Will Americans get to like it in the Third World?

Today, with traditional media losing their advertising support to the Internet, there are fewer reporters to look for news that oozes. Maybe that’s why a really big trend has gone unnoticed, one that might explain much of the political unrest we’re seeing today. It is the shift in the income distribution of the United States to a pattern very much like that of the third world.

 

We’ve always had more income inequality than our peers in the developed world, and we considered it a good thing, because it was accompanied by opportunity. But that case is no longer so clear.

 

An early warning of the current situation appeared in Harvard Business Review back in 1996. The economist Richard B. Freeman cautioned that we might be headed for “an apartheid economy.”

 

A decline in the real earnings of our lower paid workers can “breed antagonism between groups as well as general social instability,” he said.  “. . . When my earnings are falling despite my hardest efforts, whom shall I blame? If year after year, you are getting wealthier and I am getting poorer, who knows what demagoguery might appeal to me?”

Was he predicting the Tea Party? Well, since Freeman uttered that warning, income inequality has gotten worse. Much worse.

By 2007, inequality was the highest in 95 years, with 49.7 percent of all income going to the richest 10 percent, according to Emmanuel Saez of the Department of Economics at Berkeley.

 

Because it can have an effect on political stability, income inequality is one of the economic indicators tracked worldwide by the Central Intelligence Agency. Its current World Factbook puts the United States just inside the most unequal third among 184 nations, between Uruguay and Cameroon. Immediately below the USA and Cameroon in the rankings – that is more equal -- are Ivory Coast, Iran, Nigeria, Guyana, Nicaragua, and Cambodia.

There are several ways to measure income inequality. The CIA uses the Gini coefficient, a number from 0 to 100 where 0 would mean that everyone in the country has exactly the same income and 100 means that one household has it all while everyone else has none.

 

Gini for the USA when the CIA list was posted was 45, which put us close to Mexico at 48.2 and far from our politically stable neighbor, Canada with 32.1. The most income-equal among the CIA-tracked nations is Sweden with a Gini of 23. The most unequal is Nambia, 70.7.

 

Professor Saez and his colleague Thomas Piketty have measured inequality in a more intuitive way by using income tax reports since 1913 and tracking the proportion of income going to the top 10 percent. That group’s share first got close to 50 percent in 1928, at the peak of the stock market bubble.

 

The New Deal produced some leveling as President Franklin D. Roosevelt succeeded in turning populist anger against bankers and Wall Street. But the greater effect came with the steeply progressive income tax that paid for World War II . The war also put everybody to work, and afterward labor unions were strong. From the World War II years through the 1970s, the top decile’s share of all income stabilized around 33 percent.

 

That began to change with Ronald Reagan as the tax system put a greater relative burden on the poor and middle class by making income tax rates flatter and sharply cutting the capital gains tax.

 

Up until the 1970s, the highest incomes were heavily based on investments, according to Saez. Then there came “an explosion of top wages and salaries” so that instead of people living on past wealth, those at the top became “the working rich.” Many of them are corporate CEOs with friendly boards and pliable compensation committees.

 

Another California professor, G. William Domhoff of Santa Cruz, looks at the increasing concentration of wealth rather than income. By 2007, he reported, only 20 percent of the people owned 85 percent of the wealth in the United States.  When he looked at pure financial wealth (leaving out the value of your home), the top 20 percent had a 93 percent share, leaving only seven percent for the rest of us.

 

This trend is worth tracking, Domhoff says, because wealth and power are closely related. One reinforces the other. “It’s tough,” he says, “for the bottom 80 percent – maybe even the bottom 90 percent – to get organized and exercise much power.”

 

Could this be what the Tea Party folks are about – expressing frustration over their relative powerlessness? If so, they are likely to find some surprises. When the wealthy use their money to control the flow of political information, both parties end up beholden to the same power centers at the top of the pyramid.  And we’re trapped in our bad economy, says Robert Reich writing in The Nation, because with all the money at the top, the rest don’t have enough purchasing power to get the country moving again.

 

Throwing the rascals out, as the Tea Partiers seem wont to do, could just produce a different set of rascals. Meanwhile, populist energy is channeled to make the grip of the powerful even tighter. Absent a World War II-level shock, we’re stuck.

 

Our elected officials won’t tell us, so it’s up to the news media. Why are we so passive?