The broken US economy breeds inequality and insecurity. Here’s how to fix it | James K Galbraith

RRising interest rates, a falling stock market, a faltering gas price, a high dollar and chaos in world finance – we see in all of this once again the folly of trying to run the world’s largest economy through a central bank. It’s time to rethink the basics: what happened in America? And what to do?

Adam Smith wrote, “Wealth, as Mr. Hobbes says, is power.” In the United States today we find islands of wealth and power on one side and an ocean of precariousness and powerlessness alongside poverty on the other. This is a structural development over 50 years, the result of politics and politics, but also of industrial change, globalization and new technologies, with intense regional, social, demographic and political repercussions.

From the 1930s through the 1970s, America had a middle-class economy, centered in the heartland, that fed and supplied the world with machinery and goods while drawing labor from the impoverished South to the thriving Midwest—an economy of powerful unions and world-dominating corporations. This has evolved into a coastal economy dominated by globalized finance, insurance and high-end services on the one hand and information technology, aerospace and entertainment on the other.

Finance and technology do not create many jobs and doing business in these sectors is predatory and predatory and often descends into fraud. A few years ago, we calculated the rise in income inequality between boroughs during the boom years of the 1990s and found that half of the rise was due to income gains in just five boroughs: Manhattan, Silicon Valley, Seattle. There have been other big gainers since then, but the fact remains: America’s biggest gains in income and wealth have been heavily concentrated in some very specific places, sectors — and people.

Yet virtually all new jobs created over the last 30 years have been in the service sector, and most of them in “stagnant services” – the plethora of restaurants, retail stores, hospitals and clinics, offices and entertainment venues fueled by household incomes ( and borrowing) are driven ) exceeding the need for material goods. The pay in these jobs is mediocre and employment is unstable. Families compensated for this by having two or more wage earners, each sometimes holding two or more jobs, whereas 50 years ago the norm was one wage earner with a steady job paying a living wage. Then Covid blew up the sector.

For better or for worse, we cannot go back: globalization and the digital revolution are irreversible facts of life. The June 2021 Supply Chain White House Review made this very clear using the example of semiconductors, rare earths, batteries and pharmaceuticals. Our advanced sectors need world markets – including the Chinese market – as much as they need access to the world’s resources. US consumers are benefiting from imported goods and the efficiencies of the information age.

The question is: what do we do now? We can adapt and build a just and secure civil society, free from poverty and oligarchy alike, with tools that are largely familiar. These tools include:

expand social security

Social Security, Medicare, Medicaid, unemployment insurance and Snap are already significantly reducing poverty, insecurity and hunger in America. They can be expanded and strengthened. If we don’t get Medicare for All, lower the eligibility age to 55 — that would cover a large chunk of the most vulnerable population and in one fell swoop reduce the burden of private health insurance on employers.

Raise the minimum wage

A federal minimum wage of $15 an hour would give at least 20% of all working Americans a raise. It would solve the perceived “labor shortage” problem in one fell swoop – without hurting one employer in relation to another. It also wouldn’t encourage immigration, as US workers would stand up to take decent-paying jobs.

Implement a job guarantee

A government job guarantee is a well-prepared proposal that would eliminate involuntary unemployment, set a base wage standard, and provide willing workers with continued employment on useful projects, thereby providing private employers with a labor pool from which to easily recruit the workers they need.

Stabilize energy prices and supplies

The TVA and other agencies provide stable power supply under long-term contracts. Why should private equity operate oil and gas on a boom-and-bust basis? Stabilize energy prices and supplies – with regulation, quotas, price controls (as in Germany at the moment), long-term contracts and public utilities – and many other problems would be much easier to solve.

Build public services and infrastructure and fight climate change

And do so while cutting military commitments and spending. The main task of infrastructure is to improve the quality of life with clean water and air, good transport and communication and – urgently – to change the resource mix in order to mitigate global warming as much as possible. We cannot meet these needs and at the same time use our talents and resources for wars – the limits for this are clear after Afghanistan and Iraq. It’s time to end the illusion that the United States can or should rule the world.

Shift of taxation towards ground rent

An important principle of classical economics was that taxes should encourage work and enterprise while preventing waste in the public and private spheres. In the 1980s, taxes shifted away from the income and capital gains of individuals and businesses to payrolls and sales – and the unsurprising result was the rise of an oligarchy of over-wealthy individuals. The cure now is to tax these accumulations and the associated rents – land values, mineral rights, technological “quasi rents” – to bring the new plutocrats back to earth. Stronger inheritance and gift taxes can encourage the transfer of large fortunes to foundations and charities such as hospitals, universities and churches, while working to prevent the emergence of financial and political dynasties.

Reform banking before it’s too late

The Glass-Steagall Act protected the middle class – the common depositor at a commercial bank – from the speculative whims of the elite. Today, despite the Great Financial Crisis, big money is back in charge – and much of the American public and the world at large are fed up with it. Perhaps the toughest and most necessary reform is to reduce debt, including student debt, downsize banks, restore effective regulation, prosecute fraud, and discipline finances to serve the common good. That will take the shine off the banker — and take the heady power out of the leadership of the Federal Reserve.

Is this program realistic? Maybe not. But consider the path we are on. What I am proposing is an alternative – to pitchforks, anarchy and civil war.

• James K. Galbraith is the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. In the 1970s he drafted the monetary prudential provisions of the original version of the Humphrey-Hawkins Full Employment and Balanced Growth Act