEFFNER: We have only four minutes left. And I don’t want to stop what you’re doing, but I, I do want to ask … on that question … do you think it’s likely that we will … do we ever show signs of doing enough to balance the imbalance that you refer to?

WANNER: No we don’t. And it’s in part because we don’t seem to be upset as a nation about inequality. When you measure people’s … what should we say … when you measure people’s worries about inequality and whether inequality makes them unhappy and you look across countries when you do that and you say, “Do we have too much inequality in the country and does it bother you that we do?” It bothers the Europeans much more than it bothers us.

So inequality is not something that people are running in the streets to, to have solved. Americans view their own lives as pretty much a matter of their individual efforts and abilities. And they see the income distribution as a result of individual effort and ability and not as the product of economic and social forces, as Europeans generally do.

HEFFNER: That’s a very sad commentary.

WANNER: Well, you think about it this way. We developed our individual ethic during the nineteenth century. Our, our commitment to individualism which has a lot of positive implications at a time before large social forces could exert so much disparity across the social fabric. And we may be relatively disabled from responding to the kinds of social and economic forces that are creating inequality because of our historic commitment to individualism which has had many positive results in the past, but now may be disabling us in various ways.

HEFFNER: Guests over the years here describing parallel situations, parallel dilemmas after the program was over, when the beady red light is off … and I ask, how are we going to remedy this, they shake their heads and say, “Perhaps only with another great depression.” Which did seem to provoke the surfacing of whatever social instincts we had.

Whatever instincts we had that ran counter to “We’re okay, we don’t need to be concerned by this disparity between the rich and the poor.”

WANNER: Well, you can argue it two ways. Certainly it is the case that in 1935 when we had 25% unemployment, people were ready to support the labor movement. People were ready to support Social Security in ways that they were not heretofore. And it certainly generated a lot of political energy. But if you ask yourself what was the other great period of social generosity, it was the 1960s which was a high growth period.

So perhaps generosity occurs, or social … our facing up to social problems occurs in two ways. One if it’s happening to us and two, if we feel wealthy enough to be more generous.

HEFFNER: But that generosity in the sixties was so vitally connected with the Civil Rights Movement, with the young being brought into the political turmoil and then, it just diminished.

WANNER: True. But remember the War on Poverty was in the 1960s and despite what Ronald Reagan said we made enormous strides against poverty. We reduced the poverty rate from 25% to 11% in the early seventies. And yes, then there was an enormous political reaction which we’ve been living through ever since.

HEFFNER: We have less than a minute. Do you remain as optimistic as I always see you being? Enthusiastic? Energetic?

WANNER: I, I think we can’t afford the luxury of pessimism. We have to do the best job we can in laying out the facts, in getting people to try to understand what’s happening and then being intelligent about where we take a limited Federal expenditure and place our bets in various ways. Not jus to reduce inequality per se, but also, and this is very important, to increase the equality of opportunity. To make it possible for people to move out of the bottom tails of the distribution.

One of the worst things about American inequality is that it’s sticky in the tails. That is, if you are at the bottom of the income distribution, it’s very hard to get out. Harder than it is to get out in Europe, for example. And that’s something I think we have to understand and then address as a nation.

HEFFNER: Clearly we have more programs to do about inequality. Thanks, Eric Wanner, for joining me again today on The Open Mind.

WANNER: Thank you very much, Dick.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time, and if you would like a transcript of today’s program, please send $4.00 in check or money order to The Open Mind, P. O. Box 7977, FDR Station, New York, New York 10150.

Meanwhile, as another old friend used to say, “Good night and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.