Engineering Inequality
By Claudio Guler for ISN
Live in the States? Earn at or below the 80th income percentile and feel like your economic future is unpropitious? It probably is. Though if it is any consolation, the system is rigged to work against you.
Income and wealth inequality in the US - looking at almost any metric available - have been rising broadly since the mid-1970s, splitting society and ridiculing the much-vaunted equal opportunity to the ‘pursuit of happiness.’
The WWII and baby boomer generations experienced a rather different arrangement and in turn greater social mobility. Inequality in the US declined or held steady from the early 1930s through to the mid-1970s.
Critics of the inequality argument suggest the split is more statistical than empirical, pointing out that even the poorest today are well off by historical standards. Well yes, but is that a benchmark to which we should aspire?
Gini out of the bottle
The gini coefficient for the US in 2008 - a common measure of economic inequality within a society (the lower the number, the smaller the disparity) - external pagehovered in the neighborhood of 47. This is the highest among developed countries and rose from a nadir of 38.6 in 1968.
external pageEurope and Canada enjoy gini coefficients closer to 30. external pageLatin American countries boast gini coefficients in the 50-60 range.
The external pageaverage hourly wage of US workers has slumped since the 1970s, and remains lower than its peak in 1972 in 2008 dollars. The external pagetop 1 percent’s share (approximately 21 percent) of total pre-tax income has returned to levels not witnessed since the late 1920s, shortly before the onset of the Great Depression.
The wealth gap is equally pronounced. In 2007, the top 10 percent of Americans controlled roughly external page70 percent of the total wealth of the nation and 90 percent of securities.
The result is two points of divergence in income and wealth inequality. The first is between the top 20, more likely the top 10 percent of income earners and the bottom 80 to 90 percent.
The second - dubbed the ‘middle class millionaire’ phenomenon by the US media - illustrates the gapping divide between immediate entrants into the top 1 percent and those sitting luxuriously at the top 0.1 percent of the US income distribution.
The policy argument
What factors then have driven inequality in the US since the mid-1970s?
Technological change that favors skilled workers and globalization - also known as trade and services liberalization - have dominated the public discourse.
Both have certainly made a contribution, but the latter is inherently a function of policy choices; US policymakers have exposed low and medium wage workers to greater competition from abroad than high wage workers, such as doctors.
The impact of globalization, moreover, is mitigated somewhat by the relatively closed nature of the US economy - although the absolute measure of US trade is gargantuan, relative to the economy it is small by international standards.
As far as technological change, this is a global phenomenon, and other countries in the rich world have not seen corresponding rises in inequality.
Economist John Schmitt from the Center for Economic Policy Research (CEPR) in Washington DC argues that a third element is at play causing high and rising inequality: external pagepolicies intended to promote inequality.
The argument is as follows: The dual oil shocks and economic stagflation of the 1970s generated a crisis environment that the US economic elite were able to identify and use to advance their interests, formerly looked after but not gorged. This coincided with the political rise of Ronald Reagan in the US and Margaret Thatcher in the UK, and the introduction of the neoliberal economic doctrine. Soon, the mantra was trickle-down economics.
In the seemingly boundless pursuit of efficiency, the political right with the left in tow, took on the unions - typified by the Reagan administration’s 1981 break-up of the air traffic controllers strike - retrenched the welfare state (for perspective read external pageGøsta Esping-Anderson), privatized many state and local government services, promoted deregulation in many sectors external pageincluding financial services, and most importantly, cut taxes across the board.
President Reagan, moreover, racialized welfare state retrenchment, and in so doing drew attention to the ethnic fault-line in US economic inequality. Remember the external page‘Welfare Queen’ from Chicago’s South Side?
“Each of these policies, while at least sold as efficiency enhancing, also has a separate, very clear effect of lowering the bargaining power of workers relative to their employers. That is the key feature that is in every one of these policies,” Schmitt told ISN Security Watch.
“A top candidate for what is driving inequality is compensation for the absolutely top tier of the American corporate structure. CEOs and the top management are enormously taking advantage of their insider position in these corporations, to take money first and foremost from workers, cutting benefits and wages for example, but also from shareholders,” he added.
Where in the 1960s external pageCEOs earned 20-30 times the average worker’s pay, by the late 2000s, the ratio had crept to upwards of 300.
A historically low top marginal tax rate, 35-39 percent (it used to be external page90 percent during the 1960s and has dropped precipitously since Reagan), tax loopholes (long-term capital gains for example, which often comprise a large portion of executive compensation packages, are taxed at only 15 percent), and the lack of redistributive mechanisms to diffuse efficiency gains and alleviate the displacement effects of noncompetitive industries resulting from trade liberalization have ensured generous earnings for the privileged pinnacle.
How then, did politicians convince voters in the industrial Midwest, for instance, to vote against what would appear to be their own economic interests? Suspicion falls on the political appeal of the tax cut, and the use of social issues - gay marriage and abortion in particular - to divert attention away from economic issues during campaign season.
Political economy
A just meritocracy then? For the top, yes. For the elite, certainly and spectacularly. For everybody else, hardly.
President Barack Obama may be the man to turn the tide. Health care reform, which has also made improvements in access to higher education, qualifies as a redistributive mechanism, as would yet-to-be-broached tax reform. But he is up against a nation indoctrinated by the deceptive allure of what fundamentally remains Reaganomics, and an otherworldly wealthy and influential upper class. Moreover, the economic debate in the US, focusing primarily on job creation, is only now set to kick off.
In the interim, the Great Recession is likely to have aggravated circumstances.
“It's tough to know how it's all going to play out. Clearly, a lot has happened here. My guess is that economic inequality, once we have all the data in, will have increased significantly over the recession. The only reason why I'd be hesitant is at least initially when the stock market crashed, the people who lost money are rich people,” Schmitt said.
“The catch is, something like 60 percent of Americans owned their house, and these have also fallen on average between 25-30 percent. So overall, wealth inequality has almost certainly gone up. On income inequality, it's a no-brainer. People at the top of the income ladder have been much more successful in defending themselves against the downturn.”
Pro-corporate and pro-market (i.e., pro-competitiveness) policies are not one and the same. Power without checks and balances consolidates, eventually crowding out all but a narrow few. Dinero behaves no differently.