James K. Galbraith: How Our Inequality Happened

James K. Galbraith — out on the uneven playing field of American wealth and power — is pointing out the 30-year drift of tax policy and political power, all of it made possible by the decontrol of campaign spending and the big-money capture of both major parties. Galbraith is an economic eminence in his own right by now at the University of Texas and on the left wing of the Democratic party, and the author most recently of Inequality and Instability.

Jamie Galbraith is also of course the son of the late Sun God of mid-century liberalism, the witty scourge of “private affluence and public squalor” as of innocent old 1958! Papa John Kenneth Galbraith‘s evergreen warning about The Affluent Society arrived in the post-Sputnik moment of the long postwar expansion not just of the US economy but of public investments in education, science and space. But even then Galbraith Sr. was worried about a widening gap between rich and poor as a risk to American stability — imagine it! — in what we remember as the rock-solid Eisenhower years.

I’m asking Jamie Galbraith to account for the split of the 1 percent and the 99 today. Shorter Galbraith: these things don’t develop by accident.

From the second World War up to the early 1980s we had a fairly balanced economic expansion in the United States. It had a very strong component of wage-led growth. After the 1980s all of that was gone, and we’ve basically expanded only on the strength of our credit markets — the strength of bank lending and the strength of stock market bubbles. And this has been wave after wave, which have now come to grief….

Let’s go back to the 1980s when we sharply reduced tax rates on upper-income people. Even in 1986 a tax reform that had some progressive aspects to it continued this process. What happened then? I think two things happened. One is that there was a very strong tax incentive to put your money in housing because mortgage interest remained deductible and no other form of interest did. So people who wanted to take out loans did so through housing; and people who got windfalls from the tax cuts also invested in mansion building, and there’s been a great deal of that ever since. A second thing is that when you reduce the tax rates on personal incomes, people who controlled corporations and controlled their own compensation as executives had a strong incentive that wasn’t there before to transfer income from the company to themselves; and so you had the executive compensation boom…

In the 1960s when we were young and into the early ’70s we had a strong momentum for building stronger, more egalitarian, more progressive social institutions. In the 1980s the initiative passed to the other side and for the last 25 or 30 years progressives have been very much on the defensive. Not that we have nothing to defend… As soon as this election is over, no matter who wins it, we are going to start hearing of a need for a bi-partisan compromise to cut Social Security benefits. This is as sure as anything I can tell you. And it will be presented as some kind of modest proposal to protect the fiscal solvency and so forth of the Social Security program. It’s utter nonsense. The purpose and effect of the cuts that are coming will be to reduce the living standard of the future elderly by very substantial amounts over time. If we allow this to happen, and in particular if we allow the Democratic Party to concede the necessity oif it happening, we’ll be committing a crime, really, against the future. We’ll be returning tomorrow’s elderly to a state of distress that they have to a very substantial extent been able to avoid…

What has happened is that our political structure is now entirely dependent upon small numbers of people with large amounts of money. That’s true of both parties. And the kinds of “countervailing forces,” to use one of my father’s phrases, are no longer nearly as strong as they were — trade unions and other kinds of civic organizations. That is a consequence of allowing inequality of wealth and power, in this case, to get out of hand. It should be at the top of any civic agenda.

James Galbraith with Chris Lydon in Boston, May 2012

Coming next: Vanessa Williamson‘s close encounter with the Tea Party grass roots. “Think of them as your Aunt Olive at Thanksgiving dinner,” she begins, prompting me to wonder: shouldn’t we see the Occupy mobs as the angry kids, literally, of those furious old tax rebels. Different wardrobes, in short, one breakdown?