Inequality in America

On October 25, 2013, in Latest News, by The Somerville Times

Part 2:  Economic Forces
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shelton_webBy William C. Shelton

( The opinions and views expressed in the commentaries of The Somerville Times belong solely to the authors of those commentaries and  do not reflect the views or opinions of The Somerville Times, its staff  or publishers)

I was taught in my youth that America is the land of opportunity and that my nation is the most egalitarian in the world. This overlooked a significant number of Americans who lived in poverty. But it was truer for the United States than for many countries. In 1978 the median male worker in the U.S. earned $48,302 in today’s dollars.

Today America’s is the most unequal economy in the developed world. The distinction between the middle class and the poor has become blurred as more and more families hover above or slide below the poverty line. The median male worker today earns $33,751 per year, 30% less than in 1978.

In that year, the average income for America’s wealthiest 1% was $393,682. Today it is $959,720, a 243% increase in constant dollars.

Until the great recession, this long descent into inequality was not the result of fewer jobs. Instead, lower paying jobs replaced higher paying jobs. And compensation for middle- and lower-income jobs declined, even though worker productivity steadily increased. Meanwhile, the cost of healthcare, childcare, higher education, and housing in some markets increased faster than inflation.

Mainstream economists most often cite globalization and technology to explain increasing inequality. Robert Reich’s new film, Inequality for All, explores these trends. Some economists also cite demographic changes. Understanding economic forces is necessary, but not sufficient, to explain what happened.

 

Globalization

Goods, services, money, labor, and corporations now easily move around the world. The first General Agreement on Tariffs and Trade (GATT) in 1947 substantially lowered trade barriers, initially creating an advantage for both American investors and workers. But by the 1970s, the other World War II belligerents had rebuilt their economies with new technology. And emerging third-world economies were beginning to dominate the simplest manufacturing sectors.

The Reagan era brought with it a worship of unfettered markets. The U.S. exported this “Washington Consensus,” pushing for planet-wide deregulation, reduced public spending, privatization, and abolition of trade barriers.

Bipartisan policy legislation during the Clinton administration produced the North American Free Trade Agreement (1993), a new GATT (1994), and other trade agreements. These restricted the use of environmental protections, labor rights, and most tariffs as means of regulating trade.

They promised to increase economic growth, and they did. But the gains went to the wealthy.

“Free trade,” as opposed to “fair trade,” wiped out most clothing and consumer electronics production in the U.S., along with whole manufacturing sectors. The threat of outsourcing enabled corporations to extract wage and benefit concessions from workers and, in some cases, bust unions. Many middle-class jobs disappeared, and many that remained paid less.

Since 1990, job growth has been mostly in sectors not exposed to global competition like government, healthcare, and other services. Between 1999 and 2009, U.S. based multinationals created 2.4 million jobs abroad and eliminated 3 million at home.

 

Technology

Technological change has been a driver of capitalist economics since the industrial revolution. But digital technology has greatly accelerated the pace and global reach of change beyond that seen in previous generations.

New technologies eliminated many middle-skilled jobs—like production line work, fabrication, cashiering, secretarial work, and long shoring—while increasing demand for the higher skilled jobs required to design, implement, and mange the new technologies. This growing demand for higher skills was met, in part, by an expanding and lower paid work force outside the United States.

Jobs that sustained the broad middle of the labor market—people without college or highly technical training—disappeared. Jobs at the edges of the labor market increased, some in high-skill high-wage occupations, and more in low-skill low-wage occupations like security services, food preparation, landscaping, and home healthcare.

 

Demographic changes

Some economists point to the fact that median family income growth has slowed or reversed over the same period that single-parent households have increased as a share of all households.

And Sociologists point to an increase in “assortative mating.” Before the huge increase in women’s labor force participation, enabled by the women’s movement and obligated by economic necessity, men often married women who had less education or income than they did. Increasingly people tend to marry others who share their educational and/or economic background, widening the wealth and income gap between families.

 

Necessary but not sufficient

Globalization, technology, and demographics go only so far in explaining America’s stark and growing inequality. The U.S. is less exposed to free trade pressure than any other of the developed countries that form the Organization for Economic Cooperation and Development, but it is the most unequal.

It’s true that the incomes of workers with college educations accelerated in the 1980s and 1990s, but that trend has slowed, while technological change has increased. Also slowing over that period has been growth in high-skill high wage jobs. Now, they go to a lucky subset of the college educated, while many are stuck in low-wage jobs or unemployed.

Single parent families are more common in Scandinavia, Canada, and Western Europe than they are in the U.S.  In fact, U.S. economic inequality is growing faster among families with two parents than between those with one parent and those with two parents.

So an understanding of economic forces is necessary, but insufficient, to explain the hollowing out of America’s middle class. All other developed countries had to cope with these changes, and most, to a greater extent that the U.S. Explaining this requires an understanding of political forces, and that is the subject of the next column.

 

12 Responses to “Inequality in America”

  1. JPM says:

    It is astounding that the US does not even tax estates federally until they go over $5.25 million…..this is simply absurd. (there are state estate taxes but these are low and the exemption in MA is still over 1 million) In the UK for example, you pay taxes on estate once they go over $525,000.

    Heck…it’s nice to inherit money….but it’s not like you earned the money. The federal estate tax should exemption should be lowered to $1.5 million. As I was having my will done this week, my estates attorney noted that only a tiny percentage of people in the US even pay inheritance tax federally.

    Bill you write very well on macro issues…..I don’t agree with your Somerville positions very often, but that is a for another post.

  2. Bill,

    Our entire nation is becoming one big tourist attraction. Seasonal communities operate with two large distinct cultures: The rich and the poor. Few working class families can survive since there is no sustainable working environment, only service jobs for the working class and undocumented worker/temporary visa holders–which allow many companies to thrive.

    Those who were born and raised suffer a similar plight in areas which are being swallowed up by a development frenzy as we face in Somerville. Where money goes, development will soon follow and their benefactors are only to happy to give it away for their own selfish gains.

    Economic downfall and unemployment the working class face lead to divorce, addictions such as gambling, drug and alcohol abuse as well as infidelity. Of course we know the wealthy communities are not immune to these social problems, but I think you will find most experts who study human behavior would agree–when people suffer great amount of stress from job loss, or too much pressure from financial obligations, they will resort to coping mechanisms which perpetuate from the origin of poverty.

    Then its the blame game: The rich blame the govt. for taking a portion of their million/billion dollar income “taxes”, working class unions, welfare moms and immigrants. Their claim is that if they get taxed, they will provide jobs elsewhere. Just abandon a billion mothers, fathers and children who depend on your jobs for food, housing and healthcare–sounds fair.

    The working class blame the rich for outsourcing, Wall Street’s lust for gambling with other people’s money –investors and pension holders, in their high risk pursuits worthy of jail time for loansharking. They also blame the govt. for allowing the rich to continue to fleece the working class while ignoring their promise to create jobs and eliminate their long overdue tenure on “tax-breaks”. Underlying issue, is tax evading funds shipped to Cayman Islands which IRS and states should find a way to claim. Instead of allowing the lawyers to sort it out–break international laws which protect those who steal from the US govt. and the American taxpayer–even a portion of stolen proceeds would create a surplus. Or maybe we should all abandon our homes, live in cardboard boxes and become street beggars as other impoverished countries?

    We are becoming a childless society because it’s too expensive to raise a family and own a home. But if the jobs don’t pay for the average cost of living, what do you expect a working class person to do? Everyone is afraid to take out a loan because they worry about being laid off. Even if you qualify, you are faced with a higher rate than the rich who don’t need the loan, only use it as a tax write off, as they do with charities and political campaign contributions.

    The rich have fled overseas to $greener$ pastures. Why should they stay here and pay high taxes when they can pay .50 an hour to someone in India who never had a job until US corp. came to town? Maybe our former presidents should have never signed on to free trade–or would we be content to not hold our title as “super-power”, boohoo.

    Cry Me A River…….

  3. Pixie Pocahontas says:

    And for those who wish to dispute those grim facts I pointed out, who’s homes have been paid for, are happily retired with money in the bank and paid children’s tuition twenty years ago, do not profess to blame those of us who are still struggling as single working class or married with children. It is an entirely different world today and be thankful you don’t have to deal with issues we face today. I’m tired of the ignorant pointed fingers who misjudge those who can’t find work and struggle to raise children who also will inherit same fiscal mess created by the corp, predatory banking and ws swine. You have no clue.

  4. Matt C says:

    Pixi – lots of points made with a lot of passion.

    Outsourcing and offshoring have had huge effects on the us economy. Both positive and negative. You covered the negative well – just don’t forget about all the cheap goods people want that they could not get if they were made here. Many people do try to buy local or nationally made products and some are willing to pay a premium for that, but many are not able to pay the difference.

    I don’t like the throwaway economy where having a lot of cheap stuff is more important than having a few quality items but i recognize i am not the majority of people for example I don’t have fast growing kids that out grow clothes ever 4 months.

    The Economist did a special report on offshoring back in Jan ’13 – great reading and very balanced – I’d recommend reading it.

  5. Matt C says:

    Pixi – one other topic area you hint at is that of a living wage. MIT put together a tool that calculates what a living wage is in a city or town (http://livingwage.mit.edu/places/2501762535). In somerville a single parent of 2 has a living wage of $32.84/hr or 68k/yr and an individual would need about 13$/hr

    How would you recommend implementing a living wage? Would you focus on the individual or the family? Would you set a 13$ or 15$ min wage in the city? One thing that I have seen is a tiered minimum wage one for young people (teens) and one for older (adults). I think this is a smart approach myself. Anyone else have thoughts on this?

    I know the Earned Income Tax Credit is a program is a federal program designed to help low income families… maybe an expansion of this program is a benefit or a higher minimum threshold on taxing…

  6. JPM says:

    Minimum wage has to be set federally or maybe state wide….with a weighting for big cities. A min wage in Somerville alone would be a disaster.

  7. Pixie Pocahontas says:

    Let’s cut to the chase, Matt. I propose that we abolish capitalism and institute the same form of government as Sweden where there is virtually no crime or poverty. I frankly could care less about any studies you list for reading since most are written by the same people who implement slave labor in the US and other colonized nations, England has been notorious for doing over the last centuries and longer.

    Outsourcing has been created so corporations can continue to make billions while they shut down factories and companies millions of Americans have relied on. With many left without an education to compete for alternate work options, they are left to fend for themselves. What do YOU propose THEY do to survive?

    Harvard Business School is responsible for creating such ventures which fractured an entire nation of working people. Most belong behind bars, especially those who created derivatives and credit default swaps, predatory lending which is the direct result before us today, too many people who made too much money the wrong way so they can continue to impoverish millions more. How you claim this is all a good thing, I have no clue and please refrain from your attempts if trying to convince me otherwise. I have gained extensive knowledge by discussing this with financial experts who worked among the white collar criminals who were involved. Lucky for him, he got out early when he knew what they were doing. He is a better man today and would not go along, that’s why he left. So I guess you believe corporate raiders like Mitt Romney are heros.

  8. Pixie Pocahontas says:

    By the way, until we have a fair education for all, we will never provide equal opportunities to all our children. Very few can succeed in life without it. Socioeconomic barriers prevent them from gaining same opportunities laid out to the rich. Unless we fix that problem we will continue on the same crooked path. I grew up poor, but I took classes as an employee at an Ivy League school so I know how much harder working class kids work to become successful. There are a great deal of disadvantages working class have but if trapped in a dangerous situation, which do you think I would choose to help get me our of a tough situation? We don’t jump out of windows or cry to our lawyers, we dig in and learn to survive. That is the difference.

  9. Matt C says:

    JPM – I am in full agreement with you. I don’t know if they would work at the state level either – at least for non-local services because in those jobs someone would relocate to a lower cost area. I think that the solution is a moderate increase in the wage and a significant change in the tax code.

  10. Matt C says:

    Pixi – There was no attempt to attack you – it was an attempt to have a constructive conversation.

    Its really quite difficult to compare sweden and the US. Scale, scope, demographics, history etc are all wildly different. My guess what you are focusing on is distribution of wealth and services. I agree I would far prefer to see a similar distribution of wealth in the US, increased support for higher education as well as health care.

    To make this kind of change it would require not just higher taxes but a complete realignment of government priorities. Our military would be decimated and our role in geopolitics from this “hard” power would change dramatically and our “soft” power would be based on our markets (ability to consume or create goods). The way we look at healthcare would also change… significantly – we would all have to gain a deep and profound respect for death and dying and realize that it is okay to die rather than the abject fear of death and physical decline we currently have as healthcare would focus on prevention and likely outcomes rather than perfection.

    Even with these kinds of changes it would take decades to see similar levels of income inequality in the US as there is in Sweden if ever. Now the question is are we as a society willing to make those changes? and the answer is probably different than the answer to the question should we…

  11. Matt C says:

    As I said in my first post outsourcing and offshoring have had huge effects on our economy. There are two ways we can affect it – one is to stop it altogether (trade barriers and the such) the other is to be the best at doing specific things such that the benefit of producing locally is the best choice. Now what happens to those that lost their job – I don’t have a good answer.

    The way that a consumer to make a difference is to tell corporations that you want locally sourced and produced goods and then be willing to pay for them, because they will be more expensive.

    Regarding the financial industry and crises… I said nothing about it and nor did the article.

  12. Matt,

    The financial crisis is responsible for the great class divide before us today, worse now than it ever was, and sinking the middle class into abject poverty– so it is relevant. What planet do you live on?

    Hello–the title of this article is “Economic Forces”. You are so hopelessly uninformed about how they got us into this mess. I think you should try to enlist someone from the Globe or the AG’s office to take you up to speed. Why do you suppose 20 million homeowners lost their homes? After all that has come out in the media, I thought you could do better, seriously, you consider yourself up on current events. So where have you been over the past 10 years? In hiding with the rest of the Libertarians?

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