Last month, 40 US billionaires including Bill Gates and Warren Buffett agreed to donate at least half their fortunes to worthwhile causes. Their actions reflect a keen sense of social responsibility and are consistent with a tradition first established by Andrew Carnegie, John Rockefeller and other successful entrepreneurs of the past 2 centuries.
In the broadest sense, these behaviors can be seen as part of a virtuous cycle of American capitalism, in which our uniquely entrepreneurial culture creates both wealth and the philanthropic mechanisms by which that wealth can be recycled.
Some suggest that this cycle is the defining characteristic of American capitalism. In fact many conservatives and supporters of private enterprise believe this is single most important mechanism by which our economy differs from socialist economies, in which government takes responsibility for recycling wealth, and the economies of developing nations, in which the fortunes of those in control are almost never recycled.
These are the same people that believe low tax rates, small government, and light-handed regulatory strategies are the proper elixir for long-term economic growth.
The problem with this approach, according to Washington Post columnist Steven Pearlstein, is that it ignores other mechanisms that serve to buffer the economic inequalities that inevitably result from the US brand of capitalism. Pearlstein cites unions, “which ensured a fair distribution of corporate profits,” as well as antitrust laws which prevent large companies “from snuffing out entrepreneurial competition,” for example. He also mentions “tax-supported schools, playgrounds and hospitals that were good enough to be used by rich and poor alike.”
Pearlstein contends that regardless of which party has governed our country in the past 2 decades, the American political system has progressively savaged these other buffers to a point where economic inequalities in the US are greater than they have been in the last century. CBO data from 2007 show for example, that the richest 20% of US households amassed 52% of the country’s after-tax income. The top 1% earned a whopping 17% of such income. In the 2 decades before 2007, “the average after-tax, inflation-adjusted income of households in the middle of the ladder increased 25%; for the top 1 percent, it rose 281 percent,” Pearlstein wrote.
As these inequalities increase, poor people find it increasingly difficult to improve their economic position. In fact, a recent study by Isabel Sawhill and Ron Haskins of the Brookings Institution showed that while US citizens born into the middle class remain quite mobile economically, those born into wealth and poverty tend to stay there throughout their lives. Shockingly, US citizens nowadays enjoy less economic mobility their counterparts in France, Germany and Canada, at least according to some measures.
“The idea that equality of opportunity is a distinctly American strength is a myth,” concluded Sawhill and Haskins.
The endemic problem of economic “stickiness” was easier to swallow when the US economy was growing robustly, creating jobs and income opportunities for much of our population, but the Great Recession of 2008-2010 has changed that. It has imperiled the most fundamental American dream: that with hard work and some old fashioned ingenuity, people, or at least their children, might be able to improve their standing in society.
No one argues that Gates, Buffett and their wealthy contemporaries did a marvelous thing last month. Their generosity will help millions of people. But as Pearlstein says, “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.”