Ali’s blog

Mostly quant stuff with occasional digressions

Widening income inequality

Posted by alifinmath on March 20, 2008

This is an old article (October 12, 2007) in the WSJ:

The richest Americans’ share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

Now mind: this is the WSJ — not some commie rag. And the reasons according to the WSJ:

Scholars attribute rising inequality to several factors, including technological change that favors those with more skills, and globalization and advances in communications that enlarge the rewards available to “superstar” performers whether in business, sports or entertainment.

But why just here in the USA, WSJ? After all, these same factors can also be found in Japan and the EU. Yet the average Japanese CEO earns only ten times what his average worker does, the German and the French about 20, and the American 500. Why this disparity? Why does the USA uniquely have an overclass along with an army of underpaid helots? Why is the WSJ neglecting mention of how the game is rigged, with state intervention a major culprit?

Meanwhile, from the fount of all wisdom:

In an interview yesterday with The Wall Street Journal, President Bush said, “First of all, our society has had income inequality for a long time.”

But why has it steadily been getting worse from 1979 onwards, GWB? And in any case, should the USA not be converging to more civilised parts of the globe instead of moving closer to Brazil and Panama?

“Secondly, skills gaps yield income gaps.”

If that were the case, GWB, you’d be earning $8 an hour as a building janitor. Instead, as a member of an influential family, and as the anointed representative of a clique of moneyed interests out to hijack the mechanism of the state, you’re the president of the land of the free and the home of the brave.

“And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids.”

Why do you keep hurling these non sequiturs and red herrings in our path, GWB? In Finland and Norway, a large chunk of the population may not have university degrees but they still have a larger measure of job security, high real wages, and access to a panoply of state services such as health care, pensions, higher education, and child care. In the USA, in contrast, you can see college graduates working in coffee shops and bookstores. Even if an American earns an engineering or computing degree, there’s no guarantee of a job, or employment security (since so much has either been outsourced or in the process of moving offshore). And in any case, a college education — and particularly professional post-grad qualifications — is increasingly a rich man’s game, with the sharp increase in tuition fees ovber the last thirty years and the reduction in federal and state subsidies to universities and the decline in Pell grant funding. Indeed, the US system of higher education is one instrument by which the class system is perpetuated.






5 Responses to “Widening income inequality”

  1. Chris Prouty said

    “If that were the case, GWB, you’d be earning $8 an hour as a building janitor.”

    I think rodeo clowns can pull as much as $12/hr.

  2. Chris Prouty said

    As a matter of principle, answer a couple questions for me.

    Assume a scenario in which there are ten men, one of whom is qualified to earn a salary that places him above the poverty line. The rest, for whatever reason, are not capable of earning higher wages. Is it right to forcibly take assets away from the higher earner and grant them to the lower earners? When do you stop taking assets away? When they are all equal, or does the higher earner deserve a better quality of life?

    Now imagine a second scenario, in which all ten men are equally qualified and earn the same hourly dollar figure. Men 1-9 *choose* to work 5 hours a week, and therefore live below the poverty line. Man 10 *chooses* to work 80 hours a week, and lives in luxury. Is it right to confiscate Man 10’s assets to bring 1-9 above the poverty line, even though each man effectively chooses his own quality of life?

  3. alifinmath said

    I don’t subscribe necessarily to equality of outcome but I am a fervent believer in equality of opportunity — perhaps a guiding principle of the early American republic. I think many of the founding fathers were suspicious of inherited wealth passing from generation to generation and exercising a malignant impact on any form of democracy. But we don’t have equality of opportunity. Well, it didn’t exist in the US fifty years ago either but there was more of it. A college education was affordable; a single blue-collar salary was enough to buy a humble abode and raise a family. That’s all gone — largely because the rich have gotten richer at the expense of everyone else. And this hasn’t been done by “free market forces” but by a heavily rigged labor market, and the hijacking of state power to confer monopoly privileges, do away with a lot of progressive taxation, get rid of environmental regulations, weaken workplace safety regulations, do away with mandatory overtime, allow unfettered mobility of capital (so that entire factories can be transplanted abroad), and on and on the list goes. If the chairman of United Health can take home a $1bn cheque and has a whole department staffed just to deny legitimate claims, something is fundamentally wrong with the system. If the rich can afford an extra jet or yacht at the expense of the rest of living a bit more insecurely, a bit closer to the poverty line, again something is wrong. And even without these excesses, vast disparities in wealth and income are inimical to social cohesion: the poor end up living in slums and the rich in their guarded enclaves. This kind of predatory capitalism is at odds with any kind of democracy except the purely formal, rubber-stamping kind one sees in the contemporary USA.

    So my objections are twofold: first, it’s a rigged set-up that allows the rich to get richer at the expense of everyone else. And second, even if there were “free market forces” (which is a moot point, as capitalism and state power historically have co-evolved) that allowed for this kind of polarisation, there should be mitigating forces, if only for social cohesion. Does a Buffett really need an extra billion? Do the richest one percent or five percent really need a larger chunk than any other industrialised country? In other words we need to ask ourselves not only what standard of living we want individually or collectively but what kind of society we want to live in. Is there to be any sort of social contract between all of us collectively? Or is more along the lines of grab what you can and the devil take the hindmost?

  4. Anonym said

    Here is a gem of an interview from August with a University of Missouri economist wherein he predicts much of the current financial crisis to a T. Note: he misspeaks a couple of times during the hour-long interview, but it’s obvious from context what he means.

  5. Anonym said

    Note that he brings up troubling signals emanating from Bear Stearns (7 months ago.) Now contrast that with what the public hears from their pop-economics experts. I’m reminded of the scandal immediately after the tech-bubble burst where celebrity analysts were outed as having hyped certain stocks to the public, while privately telling their large clients to get the hell out. Of course, then Bush came into office and the investigation fizzled out and has since slipped down the memory hole.

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