Wednesday, March 2, 2011

Inequality in the United States

It always amazes me how inequality seems to be 'accepted' by Americans, almost as an essential part of an entrepreneurial or 'can-do' society - an ethos that supposedly drives American prosperity and global dominance. It should be harder to make these arguments in the States now, but this doesn't appear to be the case. Instead it appears that government is getting the blame for the crisis, rather than the real culprit a lack of effective regulation (i.e. government).

It was possible to believe in 2008 and 2009 that the financial crisis would shock Americans into doing something about inequality - the bailouts and then the quick return to obscene bonuses in the financial sector gave hope to those who saw the crisis as a possible catharsis on the road to a more equal society ...

Aaaah no ... what we got is a President who sees no option but to give into the plutocrats and cut government programs that benefit the poor. The real question here is whether Obama's pragmatism is a step on the path to better outcomes or a continuation of a rightward shift that seems to have as it logical conclusion an even more divided America that will make governing even more difficult in coming years.

One wonders whether the widely quoted critic of economic liberalism Karl Polanyi's words from his magnificent Great Transformation apply to the US:
Our thesis is that the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society … Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way.
Polanyi's basic view was that society's need to protect itself from the market was an inevitable reaction to market society. He believed that the world would transform itself in the aftermath of WWII. In a way he was correct, advanced capitalist countries did make changes to governance that extended wealth across societies, even in the US. But in another sense he was wrong as the advanced economies had another great transformation back to market societies.  The question for the US in the 2010s is what sort of political reaction - the measures society takes to protect itself - continuing inequality will induce in the US.

For what it's worth I'm not optimistic that the societal response will produce a more just society in  the US, one just has to consider the rise of Tea Partiers to realise that the reaction is more likely to be a right-wing one than a left-wing distributionalist one. But I have no doubt that unless the US does something about rising inequality then there will be a reaction and a likely target will be globalisation.

Globalisation - particularly open trade - provides an easy target for the disaffected. It's easy to point to China's rise as a manufacturing power and argue that the solution is to restrict Chinese imports, it's easy to blame China for American financial woes, as though it's China's fault for buying so much American debt and forcing Americans to invest unwisely and consume too much.

Whatever the outcome a good place to start is to familiarise yourself with the evidence. Just how unequal is the US? Looking at these stats on US inequality in nice graphic form makes you realise just how bad social outcomes have gotten in the US. 

Average Income by Family, distributed by income group.

This graphic above reveals the extent of inequality better than any I've seen. The wealth of the top 0.01 per cent is too big to show as a relative relationship on a graphic!!  This is income remember, which needs to be distinguished from wealth inequality below (income is a flow concept, wealth is a stock concept).

The richest controls 2/3 of America's net worth

Aevrage Household income before taxes.

This next one is particularly interesting because it shows what Americans actually think is happening with the distribution of wealth. Given that most (92 %) would prefer a more equal distribution, how does this square up with the seeming 'acceptance' of inequality. The problem probably lies more with arguments about the 'causes' and 'solutions' to the problem. Those on the right often think that poverty is individual in nature, while those on the left think that poverty is structural. The truth like many things probably lies in between - structure provides an environment where moving up the distributional ladder is more difficult (and vice versa). The fact that some people break out through sheer luck, skill and desperation doesn't negate the fact that it is extremely difficult in some societies to rise up the income and wealth ladder.

Average Income by Family, distributed by income group.

median net worth of american families, median net worth for mebers of congress, your odds of being a millionaire, member of congress's odds of being a millionaire

Now how did these members vote on extending the Bush Tax cuts for the rich? You guessed it they were in favour of it.

Wall Street seemingly on its knees after the financial crisis has returned to mega profit on the back of government support, meanwhile the unemployed suffer from cutbacks to government programs. Households were not bailed out of their decisions to buy houses. it seems if you're gonna make a financial mistake make it a big one, a very big one. Galbraith said years ago that the US provided socialism for the rich and capitalism for the poor.

Gains and Losses in 2007-2009, Average CEO Pay vs. Average Worker Pay

Tax rates for the rich have come down enormously since the end of WWII. And corporate tax has also declined significantly as a percentage of total taxation, while payroll taxes (effectively a tax on employment) have gone up.

A millionaire's atx rate, now and then. Share of Federal Tax revenue

This last one is my favourite because it shows the cost impact of the changes to policy from 1979 to 2005 compared to trends in previous decades.

Now some writers believe that the shift to greater inequality is an inevitable consequence of globalisation, that politics has been forced by economics to adjust in an inequitable direction. The belief that globalisation means that economics has usurped politics is wrong in two ways. Firstly, states and societies can make positive choices about the extent to which they engage with the world economy and the ways that that they distribute the benefits and costs of doing so. Secondly, politics can intervene in negative ways, whether as a result of unsustainable political choices in the first instance, or possibly as an outcome of sheer human or societal malevolence. Globalisation needs to be managed both domestically and internationally and a failure to deal with political problems will lead to economic problems.

The great powers mould the progress of economic interconnection but smaller states also contribute by influencing the larger states and by shaping the impact of globalisation on their societies. A more socially sustainable globalisation would entail spreading the benefits of growth and openness as widely as possible by redistributing wealth and compensating those adversely affected by the continual structural change necessary for adaptation to the world economy. While most countries might have to adjust to the world ‘as it is’, the choice of adjustment strategy is shaped but not determined by the world political economy. Varying responses and outcomes are always possible: both the progress of globalisation and adjustments to its opportunities and constraints involve political choices made by citizens and their governments.

The globalisation debate has been especially important in the Anglo economies. Globalisation has been the dominant story since the end of the Cold War and a predominant narrative about inevitability reinforced its progress. The rapid pace of globalisation since the 1970s has spread the impact of the recent financial and economic crisis across the globe, although politics and luck has meant that the impact of the crisis has varied across countries and, of course, within countries as the above graphics make clear.

There are three major questions for the trajectory of globalisation over the coming years and inequality will play an important role in working out what happens. Firstly, will the major states cooperate to regulate global capitalism, particularly global finance, more effectively? Secondly, will states develop policies that distribute the benefits of globalisation widely across their societies thus maintaining support for dynamic economic integration? And finally, will the developed world see the economic challenge from developing countries through liberal or realist eyes – as an opportunity or a threat? Globalisation as a foreign policy issue will become increasingly important because the major developing states will seek to play a larger role in structuring the rules and regulations of the world economy, while developed states seek to maintain their privileged position. But globalisation as a domestic issue will also become increasingly important as voters seek to blame outsiders for rising inequality rather than the real culprits - their fellow citizens and political system.

Ultimately, globalisation’s future will require domestic support in both liberal democracies and authoritarian regimes. This support will depend on globalisation producing more winners than losers or, at least, on the winners being able to convince the losers that they stand ultimately to benefit from short-term sacrifices to their welfare. Globalisation needs to be able to produce the goods – and the services. A liberal economic policy structure and support for globalisation is not set in stone.

As the next few years will show, the imposition of market-based regulation did not settle regulatory struggles for all time. The art of government will continue to involve trade-offs between economic and political pressures and domestic and international arenas. The possibility remains that coalitions against globalisation and economic liberalism will emerge and that some groups within nation-states will continue to be amenable to protectionist rhetoric and policies.

Thanks to David Schak for showing me the article from Mother Jones

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