"Excessive" is the operative word here. Inequality is not a bad thing in a free market economy; indeed, it's essential if we're to benefit from the incentives and efficiencies that make the market so effective a producer of wealth. But left entirely to its own devices, the free market will produce more inequality than is necessary for efficiency or a healthy society. That's especially true in an economy marked by globalization, the increased use of information technology, and the rapid flow of capital across borders. Alan Greenspan said as much when he told Congress' Joint Economic Committee in 2004 that nearly all the benefits of recent productivity growth were going to corporate profits, resulting in "a marked fall" in employees' share of the gains.
Nothing in the past two years has alleviated that problem. Real wages for the average worker have eroded, and health and pension benefits have faded. Meanwhile, corporate profits and pay for the top 2% of the population have soared.
For many of us, this is morally objectionable because it means that a large majority of people live at a lower standard of living than we think Americans ought to. But the counterargument, supported by many in Corporate America, is that focusing on inequality is a mistake, so long as the absolute level at which the majority lives is acceptable. So any reduction in inequality can only be won by a majority that includes people who do not share my values-based objections.
That's why business must understand that it too benefits by reducing inequality. In testimony last summer, Greenspan lamented the "growing evidence of antiglobalization sentiment and protectionist initiatives," which threatened economic flexibility. And he agreed when I suggested that this is not simply a case of crankiness but a broad public reaction to the perception of inequality he cited in 2004. Indeed, when people see their real wages stagnating or falling, health benefits threatened, and pensions insecure, they're unlikely to support policies that help the economy at their own expense.
Look overseas. In 2004, India's ruling Bharatiya Janata Party (BJP) called elections in a campaign based on overall economic growth that had exceeded expectations with the slogan "India Shining." But with hundreds of millions of ordinary Indians feeling they had not shared in the benefits of economic reform, voters' response was essentially "shine this," and the BJP lost. More recently, Latin American voters have backed leaders hostile to deregulation, globalization, and economic flexibility.
So it's important for business leaders to understand that overall gross domestic product growth is not enough to win political support for the tax code changes and curbs on public spending they support. This was brought home at a dinner I attended last month at the World Economic Forum in Davos, where a leader of a large financial institution voiced frustration with the average American's lack of support for globalization. "After all," he said, "a recent study by the Institute for International Economics showed that globalization adds a trillion dollars a year in value to the American economy," which, he noted, was worth $9,000 a year to the average American family. The problem, of course, is that the average American hasn't seen that $9,000. Instead, many of them believe -- resentfully -- that corporate executives have been keeping it all for themselves.
Therefore, it's time to make a deal. I am prepared to help persuade my fellow liberals that many of the public policies they have been resistant to, or skeptical of, are in the national interest, if those in the business community work with us to ensure that the bulk of Americans get a larger share of our increased wealth. Our nation has both the resources and the intellect to implement public policies that diminish inequality so that it does not become socially corrosive, without reaching the point where that diminution threatens the needs of the capitalist system. Is Big Business ready to come to the table? Barney Frank, a member of Congress since 1981, is ranking Democrat on the House Financial Services Committee.