Summary: Part One looked at America’s rising inequality. Today we look at the resulting wide range of ill effects, a major driver building a New America. A rising concentration of income and wealth quickly becomes self-perpetuating as the 1% exploits their control of the government to gain yet more money and power. At some point we will have (or already have) a new political regime.
“In a state which is desirous of being saved from the greatest of all plagues — not faction, but rather distraction. There should exist among the citizens neither extreme poverty, nor, again, excess of wealth, for both are productive of both these evils.”
— Plato’s Laws.
“Avarice, the mother of all wickedness, who, always thirsty for more, opens wide her jaws for gold.”
— Claudianus, De Laudibus Stilichonis (~400 AD).
- Causes of income inequality.
- “The Impact of Inequality on Growth”.
- Wasting our human resources.
- Concentrating political power.
- For More Information.
- Another perspective.
(1) Causes of income inequality.
“Inequality over the Past Century“, Facundo Alvaredo, Finance & Development, September 2011 — “After declining in the first half of the 20th century, income inequality makes a comeback”. Excerpt:
In the United States, average real incomes grew at a 1.3% annual rate between 1993 and 2008. But if the top 1 percent is excluded, average real income growth is almost halved, to about 0.75% a year. Incomes of the top 1% grew 3.9% a year, capturing more than half of the overall economic growth experienced between 1993 and 2008.
… The new data call into question the standard relationship between economic development and income distribution—that growth and inequality reduction go hand in hand. But that relationship, postulated by economist Simon Kuznets, appears to be less certain — especially in English-speaking countries, which had a period of falling inequality during the first half of the 20th century followed by a reversal of the trend since the 1970s.
(2) The cost to America of wasting our human resources.
Becoming a better America paid off after WW2; stopping has cost us dearly: “The Allocation of Talent and U.S. Economic Growth“, Chang-Tai Hsieh et al, 22 February 2013. — Summary:
In 1960, 94% of doctors and lawyers were white men. By 2008, the fraction was just 62%. Similar changes in other highly-skilled occupations have occurred throughout the US economy during the last 50 years. Given that innate talent for these professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage.
This paper measures the macroeconomic consequences of the remarkable convergence in the occupational distribution between 1960 and 2008 through the prism of a Roy model. We find that 15 to 20% of growth in aggregate output per worker over this period may be explained by the improved allocation of talent.
(3) “The Impact of Inequality on Growth”.
“The Impact of Inequality on Growth“, Jared Bernstein, Center for American Progress, December 2013. — Summary:
Among the most important economic challenges facing the United States and some other advanced economies today is the increase in the inequality of economic outcomes. In the case of the United States, the distributions of income, wages, and wealth are more dispersed than ever. Though measurement issues abound, it is widely agreed that U.S. economic inequality is at historically high levels.
This fact, however, has different implications for different observers. Many critics of higher inequality suggest that it violates basic fairness, particularly when considering, for example, the divergence of median compensation and productivity growth. Such trends, these critics hold, are evidence of working people no longer getting their “fair share” of the growth that they are helping to generate.
Others note that inequality serves as a wedge between growth and living standards, funneling income largely to those at the top of the scale and thus making it harder at any given level of economic growth for living standards to grow as they have in more equitable times or for poverty to fall during business cycle expansions. … t so far in this expansion, which officially began in the second half of 2009, the stock market is up 60%, GDP is up 8%, corporate profits as a share of national income are at historic highs, yet median household income is down 5%, with all figures adjusted for inflation.
Another more recent line of argument holds that persistently high levels of inequality are eroding opportunity and mobility for those whose living standards and economic well-being are negatively affected by the wedge dynamic just described. This is a fundamental critique because it is widely held that in America, while we do not aspire to equal economic outcomes, we believe strongly in equal opportunity. If inequality were to thwart the opportunities of the “have-nots,” this would represent a significant violation of a basic American tenet.
… In that regard, the high level of inequality that we have today requires a policy response leading to a more equitable and inclusive economy. Full employment is especially important, and given the persistence of weak labor markets since 2000 — very much predating the last recession—achieving full employment may require public-sector job creation, either directly through public infrastructure projects or indirectly through public subsidies for private jobs. Incentives such as greater union representation, increased minimum wages, a solid safety net, progressive taxation, and sectorial policies that lift productive sectors such as manufacturing can help raise the relative incomes of middle- and low-wage workers.
Also see these slides: “Inequality, Opportunity, and What It Will Take to Get Less of the Former and More of the Latter“, Jared Bernstein, Center on Budget and Policy Priorities, 12 December 2013.
(4) The real problem: concentrating political power.
Feed the 1% with income, wealth, and power works like feeding a fire with gasoline. The 1% insatiably grows stronger when fed. The more income and wealth, the more political power. Political power yields yet more wealth and power. Repeat until we have a New America, stable at a new equilibrium.
(a) Krugman touches upon this in “Inequality As A Defining Challenge“, New York Times, 14 December 2013. Excerpt:
… there’s the political economy aspect, where you can argue that policy failures both before and, perhaps even more crucially, after the crisis were distorted by rising inequality, and the corresponding increase in the political power of the 1%.
Before the crisis, there was an elite consensus in favor of deregulation and financialization that was never justified by the evidence, but aligned closely with the interests of a small but very wealthy minority. After the crisis, there was the sudden turn away from job creation to deficit obsession; polling suggests that this wasn’t at all what the average voter wanted, but that it did reflect the priorities of the wealthy. And the insistence on the importance of cutting entitlements is overwhelmingly a 1% thing.
(b) Brad DeLong writes at the Washington Center for Equitable Growth. — Excerpt:
And then there are the political consequences of inequality. A more unequal economy is one in which the voice of the rich speak louder in the political debate, and the rich want to keep what is theirs. Before 1975 the U.S. made a uniquely large effort to educate its people, and win the race between education and technology. The result was a middle-class society for white guys (and, alas, for white guys alone).
Then came what Robert Kuttner calls The Revolt of the Haves: the great pulling-up of the ladder of free public higher education. The consequence was another factor pushing for the great widening of income inequality, as America began to lose the race between education and technology. And the consequence was that 0.3%/year of American real economic growth simply vanished as we were no longer making the requisite educational effort to keep our population the best-educated in the world. Over 35 years that failure has made us another 10% poorer –and more unequal to.
I think there’s a lot of debate about the economic impact of income inequality. There’s literature on how greater inequality might slow economic growth because it creates a less conducive environment for consumer demand or credit. But at the end, my view, and that of our book with James Robinson, is that the more pernicious effect of economic inequality comes indirectly through its impact on political inequality.
It’s a general pattern throughout history, and we see around today, that when economic inequality increases, the people who have become economically more powerful will often attempt to use that power in order to gain even more political power. And once they are able to monopolize political power, they will start using that for changing the rules in their favor. And that sort of political inequality is the real danger that’s facing the United States.
(a) From the New Left (aka not-so-Left).
Leftist darling Ezra Klein plays the False Dilemma logical fallacy: “Inequality isn’t ‘the defining challenge of our time’“, bog of the Washington Post, 13 December 2013 — Excerpt:
Income inequality is easy to worry about. It offends our moral intuitions. Its tears into the fabric of the American dream. “That we’re all created equal is the opening line in the American story,” Obama said. “And while we don’t promise equal outcomes, we’ve strived to deliver equal opportunity.”
… But is inequality really the country’s most pressing problem? Imagine you were given a choice between reducing income inequality by 50% and reducing unemployment by 50%. Which would you choose?
Steven Randy Waldman reviews Klein’s article: “It is terrible“.
(b) About pushback from the Right.
“The right’s inequality canard: They botch history and economics“, Sean McElwee, Salon, 14 December 2013 — “With President Obama talking about the scourge of low wages, conservatives are completely confused by the problem”
(6) For More Information.
(a) Articles by Martin Gilens (Prof of Politics, Princeton) about inequality of wealth and income driving inequality of power:
- “Inequality and Democratic Responsiveness“, Russell Sage Foundation, 27 July 2012.
- Economic Inequality and Political Power by Martin Gilens — Part one, part two, part three.
(b) Posts about inequality:
- A sad picture of America, important for us to understand, 3 November 2008 — About social mobility.
- An opportunity to look in the mirror, to more clearly see America, 10 November 2009.
- Graph of the decade, a hidden fracture in the American political regime, 7 March 2010.
- America, the land of limited opportunity. We must open our eyes to the truth., 31 March 2010.
- Modern America seen in pictures. Graphs, not photos. Facts, not impressions., 13 June 2010.
- Jared Bernstein examines the economic impact of raising taxes on high-income households, 30 April 2012.
- How clearly do we see the rising inequality in America? How do we feel about it? Much depends on these answers., 27 September 2012.
- Ugly truths about income inequality in America, which no politician dares to say, 2 October 2012.
- Glimpses of the New America being born now, 18 June 2013.
- Why Elizabeth Bennet could not marry Mr. Darcy. Nor could your daughter., 12 July 2013.
- For Thanksgiving, Walmart shows us the New America, 19 November 2013.
- Back to the future in New America: our new class structure, 27 November 2013.
- Learning not to trust each other in America, and not to trust America, 4 December 2013.