'America the Possible': How We Can Reclaim the American Dream and a Just Society

In his new book, James Gustave Speth explains how America is not broke, the money is just in the wrong places.

The following excerpt is from James Gustave Speth's new book, American the Possible: Manifesto for a New Economy (Yale University Press, 2012).

This book began by examining the intolerable levels of social decline now afflicting America. Poverty, financial insecurity, and economic inequality have all reclaimed highs not seen for many decades, plunging America to the bottom among our peer countries and spawning a host of pathological social consequences. Central to building a new political economy is the transformation of American society from this sad state to one that is truly fair and equitable, where all people have the opportunity and the means to realize their potential, where substantial equality is prized and sought with affirmative action, and where caring for one another with compassion and generosity are hallmarks.

When James Truslow Adams coined the phrase “the American dream” in his 1933 book The Epic of America, he used it to refer not to getting rich or even especially to a secure, middle-class lifestyle, though that was part of it, but primarily to something finer: “It is not a dream of motor cars and high wages merely, but a dream of a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.” That American Dream is well worth carrying with us into the future.

It is a measure of the political strength of the growth ideology that some of the most passionate advocates of greater fairness in American society have adopted the argument that we need more equality in order to promote more growth. A 2011 report from the Center for American Progress makes the case, albeit tentatively, that inequality is bad for sustained economic growth. Robert Reich in his 2010 book Aftershock explains his view that America won’t have a sustained economic recovery unless a much larger share of income is directed back to the middle class: “Unless America’s middle class receives a fair share, it cannot consume nearly what the nation is capable of producing. . . . The inevitable result is slower economic growth and an economy increasingly susceptible to great booms and terrible busts.” These views, of course, upend the traditional understanding--that inequality facilitates and spurs on growth.

At least one line of argument suggests that a more egalitarian society would eventually deemphasize economic growth. Much of the consumer impulse that drives GDP growth depends on what economists call positional goods--the drive to acquire things largely because others have them. Robert Frank explains what that means in an unequal society: Positional “arms races,” he notes, “are well illustrated by the familiar metaphor in which everyone stands up to get a better view, yet no one sees any better than before. It is the same with many forms of consumption. . . . Although there is scant evidence that middle-income families in America resent the spending of top earners, they are nonetheless affected by it in tangible ways. Additional spending by the rich shifts the frame of reference that defines what the near rich consider necessary or desirable, so they too spend more. In turn, this shifts the frame of reference for those just below the near rich, and so on, all the way down the income ladder.” It seems likely that in a far more equal society, the impulse to consume positional goods would decline, thus creating a tendency for growth to slow.

As far as the argument that those who grow rich in America have earned it and deserve to keep it, this claim is hollow in the extreme. Today’s high productivity and economic growth stem largely from the accretion of scientific and technological knowledge, most of which is inherited from the past, as Gar Alperovitz and Lew Daly point out in their remarkable book Unjust Deserts. In other words, the greater portion of income and wealth today “comes to us through no effort of our own.” As Nobel economist Herbert Simon observed, if “we are very generous with ourselves, I suppose we might claim we ‘earned’ as much as one fifth of [our income].”

Alperovitz and Daly stress the importance of this analysis for distributive justice: “If most of what we have comes to us from those who came before, we quite literally owe it to ourselves to consider how we as a society wish to use and divide this great and generous gift of the past. When and as we do, we believe Americans are increasingly likely to demand answers to the question of why, specifically, any one person should receive more than any other from the gift of the past--from the large share of current wealth that no one living creates.”

Whether inequality promotes or inhibits economic growth, we should pursue a more just and equal society regardless. The grounds for action to dramatically reduce America’s vast economic insecurity and inequality are ample: in the pragmatic conclusion of Wilkinson and Pickett’s The Spirit Level that “most of the important health and social problems of the rich world are more common in more unequal societies”; in the ethics of distributive justice; in the need to be true to our national values as reflected in James Truslow Adams’s American Dream; in our innate sense of fairness described by Peter Corning in The Fair Society; and in the realization developed by Alperovitz and Daly that today’s wealth is largely the product of the knowledge commons inherited from the past by all of us and thus rightly to be shared.

In recent years, America’s fraying social fabric has galvanized the attention of progressive communities, and an abundance of well-designed proposals to promote economic security and equity have emerged. Some have laid comprehensive plans for a new war on poverty in America; others have focused on the need for universal health insurance or on the imperative of high-quality and affordable education at all levels; still others have concentrated on a just and fair tax system; and many have focused on creating and even guaranteeing meaningful, living-wage employment opportunities for all those seeking jobs, including revitalizing America’s manufacturing base.

These are vital areas for action, but they should be complemented by measures that go to the heart of the matter. First, we have heard for decades that America must keep growing, or, otherwise, we will face the need for income redistribution. Well, for the most part America has kept growing, and the need for redistributive policies has only grown more acute. The growth-instead-of-redistribution argument has failed in practice, and in a world where growth will be increasingly constrained, it also fails in theory. It’s time for America to face the need explicitly and directly to redistribute incomes.

One good idea is to place brackets around income levels, with minimum and maximum incomes. Here, as elsewhere, Herman Daly has made the case well: “The civil service, the military, and the university manage with a range of inequality that stays within a factor of 15 or 20. Corporate America has a range of 500 or more. Many industrial nations are below 25. Could we not limit the range to, say, 100, and see how it works?”

Harvard’s Howard Gardner has argued that “no single person should be allowed annually to take home more than 100 times as much money as the average worker in a society earns in a year. If the average worker makes $40,000, the top compensated individual may keep $4 million a year. Any income in excess of that amount must be contributed to a charity or returned to the government, either as a general gift, or targeted to a specific line item (ranging from the Department of Veterans Affairs to the National Endowment for the Arts).” He further proposed that no individual would be permitted to pass more than $200 million to his or her heirs, and that any excess must be contributed to charity. “To those who would scream ‘foul’ to such limits on personal wealth,” he concludes, “I would remind them that just 50 years ago, this proposal would have seemed reasonable, even generous.”

Another good idea is a reverse income tax, as recommended by Bob Reich in Aftershock. Building on the negative income tax idea examined in the 1960s and today’s earned income tax credit, he urges that “full-time workers earning $20,000 or less (this and all subsequent outlays are in 2009 dollars) would receive a wage supplement of $15,000. This supplement would decline incrementally up the income scale, to $10,000 for full-time workers earning $30,000; to $5,000 for full-time workers earning $40,000; and then to zero for full-time workers earning $50,000.

“The tax rate for full-time workers with incomes between $50,000 and $90,000--whether the source of those incomes are wages, salaries, or capital gains--would be cut to 10 percent of earnings. The taxes for people with incomes of between $90,000 and $160,000 would be 20 percent, whatever the income source.”

Reich would join this support for those at the bottom with higher taxes on the wealthy, generating almost all the income needed to pay for his wage supplements: “In a nation facing a widening chasm between the very rich and everyone else, it is not unreasonable to expect those at the top to pay a higher tax on their incomes, from whatever source (wages, salaries, or capital gains). I propose that people in the top 1 percent, with incomes of more than $410,000, pay a marginal tax of 55 percent; those in the top 2 percent, earning over $260,000, pay a marginal tax of 50 percent; and those earning over $160,000, roughly the top 5 percent, pay 40 percent. These taxes, when added to the modest amounts contributed by taxpayers who earn between $50,000 and $160,000 under my plan, would raise $600 billion more than our current tax system per year.”

Another major step forward should be to implement the important proposal put forward by Bruce Ackerman and Anne Alstott in The Stakeholder Society: “As a citizen of the United States, each American is entitled to a stake in his country: a one-time grant of eighty thousand dollars as he reaches early adulthood. This stake will be financed by an annual 2 percent tax levied on all the nation’s wealth. The tie between wealth-holding and stakeholding expresses a fundamental social responsibility. Every American has an obligation to contribute to a fair starting point for all. Stakeholders are free [to] use their money for any purpose they choose: to start a business or pay for more education, to buy a house or raise a family or save for the future. But they must take responsibility for their choices. Their triumphs and blunders are their own.”

Reich and Ackerman are right to focus on the revenue side of their proposals. In the years ahead the federal government should spend more on social and jobs programs, on environmental protection, and on neglected needs abroad. Meanwhile, our annual federal budgetary deficits should be brought down to sustainable levels. Government cannot count on high growth rates to expand the federal coffers. The good news, from the point of view of finding our way forward through this thicket, is that there are many ways to raise new revenues--closing down tax breaks for the rich, shifting taxes from things we want to encourage to things we want to discourage, taxing luxury items, closing corporate tax loopholes, strengthening the estate tax, and moving toward a more progressive tax structure. For example, a 2009 report by John Cavanagh and his colleagues at the Institute for Policy Studies proposed the following plan that would raise an additional $3 trillion in federal revenues over a five-year period:

1. Repeal tax breaks for households with annual incomes over $250,000: $43 billion per year.

2. Tax financial transactions: $100 billion per year.

3. Eliminate the tax preference for capital gains and dividends: $80 billion per year.

4. Levy a progressive estate tax on large fortunes: $40–60 billion per year.

5. Establish a new higher tax rate on extremely high incomes: $60–70 billion.

6. End overseas tax havens: $100 billion per year.

7. Eliminate subsidies for excessive executive compensation: $18 billion per year.

In short, America is not broke. There is plenty of money; it’s just in the wrong places.

James Gustave Speth is Professor of Law at Vermont Law School and a senior fellow at Demos and the United Nations Foundation. Previously he was Sara Shallenberger Brown Professor and Dean of the School of Forestry and Environmental Studies, Yale University.

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