Saving Capitalism from Capitalists

By Achal Mehra | December 19, 2011

It remains to be seen whether the Occupy Wall Street movement can sustain its momentum against the increasingly repressive and brutal tactics of cities and police departments across the country trying to shut them down.

We sure hope it can, because this country needs political realignment to address glaring income inequality, which fueled the rise of the movement.

A 2011 study by the Congressional Budget Office found that the income of the top 1% grew 275% – more than four times that of the rest of the population. “As a result of that uneven income growth,Ó the report said, “the share of total after-tax income received by the 1 percent of the population in households with the highest income more than doubled between 1979 and 2007, whereas the share received by low- and middle-income households declined É. The share of income received by the top 1 percent grew from about 8 percent in 1979 to over 17 percent in 2007.”

The income disparity in America is the greatest it has ever been since the Great Depression in 1928. The richest 1% of the American population now own 35% of the countryÕs total wealth, more than twice what the bottom 80% own – just 15%. Financial inequality (net worth minus home value) is even greater with the top 1% owning 43% and the bottom 80% just 7%.

Evidence is that the disparity is accelerating. For example, between 2002 and 2007, the top 1% saw their income grow 10 times faster than the bottom 90%. The United States now has among the highest level of inequality in the developed world.

These income disparities may well have been tolerable in boom times – a rising tide, after all, lifts all boats – but they are unsustainable in democratic societies during periods of economic stress. The Occupy Wall Street movement is the first salvo in what is certain to be growing political backlash as U.S. and European economies sputter.

We may be headed for a fairly long economic downturn, Far from improving, Western economies could slide into a double dip recession. But even if the economies plod along, gyrating with every political hiccup in Washington, D.C. or Brussels, we could be sitting on a powder keg, which will explode, unless Western governments begin addressing the growing income gap.

The capitalist system has been unquestionably successful, but if it is to sustain its momentum, some of its worst excesses must be restrained. Whatever the right wing loonies might believe, capitalism is not gospel written in heaven. It is a human invention, which like other great ideas, has a historical location and requires adjustments and accommodations.

Imposing limits on income disparities is one such area. Valuing number-crunching college graduates at Goldman Sachs at 20 to 100 times their peers in other professions is irrational. Rewarding anyone – entrepreneur or CEO – with hundreds of millions and even billions of dollars is foolish. Allowing individuals to amass tens of billions of dollars in wealth, far in excess of the gross domestic products of half the countries in this world, is just plain obscene.

The problem is so acute that tinkering with the tax code is not enough. This is not about the government taking – any share of it – what rightfully belongs to an individual. It is about that individual not having a rightful claim to that wealth in the first place. The capitalist system has been gamed to privilege some and disadvantage others. It can be retooled to service its original first principles: reward initiative, creativity and risks, with rational limits on income, wealth and inheritance.

If the Occupy Wall Street movement prods U.S. politicians to reexamine fundamental assumptions of capitalism and recalibrate its practices, it could be reinvigorated for new times. If not, in a matter of a few decades, when mass democratic movements revolt against capitalismÕs excesses, history will record what Indian Prime Minister Manmohan Singh so presciently described as “a warning for all those who are in charge of the processes of governance” was tragically ignored.