Former Treasury Chief Lawrence Summers: Income Inequality May Push US to 'Downton Abbey Economy'

Image: Former Treasury Chief Lawrence Summers: Income Inequality May Push US to 'Downton Abbey Economy'

Tuesday, 18 Feb 2014 09:02 AM

By Dan Weil

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If we don't correct our gaping income inequality soon, the results won't be pretty, says former White House economic adviser Lawrence Summers.

The inequality is clear, he writes in the Financial Times. "The share of income going to the top 1 percent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity."

And what do these developments mean for the economy as a whole? "The U.S. may well be on the way to becoming a 'Downton Abbey' economy," writes Summers, who was Treasury secretary from 1999-2001.

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Downton Abbey is a U.K. TV show which chronicles a wealthy British family and its servants in the early 20th century.

Summers defends President Barack Obama's approach to the income inequality issue. "Those who condemn him for 'tearing down the wealthy' and engaging in un-American populism are, to put it politely, lacking in historical perspective," Summers writes.

Several presidents have spoken out against excessive wealth, he says. "Some have gone beyond rhetoric. Confronted with rising steel prices, John Kennedy sent the FBI storming into corporate offices and is widely thought to have ordered the authorities to audit executives’ personal tax returns."

Richard Nixon ordered tax investigations of companies that raised prices above a ceiling his administration set, Summers says.

"Given the widespread frustration with stagnant incomes, and an increasing body of evidence suggesting that the worst-off have few opportunities to improve their lot, demands for action are hardly unreasonable," he writes.

As for what action to take, tax reform should play a major role, Summers says. "The current tax code is so badly designed that it is very likely to be having the effect of reducing economic growth. It also allows the rich to shield a far greater proportion of their income from taxation than the poor."

For example, the stock market gained $6 trillion in value last year, and the bulk of that accrued to the very wealthy, Summers says.

"It is unlikely that the government will collect as much as 10 percent of this figure. That is because of a host of policies that favor the rich, such as the capital gains exemption, the ability to defer tax on unrealized capital gains, and the fact that gains on assets passed on at death are not taxed at all."

Closing loopholes for the wealthy would enable tax cuts for the poor and middle class, such as through the earned income tax credit, Summers says.

"It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy," he writes.

Mohamed El-Erian, outgoing CEO of Pimco, shares Summers' concern.

Among the most important issues for policymakers and the rest of society to address are income inequality, wealth inequality, and inequality of opportunity—the "trio of inequality," El-Erian said at a conference last week, Business Insider reports.

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