Wednesday, December 4, 2013

Wealth Inequality in America

Recently a friend of mine posted the following video on Facebook. Normally I wouldn't bother too much with watching a video on wealth inequality - I've heard all the arguments ad infinitum from the Occupy Wall Street crowd - but I paid attention to this because my friend who posted it used to be the New Zealand head of a major American IT company and is about as far from an Occupy protestor as you could get. I watched the video and decided that it made a fair point - the United States has a very inequitable distribution of wealth - and I decided to write a blogpost about the subject, but not before I'd looked a bit further into the issues shown on the video.


Like many of the claims made by the Occupy movement, the facts of the matter aren't quite as straightforward as the video makes them out to be, as the following critique video makes clear.


In spite of the validity of the critique, I'm sure the overall point made in the first video is sound - America has become more unequal in the last few decades. The video also implies (but doesn't provide any statistics to support the implication) that economic mobility has been reduced. This is, I suspect, a bigger problem for America than increased inequality per se.

British journalist Jonathan Freedland, who was The Guardian's Washington correspondent for five years, revealed a remarkable statistic about America in his book, Bring Home the Revolution, that reveals the United States really is the land of opportunity: of all the people in the bottom fifth of the US income scale in 1975, only 5 percent were still there in 1991. In other words, within a decade and a half, 95% of America's poor were poor no more. What is more, one third of those bottom-fifth families had moved into the top half of incomes within a generation. Another statistic that supports this picture of economic mobility is that four out of five American millionaires made their wealth from scratch.  The figures in Britain are substantially the reverse.  This is what makes America what it has been - the land of opportunity. But Freeland concedes that by the time he published his book in 1998 the trend was slowing and I suspect that since then it has slowed further.

Personally, I think income inequality does not particularly matter so long as people have the opportunity to improve their lot. The natural state of human beings is abject poverty - subsistent living. The beauty of the free market is that it allows people to improve their situation by using their abilities to produce goods and services that they can trade with others who produce other goods and services, thereby improving the lot of everyone. Even the lowly labourer benefits because he can use his labour to produce higher value goods (e.g. assembling iPhones) and get greater rewards for his labour than he would get in subsistence work. But the system depends on 'churn', i.e. the ability of people to improve their lot - the labourer saves up and sets up a small business or funds himself through night school and uses his qualification to get a better-paying job. Contrary to what Socialists believe, it really does work and the statistics Freeland quotes in his book proves that it worked for the United States.

Why has it stopped working? Well, I think the answer is simple - capitalism has become crony capitalism. America today is a place where if you are big and powerful enough (i.e. "too big to fail"), the government will support you and bail you out when you make bad decisions. The big guys get the subsidies, the tax breaks and the preferential regulatory treatment, whereas smaller businesses and the middle class salary and wage earners get the regulations, the compliance costs and pay the bulk of tax. The system acts as a brake on economic mobility. When the big guys are protected from failure and the little guys prevented from succeeding, it is no surprise that there is little economic churn. The Occupy crowd blames capitalism, as if America still had some form of genuinely free market economy, but it does not. Capitalism is not to blame, it is government that has perverted the free market and created crony capitalism by allowing its favours to be bought and sold. It is only a return to free markets and government 'of the people for the people', rather than of and for the powerful, that will solve the problem of increasing inequality.

1 comment:

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