The Accidental Capitalists
Occupy Wall Street's threat of class war could be good for everyone -- rich and poor alike.
As the Occupy Wall Street protests drag on into their ninth week, the movement has spawned global "occupations" from Rome to London, Toronto to Santiago, Hong Kong to Taipei. Meanwhile, the protesters continue their calls for "democracy not corporatocracy" — revolutionary language, even if it falls just a bit short of "eat the rich." So perhaps it is no surprise that some of those more at home with the traditional occupants of Wall Street have been quick to complain that this is just one more sign of growing class warfare.
But is the threat of conflict between the rich and the rest a good thing once in a while? Talk of class warfare rears its head when more people start thinking that the rich are rich not because of their hard work or talent but because they are lucky or because the system is stacked in their favor. That view is becoming increasingly widespread — 75 percent of Americans back a millionaires’ tax, for example. And to an extent, it’s right — not just as a matter of fairness, but as a matter of economics. A bit of redistribution might actually help make everyone — including the rich — better off in the long term.
Behind the protests is a growing level of frustration over the yawning income gap. The top fifth of households in the United States earn 10 times what the poorest fifth makes and more than the rest of the country combined. The incomes of the richest 1 percent are 67 times those of the poorest 20 percent of households. And over time, that gap has widened. According to the Congressional Budget Office, between 1979 and 2007, the richest 1 percent saw their after-tax incomes climb 275 percent compared with an 18 percent rise for the poorest fifth. The story is similar, if less dramatic, in other rich economies.
In the United States, a number of prominent Republicans, including House Budget Committee Chairman Paul Ryan and House Majority Leader Eric Cantor, have responded to disquiet over this income gap by emphasizing the need for equality of opportunity for all Americans. That is surely the right focus: We want to reward both hard work and talent to ensure continued prosperity for everyone. But the evidence suggests we are a very long way from equality of opportunity in most countries, and in particular the United States. According to an analysis by economists Samuel Bowles and Herbert Gintis at the Santa Fe Institute, of children born to the poorest 10 percent of parents in the United States, more than half remain in the bottom fifth of incomes as adults.
This is a problem for everyone, rich and poor, because international evidence suggests that more equal economies grow faster. In fact, the historical evidence for the Americas, compiled in 2005 by economists Stanley Engerman and the late Kenneth Sokoloff of the National Bureau of Economic Research (NBER) suggests that an early source of wealth in the American Northeast was a colonial farming system based around small landholders that encouraged equality and the provision of public goods — as opposed to the plantation model used in the South and the Caribbean, which favored a small elite uninterested in representative government or widespread education. Similarly, a number of East Asian countries such as South Korea started their path toward miracle growth with land reform and broad-based education, which leveled the economic playing field. More recently, New York University economist William Easterly and others have argued that a higher share of total income for the middle class is associated with improved outcomes in health, education, stability, and growth for all. Consider the economic burden of unequal opportunity on the United States today, with 9 percent unemployment, seven-tenths of a percent of the country in prison, and 28 percent of the population without a high school diploma.
Of course, actual class warfare itself usually doesn’t turn out well for any of the classes involved. But the threat of class conflict is a different matter — it can help galvanize reforms that benefit not just the poor but the whole of society. And when people in the middle start empathizing with the poor they fear becoming, rather than the rich they dream of joining, reform movements take hold. Take British Prime Minister Earl Grey, who took time away from tea-tasting to expand the right to vote in 1832, explaining, "The Principle of my reform is to prevent the necessity of revolution. … I am reforming to preserve, not to overthrow." Faced with the threat of violence in the streets during the Great Depression, Joseph P. Kennedy Sr., at the time a prominent businessman and later Franklin D. Roosevelt’s Securities and Exchange Commission chairman, justified his support for the New Deal on similar grounds, writing after the fact, "[I]n those days I felt and said I would be willing to part with half of what I had if I could be sure of keeping, under law and order, the other half." He wanted Roosevelt in the White House, he suggested "for my own security, and for the security of our kids."
Kennedy was right — Roosevelt’s New Deal legislation laid the basis for recovery and sustained, equitable growth over the next 40 years. According to NBER economists Thomas Piketty and Emmanuel Saez, the top 10 percent of Americans’ share of total national income dropped from around 45 percent in the 1930s to 32 percent in the postwar period and stayed there until the end of the 1970s. Since then, it has climbed back above 40 percent, while average income growth rates have moved in the other direction. The three decades from 1950 to 1980 saw annual per capita income grow at about 2.2 percent a year; the average rate in the 30 years since then has been nearer 1.8 percent.
If the threat of class war helps create pressure to deal with the unearned privileges of the rich and the unrealized potential of the poor, that would be a struggle of which not only Karl Marx but also Adam Smith could be proud. The unlikely class warriors of Occupy Wall Street are derided as a bunch of spoiled kids who should have better things do to than camp out in parks, and maybe that’s the case. But they could also be a force for greater economic liberty and, however paradoxically, a wealthier America.