Tuesday, November 25, 2014

America the Unequal

PARK CITY, UTAH – The last documentary film that used dry charts and statistics to make an abstract argument about a global issue and nonetheless became a pop-culture hit was Al Gore’s An Inconvenient Truth. But the hit of this year’s Sundance Film Festival was a low-key affair called Inequality for All, in which Robert Reich, a labor secretary in the Clinton administration, explains how rising income inequality and the demise of the middle class is causing so many Americans to suffer.

With President Barack Obama recently taking up some of these themes in his second inaugural address, it is worthwhile to examine the message of Inequality for All more closely. The film’s charts are not boring, but actual showstoppers: Reich makes the point that the mid-1940’s to the mid-1970’s were decades of relative income equality, which corresponded with overall affluence. (The last time that income inequality in the United States was as deep as it is now was immediately before the 1929 stock-market crash.)

But the last 20 years have witnessed a spike in the difference between the top earners and the middle class: the “1%” really are living in a stratospheric bubble. As the journalist Chrystia Freeland has recently argued, a meta-class of global “plutocrats” is emerging – people who have little in common with the rest of us.

Inequality for All makes the case that the wealthiest 1% simply cannot consume enough, no matter how hard they try, to generate the revenue that an affluent middle class could. The secret to a strong economy is to invest in education, strengthen household incomes with a decent minimum wage and strong unions, and raise skill levels, thereby generating sustained consumer demand. This, Reich argues, is the “virtuous cycle” that we see in strong economies such as Germany, in which workers are highly skilled and educated, unions are protected, and the middle class has leisure and money to spend.

Reich also persuasively describes the “vicious circle” – with falling wages undermining consumer demand and leading, in turn, to shrinking output – that has made the US economy fragile and boosted social instability. He analyzes a middle class that is skating on the thinnest of ice, with employment coming at the price of lower wages and benefits. Moreover, millions of middle-class American homes are “underwater” (the mortgage is more than the home’s underlying value).

The film interviews one of the rich, a charming millionaire who owns a pillow company and points out that he and his fellow rich guys and their families simply cannot spend enough to offset the lost demand of a strong middle class. In fact, the richest save rather than spend their dollars, and send them around the globe in transnational hedge funds rather than using them to create more jobs at home.

So, the “trickle-down” story that the middle and working class are told every election cycle in America – that cutting wealthy people’s taxes means more job creation in America – is simply not true. Those wealthy people’s untaxed dollars stay in hedge funds and out of the revenue stream. The cost to social programs, infrastructure, and public schools intensifies stress on the middle class, who end up poorly educated, work long hours in dual-career ill-paid jobs, lack leisure time and money to spend, and so on.

Are we stuck with this vicious circle, which advocates of laissez-faire globalization have told us for 15 years is an inevitable consequence of the “invisible hand”? Or could Reich’s retro prescriptions, which he has affirmed for decades, be taken up again? Could they bring back the affluent years of the early Clinton era, when it seemed as if domestic policies could actually influence and even benefit the US economy?

I asked Reich what three policy prescriptions he would give to an American president and Congress today, especially drawing on the lessons of other countries. “I’d like to see what we did so successfully in the first three decades after World War II, when prosperity was widely shared.” That means large investments in public education, including higher education; substantial investments in infrastructure, funded by a highly progressive tax whose top marginal effective rate never fell below 50%; and strong labor unions.

“Anyone who thinks these policies are no longer feasible in a global economy,” Reich told me, “hasn’t looked at modern Germany, which features all of them, and where the median wage is higher than ours.”

It sounded great – but it also seemed to contradict the conventional wisdom, according to which cut-rate labor in Pakistan or Mexico is the inescapable death knell for $25-an-hour union jobs, with benefits, in Detroit.

“How do you keep US labor unions strong if Mexico, for example, undercuts US hourly wages,” I asked. Reich replied in more detail: “Strengthen labor unions in industries sheltered from global competition – workers in retail chains, hotel chains, restaurant chains; childcare and elder-care; hospital workers; and so on. Attract manufacturing and manufacturing engineering back to the US by improving the skills and productivity of US workers (as Germany has done for German workers). And encourage trading partners to improve their own wages and labor standards (for example, by requiring in all trade treaties that a country’s minimum wage be half its median wage).”

Is this agenda feasible in America today? To be sure, one would have to mend the broken political system first. But, looking at the affluent German middle class from the US, where a quarter of jobs pay wages that place workers at or below the poverty line, Reich’s recommendations seem worth fighting for.

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    1. CommentedWaleed Addas

      One should not worry too much on the state of the economy or the vicious conditions of the circular flow of income. Life is much bigger than the economy.

      The problem is that people in the modern era have been made to think that the economy is all that matters in life and as such this has shaped our social status and relations.

      I believe we are here for a much higher ideal than "making money". To know and be thankful is the ultimate end.

      The world is so complex, it is indeed beyond our own making or even our control. But we have been so 'good' in corrupting it!

      Laissez-faire is fair when governments are bad and is foul when government are fair!

      Food for thought!

    2. CommentedNathan Coppedge

      One might expect counter-intuitive arguments in response to this one, along the lines of the mantra I believe to date to the '90s, having to do with 'being more creative'. While this creativity might not exist for upper-middle class business owners (if there are any left), it might certainly exist for government or genuine high-class corporations.

      If the only approach that remains by the standards of the world is a top-down, solve-by-agenda approach, then that's what people have to do. I don't think it's a matter necessarily of charity or even always allocating budget resources. Sometimes it's just about the baseline of 'what people do'. This is in line with what Naomi Wolf says about German middle-class wages. Some of the benefits are not charity or work, but policy decisions implemented by government. While it may look hard, it may seem easy when the conditions are right for it to happen.

      What I have been pressing for on Project Syndicate is more integration with leisure categories of production, such as information-sourcing and crowd-sourcing, which can then be used as a secondary, virtual economy. When the virtual economy is provided baseline resources, it can live luxuriously on the largess of the real, capital industry.

      In the United States, some of the lower classes, for example those on Social Security, may live relatively luxurious lives, in spite of lacking such amenities as auto-vehicles and life insurance, they may have an option for adequate nutrition. The goal should be for these people also to receive adequate education or special programming.

      I see all of these subtle goals as intricately related and, judging by the 'existence' of the economy, implementable.

    3. CommentedFrank O'Callaghan

      The decision is about how we distribute the proceeds of production. The concentration of wealth in a tiny minority has happened in every unstable societies and generally ends in a catastrophe.

      Stable societies are more equal and generally do not plunge in to disaster.

    4. CommentedZsolt Hermann

      There is no simple solution and the problem is not American.
      It is most obvious in the US because that country applied the "free market, profit oriented, over-consumption" economic model most freely, extensively as the American Dream.
      But for example Germany are not the "good guys". They simply "outsourced" their inequality within the Eurozone to the small countries carrying the burden of German success with very obvious results.
      It is not nations, politicians, parties, governments, or industries that are wrong, but the whole system.
      The inequality is necessary and finally self-destructive consequence of the present socio-economic system regardless if it is applied the American, German or even the Chinese way, it will lead to the same result anywhere.
      We cannot cheat the natural system, natural laws among we exist.
      We have to build a new system without hysterically and artificially (with brainwashing marketing) inflated desires, producing and consuming unnecessary and mostly harmful products for extra profit.
      We need an economy that caters for normal, modern, human desires within available resources, a reward and distribution system fairly rewarding everybody according to their contribution to the whole, which still allows the existence of millionaires, billionaires provided they worked for it and do everything in a transparent manner, and we need governing systems that understand and practically use the idea of a global, interconnected world where everybody depends on everybody else.

    5. CommentedShane Beck

      The key point of this system of plutocracy is globalization. Globalization permits outsourcing and offshoring of jobs, keeping union militancy at a minimum and keeping the middle class and lower classes in survival mode where job insecurity and casualization is the norm.
      The second point is that US corporations are structured for short term gains, usually at the expense of the US taxpayer, Savings and Loans bailouts, Enron, GFC bailouts etc. Germany has a different cultural background which may be impossible to replicate in the US even without its short-term approach.

        CommentedKen Presting

        I'm also against plutocracy, but I would say on balance globalization will prove to have been a great benefit to the world. The costs in human suffering have been terrible, but for that I blame individuals, not the process itself.

        If globalization of trade and industry had been accompanied by international labor organizing, we would never have seen the horrifying abuses of so many working people. And the US itself has been among the most negative actors in global environmental action.

        I'd have to agree there is a global plutocracy, but that could not survive is the USA were not a victim of that disease itself. In the Security Council, at climate talks, in human rights commissions, the USA has been a reactionary force for 40 years.

        In other words, the whole world is waiting for the USA to get money out of our politics. Project-Syndicate advances that process by enabling us to inform each other instead of depending on centralized media.

        But the other essential element is organizing. Capital naturally organizes itself by well-known means, going back to Renaissance Holland and Venice. Organizing workers and voters is a much greater challenge, and the world is still waiting for organization of public will to find a reliable means of competing with private capital. Ms. Wolf and Mr. Reich are on the front lines of this fight.

    6. CommentedAyse Tezcan

      I agree with the fact that top 1% cannot sustain a healthy economy and taxing them more could not hurt neither their wealth or their ability to create jobs (which is a fairytale). However, I am not sure emphasizing the unions to this degree should be a part of looking forward. Yes, there are inequalities and some atrocities in work environment, but not to the degree of industrial revolution and its aftermath. Collective bargaining may provide some advantages, but ever-becoming individualistic societies such as ours in US, there might not be political will for unionization even in service industries mentioned here. I sense some new tools and approaches will be developed to accomodate the needs and wants of these new times to deal with labor market issues.
      I believe economic growth will happen again when public and private sector work together to develop groundbreaking innovations; for that we need to strengthen our higher education, attract creative minds and increase public investments in research again as Reich also states.

        CommentedKen Presting

        Labor unions are important for two reasons. First, they compete with each other and with management - they fit naturally into a capitalistic, decentralized market economy. Second, they can be democratic in a way which is infeasible for corporations. Workers can vote out individual leaders, or vote out the whole union.

        The essential issue in politics is corruption - individuals or factions diverting the resources of a group to their personal gain. Unions are one among many useful institutions, when they serve the interests of their members and not just their leaders.

        But that is the same problem faced by a corporation, when the management gives itself bonuses instead of paying dividends to shareholders. Or in a government when politicians cater to contributors.

        A society is stable when at every level, organized influence is matched by organizations representing the interests of stakeholders on the other side of policy. Unions serve that purpose for working people. Corporations serve that purpose for investors. We should be encouraging both.