Economic lessons in a game of poverty poker

If you want to know how and why the growing inequality of wealth and income in the U.S. is distorting our economy and our politics, consider the game of poverty poker. For those of you unfamiliar with the term, it’s a form of the game that allows players who have run out of money, or chips, to continue to compete— they just can’t bet.

Not surprisingly, even in poverty poker, someone fairly quickly ends up with all the money. In a regular poker game, that’s the end. But in poverty poker, everyone can keep playing. But it doesn’t take long for the effects of the unequal distribution of money to make its mark on the game.

For one thing, the person with all the money has no incentive to bet, so each game is simply a contest for the ante, which has been ponied up each time by the player with all the coin. That means that while the other players can, ostensibly, continue to play, it’s pretty tough to recover when the stakes each time are so limited. As the saying goes, “it takes money to make money.”

For those without, the prospects in the real economy are actually no different. Healthy market economies maintain what economists like Robert Reich call “The Virtuous Cycle,” by which growth in productivity leads to higher wages, which leads to increased economic activity as workers have more to spend. Their spending creates more jobs and generates more tax revenues, which is then available for governments to invest in education and infrastructure, which boosts productivity, leading to higher wages and the whole cycle repeats, propelling the economy to ever greater prosperity. As the late Sen. Paul Wellstone liked to say, “we all do better when we all do better.”

We actually experienced this virtuous cycle in the post-WWII era, at least until the 1970s. But the cycle began to break down beginning in the 1980s, as wage increases increasingly failed to keep pace with improvements in productivity. Instead, the benefits of improved productivity went more and more to those at the top. While there are a number of factors behind this change, including the expansion of so-called “free trade,” tax policy has played a major role as well.

Back when the virtuous cycle was at work, top marginal tax rates in the U.S. ranged as high as 92 percent. That doesn’t mean that a top earner paid 92 percent on all their income, only on income above a certain level. And that encouraged companies to reinvest more of their income in their businesses or in higher wages and benefits for employees. There’s little incentive for yet another huge salary increase for executives, after all, if the government is going to lop off 92 percent of it.

In those days, the average CEO took home a salary equal to about 20 times the wages of the average worker, plenty to offer adequate incentive, but not out of line. These days, with marginal tax rates at 39.6 percent, and with capital gains taxes much lower than that, the average CEO now takes home nearly 350 times the salary of the average worker— and much of that money, trillions, in fact, ends up stashed away unproductively in foreign bank accounts, rather than spent or invested in the U.S. economy. Many of the biggest moneymakers aren’t even productive members of the economy— they’re just Wall Street financial speculators engaged in market manipulation, arbitrage, and outright fraud in some cases.

These folks, who we know as the One Percent, used to claim about 12 percent of the nation’s income. Today, it’s 20 percent and rising rapidly. And this same select group now controls 40 percent of the nation’s wealth.

What’s worse, nearly 60 percent of American households now have virtually no wealth at all, living paycheck to paycheck. Like the money-less players in our game of poverty poker, they may be part of the economy, but they’ve got nothing to bet. And most are now working for penny ante wages, so for most the odds of getting ahead are in line with winning the Powerball, or getting back into that poker game. America used to pride itself on its economic and social mobility, but a person born poor in the U.S. today has less chance of achieving success than that same person in almost any other developed country. The game, at least here in the U.S., is increasingly stacked against the American Dream.

A simple change in the rules, of course, can keep the poker game interesting. Rather than simply letting the person with all the money sit there, you can require that after three rounds they have to put half their winnings back in the pot. Suddenly you’ve provided opportunity for other players and you can get a competitive game going again. In the real economy, we do this same thing through a number of mechanisms, including estate taxes, higher marginal income taxes, taxes on speculation, and raising the minimum wage. Doing this helps restore that virtuous cycle, as higher wages and greater tax revenue boost consumer purchasing and government reinvestment, creating more economic activity and jobs in the process. Income redistribution always plays a critical role in sustaining viable and healthy market economies, even though some like to deny it.

Our virtuous cycle broke down in the 1980s when an alternative economic idea took hold in the U.S. Known as supply-side economics, this theory suggests that lower taxes, which, in effect, transfer more wealth to the top, spark economic growth that will trickle down to the rest of us. Calling it a theory gives it more credit than it’s due, since there’s no actual evidence to support the notion, even as evidence of its abject error stack up all around us. While Republicans still argue its virtues, former Reagan budget director David Stockman revealed the truth of the matter early on, describing supply-side economics as a “Trojan Horse,” designed simply to justify massive tax cuts for Reagan’s wealthy friends.

Time and again, big tax cuts for the rich have done nothing to spark economic growth, but they have contributed mightily to the massive income and wealth inequality we see in the U.S. today. And all that extra money in the hands of multi-millionaires and billionaires has distorted our political process, as many have poured unprecedented amounts of their windfall into political campaigns, right-wing think tanks, and high-priced lobbyists, in large part to protect their hold on so much of the nation’s wealth. Like our poker player with all the money, they want to change the rules of the game. Forget tossing half their winnings into the pot after three rounds. They’re working the refs to avoid even shelling out the ante.

And just as that would effectively end our game of poverty poker, its effect on our economy would be equally terminal. That’s why inequality matters. Market economies work best when the virtuous cycle is in place, and that’s why addressing inequality is one of the best things we can do to achieve the kinds of economic gains we all want to see. When you hear suggestions that giving more to the wealthy is the way to create economic growth, you’re being misled. We’ve gone that direction in the U.S. for forty years, and for the vast majority of us, and the economy as a whole, it’s been a rapid downhill slide. We’ve had enough of poverty poker. It’s time for a deck that isn’t stacked against average Americans.

I’d rather play “shared prosperity poker.”