Why sharing the wealth isn't enough

By Steven Pearlstein
Friday, August 6, 2010

In pledging to give away half their fortunes to worthwhile causes, 40 of the country's billionaires have resurrected and updated Andrew Carnegie's doctrine of the "gospel of wealth." Like Carnegie, the organizers of "the giving pledge" -- Warren Buffett, and Bill and Melinda Gates -- have campaigned against the practice of bequeathing their fortunes to the next generation of family members, whose traditional role is to squander it. (Buffett and Melinda Gates are Washington Post Co. directors.) And like Carnegie, many of the other 37 who signed the list are entrepreneurs who got rich by building great companies that continue to create wealth even as they give away their own.

Some may quibble with how these billionaires made their pile or the causes to which they are now giving it away. There can be little doubt, however, that their commitment has raised the bar on social responsibility even as it raises questions about the social value of large personal fortunes.

In an article last year in The American Interest, Philip Auerswald and Zoltan Acs of George Mason University suggested that the defining characteristic of American capitalism is not only an entrepreneurial culture that generates great wealth but also a philanthropic infrastructure that recycles that wealth in ways that create more opportunity, more growth and more wealth. This virtuous cycle, they concluded, is the "inner dynamic of American capitalism and the source of its prosperity." They contrast that to socialist countries, where philanthropy is weak and government takes on the recycling role, or less-developed countries, where oligarchs' fortunes are not recycled at all.

Auerswald and Acs are known as institutionalists because of their focus on institutional arrangements and behavioral norms in explaining why economies work. Not surprisingly, their views have been embraced by business types and free-market conservatives who shamelessly use them to justify small government, low taxes and minimal regulation.

The problem with this approach, however, is that it focuses on only one of the institutions that have corrected for the inequalities inevitably created by a capitalist system. Yes, philanthropy has been important, but so have unions, which ensured a fair distribution of corporate profits. So have antitrust laws that prevented successful companies from snuffing out entrepreneurial competition. So have norms of corporate behavior that made it socially unacceptable for top corporate executives to pay themselves 350 times what their workers made. And so have tax-supported schools, playgrounds and hospitals that were good enough to be used by rich and poor alike.

All of these institutions accounted for the vibrancy of the American economy by ensuring that prosperity was widely shared. But with the erosion of those institutions, that is no longer the case.

The latest data from the Congressional Budget Office show that in 2007, the top "quintile" -- the 20 percent of the households at the top of the income ladder -- took home 52 percent of the nation's after-tax income, with the top 1 percent of households earning 17 percent. The Center on Budget and Policy Priorities calculates that from 1979 to 2007, the average after-tax, inflation-adjusted income of households in the middle of the ladder increased 25 percent; for the top 1 percent, it rose 281 percent.

What this reflects is a gradual hollowing out of the middle of the U.S. economy. David Autor, an economist at MIT, published a paper this spring clearly laying out that beginning in the 1990s, all the growth in employment and pay has come at the top and bottom of the skills ladder, while demand for middle-skill, middle-wage labor in both manufacturing and service companies has declined. This "polarization" of the labor force, according to Autor, is an international phenomenon, not unique to the United States, and is driven largely by globalization and new technology. And the trend has only accelerated during the recent recession.

As the rungs of the economic ladder grow farther apart, it's not surprisingly becoming harder to move up. Recent work by Isabel Sawhill and Ron Haskins of the Brookings Institution suggests that rising inequality in the U.S. economy is leading to lower mobility. Sawhill and Haskins found that while people born into the middle class continue to move up and down the ladder, the top and the bottom rungs are becoming much "stickier," with those born there most likely to remain there. As a result, by some measures, the United States now has less class mobility than Canada, Germany and France.

"The idea that equality of opportunity is a distinctly American strength is a myth," they conclude.

We are approaching a tipping point in America. When economic growth led to more jobs and higher incomes for wide swaths of the population, it didn't matter much that some people were smart enough or lucky enough to pull way ahead. But in recent decades, there has been a dramatic erosion in both the ideal and the reality of shared prosperity that threatens to paralyze our political system and undermine economic growth.

With its "giving pledge," the Gang of 40 has taken an important step in revitalizing America's philanthropic institutions, but it will take much more to revive the virtuous cycle by which wealth begets opportunity which in turn begets more wealth. Whether at an individual company or in the country at large, it is the feeling that we are all in it together that creates the basis for a truly vibrant economy and just society. Trickle-down alone won't cut it.

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