Chapter 11

 

POLARIZING INCOME AND WEALTH

 

 

The growth in inequality in the United States is a pervasive phenomenon.  Sometimes you hear about it in terms of the super-rich.  Sometimes you hear about it in terms of the underclass, but neither of these is the real story.  The story is the widening of the income differentials across the spectrum... It's a spreading out of the entire distribution.

 

                                                                   Kevin Murphy, Professor,

                                                                   University of Chicago     

 

         

In the literature written by economists most known for their support of a free market, they acknowledge the growing polarization of income and wealth in the United States.  One would expect this from commentators on the left, but for the most part even loyal proponents of the market economy join them in perceiving a growing class separation.  The points agreed to are:

          · that in the United States a long-term decline has occurred in the real wages of the bottom half of the population;

          · that this is what economic theory would predict under the conditions of the world market;

          · that open trade with and immigration from low-wage countries will bring down the remuneration going to employees in the advanced economies;

          · that an income gap exists and is widening.

                   Milton Friedman, the much-beloved free-market proponent and a Nobel prize winner, pointed out as long ago as 1995 that "the decline in the relative wage of low-skilled workers in the United States… started several decades ago.”[1]  UCLA economist William R. Allen, quoted earlier, recognized in 1997 that the “decline in growth in real wages” had been happening over much of the preceding 25 years.[2]  Hans Sennholz of the Foundation for Economic Education described the situation strongly when in 1996 he wrote that "no matter how you may gather the data, the gap between the most affluent Americans and everyone else is widening… While real hourly wages have fallen since the mid-1970s and many high-paying jobs in manufacturing have disappeared, stock market investors have reaped extraordinary profits.  The lion's share of these profits obviously went to the top 20 percent of households."[3]

          "What we are looking at in every country," Rifkin says, "is the creation of a two-tiered society – the haves and the have-nots.  The top 20%, the knowledge workers, are growing increasingly affluent... They are a new cosmopolitan elite.  The bottom 80% of the work force are the blue- and white-collar workers – the core of the middle class – who are becoming increasingly marginalized.  They see their wages declining as productivity rises."[4]  A United Nations report in 1999 told how the world's 200 wealthiest individuals "have more money than the combined income of the lowest 40 percent of the world's population, or about 2.4 billion people."[5] 

          In The Bell Curve, Charles Murray and Richard Herrnstein expressed concern about the rise of a "cognitive elite" at one end of society and a menacing underclass at the other.  "Our thesis is that it used to be easier for people who are low in ability to find a valued place than it is now... [W]ith technological advances, the niches for the less intelligent have shrunk... From their high point in 1973, the median earnings of full-time workers in general nonfarm labor had fallen by 36 percent by 1990."[6]

          It is always helpful to read reports with a critical eye.  Before the economic crisis that hit in late 2008, a headline proclaimed that the "economic boom lowers poverty rates," and the article under it started by telling of "three straight years of growth in the annual median household income."  But then, despite the favorable promotion given by the headline and the beginning of the article, the piece concluded by saying that "the statistics show that upper-income households have clearly fared better than their lower-income counterparts... ‘The rich are getting richer and the poor are getting a little bit richer,' said Daniel Weinberg, head of the Census Bureau's division of housing and household statistics."[7]              

 

Incomes at the high end of American society are rising rapidly.  These areas have done especially well:

          ·  Growth of corporate profits relative to worker income.  A news report in 1996 said that "it was the fourth straight year of strong profit gains among companies ranked in Fortune's annual listing... The surge in profits was far greater than worker income gains."[8]  (It would be foolish to think, however, that high corporate profits can be taken for granted, since firms are by no means immune from competition and the vicissitudes of the economy.)  [9]

          ·  Investors' return on capital.  The Economist says that "most of the extra income generated by [information technology] and globalization is going straight to the owners of capital."[10]  Economist Frederick Strobel speaks in terms of people whose incomes are "capital-enhanced" as distinguished from those who are "labor-dependent," and says the former are gradually gaining ascendancy over the latter.[11] 

          That the profits from the world economy are going to equity owners and the holders of debt provides the basis for (and need for) a possible "shared market economy" such as we outlined in Chapter 3.   If the desire is to continue the vigor of a market system and at the same time overcome the crisis of polarization, a wide dispersal of the ownership of capital is essential.  It is in this context that it matters greatly how much of the world's capital assets a country's citizens own.  Economists often minimize the impact of foreign ownership of American income-producing assets,[12] but the net ownership by a country's own citizens of such assets both domestically and abroad is critically important if income-flow from capital is in the future to play a primary role.  To the citizens of a given country, it will make a considerable difference to whom the income flows.

          ·  Those who inherit.  As we fly over a continent such as North America, it is good to remind ourselves that everything beneath the airplane is, in its replenished form as some of it wears out or becomes obsolete, in the process of passing from one generation to another within a very few years.  As ownership of income-producing property becomes the preeminent source of income, one of the segments of society that will do especially well will be the inheritors of that property.

          ·  Executives' compensation.  Polarization is nowhere more evident than in the growing spread between executives' compensation and the wages paid to employees. It is worth noticing the widening gap over time:  Kevin Phillips told how "by 1990 corporate chief executives, whose 1980 compensation had been 30 to 40 times higher than that of their average worker, were being paid sums 130 to 140 times greater."[13]  But a news report in 1997 indicated that even that spread had widened: "The average CEO made 209 times the pay of factory workers in 1996.  That's way up from 1980, when CEO's made 42 times as much as factory workers.”[14]   A report by Lawrence Mishel on the Economic Policy Institute web site in 2009 tells of the continued multiplication, and gives some detail about the ups and downs in the ratio:

          In 2005, the average CEO in the United States earned 262 times the pay of the average worker…  In 2005, a CEO earned more in one workday (there are 260 in a year) than an average worker earned in 52 weeks.

          The ratio surged in the late 1990s and hit 300 at the end of the recovery in 2000. The fall in the stock market reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 143 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the average CEO was paid $10,982,000 a year, or 262 times that of an average worker ($41,861).[15]

          Counter-intuitively, executive compensation isn’t necessarily pegged to performance.  Business Week said in 1990 that the salary of the CEO of ITT doubled to $11.4 million even though the company's share price fell by 20 percent and its income from operations by 30 percent.[16]  In 1996 Business Week told how "the CEOs of the 20 companies with the largest announced layoffs last year saw their salaries and bonuses jump by 25%, well above the average.  Add the value of new stock-option packages...."[17]  Many of the top corporate officers have golden parachutes designed to pay them handsomely if things don't go well.  The American public was scandalized in 2008 by the amount of executive compensation in firms that were integrally involved in the economic debacle and even in firms that were receiving billions of dollars of “bailout” money from the government.

          It is noteworthy that so staunch a free-market economist as Murray Weidenbaum has found discomfiting "the unfortunate coincidence between the rising uncertainty and belt-tightening that is facing most corporate employees and the increasingly generous compensation packages and the security in the form of ‘golden parachutes' that are granted to the most senior executives."[18] 

          Those who see great danger to a free society in rising class envy will have to ponder these facts.  No doubt demagogues will arise to take advantage of class envy as it grows, but the polarity should also be the concern of serious thinkers whose concern is not founded in opportunism. 

          ·  The "winner-take-all" phenomenon in mass markets.  Vast fortunes are earned by individuals and firms who "hit it right" in the mass global market.  Michael Jackson, Madonna, George Foreman (who at one point topped $100 million in earnings from his boxing career), and even the people who thought up "Beanie Babies" or, a while back, "Cabbage Patch dolls" or, earlier yet, "pet rocks," earn fabulous sums.  The reason for it is well-stated in Robert Frank and Philip Cook's book The Winner-Take-All Society.  In a mass market "small increments of talent have great value, and may be greatly rewarded as a result of the normal competitive market process.  This insight lies at the core of our alternative explanation of growing earnings inequality."  What has happened is that "the salaries of top performers have grown explosively even as most people have struggled to hold their own."  They quote "Rabo Karabekian, the protagonist of Kurt Vonnegut's novel Bluebeard," who explains: "Simply moderate giftedness has been made worthless... Modern communications has [sic] put him or her into daily competition with nothing but the world's champions... The entire planet can get along nicely now with maybe a dozen champion performers in each area of human giftedness."[19]

          People will continue to enjoy such things as melodramas performed by local talent, or their own city's symphony orchestra even though they could stay home and listen to the London Philharmonic.  But the shift will grow as the world becomes more and more "electronically wired" (an expression that is apt but that will itself become figurative as wires become relics of the past).

                                                    

Many people’s income has suffered either stagnation or decline.  The devotedly pro-free market Foundation for Economic Education's Hans Sennholz acknowledged in 1996 that "no matter how you may gather the data, the gap between the most affluent Americans and everyone else is widening.[20]  The liberal Center on Budget and Policy Priorities agreed: in 1999 it reported that the top 1 percent of Americans was becoming extremely wealthy, the top 5 percent somewhat wealthy, with the result that the top 2.7 million Americans (the top 1 percent) had as many after-tax dollars to spend as the bottom 100 million.[21]

          Earlier, we quoted Richard Freeman's article in the Harvard Business Review.  It shows how long the growth of wage polarity has been underway for him to have said in 1996 that "in the past two decades, the country's normal high level of inequality, except in the category of gender, has jumped: Pay in the upper part of the earnings distribution has risen in comparison with pay in the lower part.  College graduates have gained in comparison with high school graduates or dropouts.  Older workers have gained in comparison with younger workers.  Professionals and executives have gained in comparison with clerical workers, machine operators, and laborers... These changes have occurred despite huge gains in employment... [T]he rising tide of inequality has been accompanied by stagnant real wages."[22]  

          The growing dependence by families on two incomes that we commented on earlier has masked this stagnation, allowing their standard of living to remain relatively unaffected. Katherine Newman has said that "the wholesale entry of women into the labor market is practically the only thing that kept the average middle-class family afloat.  With men's wages stagnating and the cost of living rising, it was women to the rescue."[23]  Kevin Kearns of the U.S. Business and Industrial Council says "the social impact on the United States has been widespread and often devastating.  A single wage earner has been unable to support a family for some years now.  To try to keep families afloat, millions of wives have joined the work force... The stress on individuals, marriages, children, schools, and communities is not something that economists measure... Our social cohesion has suffered greatly...."[24]           

           

The polarity is a global, not just a U.S., problem.  An example is Germany, about which an article in The Economist in May 2009 says: “Almost monolithically middle class until the 1980s, German society has grown more unequal today.”

          Looking ahead to the new century, Paul Kennedy wrote that “after nearly five decades of unprecedented global economic growth, the world heads toward the twenty-first century with more than a billion people living in poverty [his emphasis] – an awful enough figure until one realizes that those people are [defined as] people ‘struggling to survive on less than $370 a year,' not the billions... who live in countries like Botswana or Guatemala where the per capita GDP is a relatively satisfactory $750 or a comfortable $1,000 each year – levels that would horrify inhabitants of the ‘First' World."[25]

          These numbers will grow even worse as information-age technology's displacement of work more and more hits the peoples of the less developed countries.  Harald Malmgren says "in the new technological environment, the traditional reliance of some nations on natural resources may turn into an economic nightmare."[26]  The poverty levels represent untold tragedy for the people directly involved.  For the developed world, those levels create a threat of mass immigration, amounting to a demographic invasion that challenges the very existence of the developed societies. 

          Moreover, the dangers posed by terrorism and nuclear, biological and chemical weapons will multiply if billions of people are desperate.            

 

As income is polarized, so too is wealth.  As one would expect, unless there are offsetting factors, vastly unequal income will result in vastly unequal wealth.  (Surprisingly, there has not been much discussion of the effects, now and prospective, of this on society.  Billions of dollars have been made in drug trafficking, for example.  What are the sociological and political effects?  Will that wealth become the "old money" of the next generation, with its holders becoming the social and political leaders of their time?  Similar questions can be asked just as well about the wealth accumulated through the enormous lawfully-earned incomes.)  Will a rigid class (or "caste") system develop, perhaps headed by a worldwide elite?  And will it be an elite that sees itself as not particularly identifying with any one country?  (We see such an elite already.  But what we see today may be nothing compared to what will exist tomorrow.)

          Retirement stock funds became the public's most significant asset before the catastrophic fall of the stock market that greatly reduced the value of such savings, but surprisingly most Americans didn’t have them even then.  Economist Robert Kuttner traced the growth of stock holdings between 1983 and 1992, seeing a near-doubling.  But he observed that "most of these holdings were small potatoes.  The top 5% of all households owned fully 77% of equity holdings, including individual shares, defined-contribution pension funds, IRAs, Keoghs, 401(k)s and the like, and mutual funds... The bottom 80%... owned just 1.8% of the total value."[27] 

          This polarity is explained in part by the tax law’s selective treatment that has favored some and not others.  Before I retired as a professor, the tax law allowed college professors to put 17 percent of their income into tax-deferred retirement investments. I long assumed that everyone else is given the same opportunity, but they weren’t.  Legislative decisions about taxes in the United States have been divorced from equal treatment in establishing such perquisites. 

 

Little in the world is left unchanged by the forces at work.  Here are some additional areas of impact the literature discusses:

          ·  Changing values and lifestyles.  In 1970 Alvin Toffler looked ahead to "rising affluence and transience," which he said will "ruthlessly undercut the old urge to possess."  In place of possessions, "consumers begin to collect experiences as consciously and passionately as they once collected things."  What did he speculate the effects might be?  "Serial marriage – a pattern of successive temporary marriages – is cut to order for the Age of Transience."  He predicted a cornucopia of choice; few roots, but many niches; a shattering of consensus, without a new one forming; and the rise of many subcults.[28]  

          Counter-effects can also occur, depending more on the human spirit than on simple extrapolation.  In a world where everything is transitory, people may yearn for constancy and develop cultures and ways of living to achieve it. 

          The impact on lifestyles suggests that inward-looking cultures, no longer able to maintain effective isolation, will be under constant existential challenge.  Greider tells how in Malaysia "the government would like to maintain Islamic principles and protect people from Western values, but whether the government likes it or not, the people are becoming westernized."  The new technology has drawn young women out of village life, for example, and into work where they receive small incomes of their own.  The women are "starting out... on a complicated journey of self-discovery that [will be] utterly different from the traditional past."[29] 

          Ancient philosophers were convinced that affluence breeds moral decay, and there is little in current experience to persuade us otherwise.  A complex set of factors, of which affluence is just one, today break down the social cements that have held societies together and have channelized behavior.  Not long ago, a news report out of Copenhagen said that "armed biker gangs are locked in a loud and bloody war spreading across Scandinavia... The bikers' weapons of choice are not six-shooters.  They are automatic weapons and rocket-propelled antitank grenades... Indigenous clubs of Hell's Angel's and Bandidos, organized as overseas chapters of motorcycle gangs in the United States, fight for honor, revenge and territory in the drug trade... Contrary to popular image, these... are not beer-bellied dissolutes... They are well-groomed, fancying neat Bruce Springsteen-style beards and fragrant after-shave lotion."[30]

          Alfred Balk asks "What is wrong?" and answers that "in a preoccupation with pleasure, acquisitiveness, and individual or special-interest rights, we have lost a sense of community, history, and shared obligations... It is an age of discontinuity...."[31]  When today people wonder  how it is that so many corporate executives no longer feel loyalty to anyone but themselves, they would do well to see the executives’ unattached psychology as part of a much larger social phenomenon.

          Given the polarization of wealth, the rise of an elite and the crumbling of social cements, something is occurring that is eerily reminiscent of what happened as the western world passed from classical into medieval civilization: enclaves of civilization are becoming housed in wall-off communities, as wealthy neighborhoods are protected by security systems and guard houses.  As understandable as such withdrawal is, there is perhaps nothing so symbolic of the polarization.

         

                                                    

ENDNOTES

 



[1].  Milton Friedman, National Review, November 27, 1995, p. 59.

[2].  Allen, The Midnight Economist, 3rd edition, p. 140.

[3]. Hans Sennholz, "Growing Income Disparity," The Freeman, September 1996, center section called "Notes From FEE."

4. "An Interview with Jeremy Rifkin," Phi Delta Kappan, May 1996.

[5]. The Wichita Eagle, July 27, 1999, column by Marilyn Geewax.

[6]. Richard J. Herrnstein and Charles Murray, The Bell Curve (New York: The Free Press, 1994), pp. 536, 538.

[7]. The Wichita Eagle, September 25, 1998, report by Eagle Washington Bureau.

[8]. The Wichita Eagle, April 8, 1997, item "Earnings Up at Fortune 500 Companies."

[9]. William Greider, One World, Ready or Not (New York: Simon & Schuster, 1997), p. 183.

[10]. "Survey of the World Economy," The Economist,  September 28, 1996, p.        28.

[11]. Frederick R. Strobel, Upward Dreams, Downward Mobility (Lanham, MD: Rowman & Littlefield Publishers,        Inc., 1993), p. 105.

[12]. See William R. Allen, The Midnight Economist (San Francisco: ICS Press, 1989), p. 316; and Allen, The Midnight Economist, 3rd edition (Sun Lakes, AZ: Thomas Horton and Daughters, 1997), pp. 291, 293.

[13].Phillips, Boiling Point, p. xxii.

[14]. The Wichita Eagle, August 30, 1999.

12. The Mishel report appeared at www.epi.org

[16]. Business Week, May 30, 1994, p. 102.

[17]. Business Week, April 22, 1996, p. 103.

15. Murray Weidenbaum, “Outline of a New Social Contract,” Challenge, January/February 1995. 

[19]. Robert H. Frank and Philip J. Cook, The Winner-Take-All Society (New York: The Free Press, 1995), pp. 91, vii, 1, 2.

[20]. Hans Sennholz, "Growing Income Disparity," The Freeman, September 1996, center section called "Notes from FEE."

[21]. The Wichita Eagle, September 5, 1999, report by the New York Times News Service.

[22]. Richard B. Freeman, "Toward an Apartheid Economy?," Harvard Business Review, September-October 1996, p. 115.

20. Katherine S. Newman, Declining Fortunes: The Withering of the American Dream (New York: Basic Books, 1993), p. 51.

[24]. Kevin L. Kearns, testimony before the House Committee on International Policy and Trade, October 25, 1995, p. 3.

[25]. Paul Kennedy, Preparing for the Twenty-First Century (New York: Random House, 1993), p. 49.

[26]. Harald B. Malmgren, "Technology and the Economy," in William E. Brock and Robert D. Hormats, ed.s, The Global Economy (New York: W. W. Norton & Company, 1990), p. 111.

[27]. Robert Kuttner, "Soaring Stocks: Are Only the Rich Getting Richer?," Business Week, April 22, 1996, p. 28.

[28]. Alvin Toffler, Future Shock (New York: Random House, 1970), pp. 200, 223, 250, 263, 269, 283.

[29]. Greider, One World, Ready or Not, p. 99.

[30]. The Wichita Eagle, March 2, 1997, report by Los Angeles Times/Washington Post Service.

[31]. Alfred Balk, The Myth of American Eclipse (New Brunswick: Transaction Publishers, 1990), p. 118.