sme ch11 polarization

8/2/2019 SME Ch11 Polarization

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Chapter 11

POLARIZING INCOME AND WEALTH

The growth in inequality in the United States is a pervasive phenomenon. Sometimes youhear 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, theyacknowledge 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 marketeconomy 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 bottomhalf 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 theremuneration 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 UnitedStates 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 thesituation strongly when in 1996 he wrote that "no matter how you may gather the data, the gapbetween the most affluent Americans and everyone else is widening While real hourly wages havefallen since the mid-1970s and many high-paying jobs in manufacturing have disappeared, stockmarket investors have reaped extraordinary profits. The lion's share of these profits obviously went tothe 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 increasinglyaffluent... They are a new cosmopolitan elite. The bottom 80% of the work force are the blue- andwhite-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 theworld's 200 wealthiest individuals "have more money than the combined income of the lowest 40percent 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 ofa "cognitive elite" at one end of society and a menacing underclass at the other. "Our thesis is that it


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used to be easier for people who are low in ability to find a valued place than it is now... [W]ithtechnological 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 inlate 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." Butthen, despite the favorable promotion given by the headline and the beginning of the article, the piececoncluded by saying that "the statistics show that upper-income households have clearly fared betterthan their lower-income counterparts... The rich are getting richer and the poor are getting a little bitricher,' said Daniel Weinberg, head of the Census Bureau's division of housing and householdstatistics."7

Incomes at the high end ofAmerican society are rising rapidly. These areas have done especiallywell:

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 immunefrom competition and the vicissitudes of the economy.) 9

Investors' return on capital. The Economistsays that "most of the extra income generatedby [information technology] and globalization is going straight to the owners of capital."10 EconomistFrederick Strobel speaks in terms of people whose incomes are "capital-enhanced" as distinguishedfrom those who are "labor-dependent," and says the former are gradually gaining ascendancy over thelatter.11

That the profits from the world economy are going to equity owners and the holders of debtprovides the basis for (and need for) a possible "shared market economy" such as we outlined inChapter 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 contextthat it matters greatly how much of the world's capital assets a country's citizens own. Economistsoften minimize the impact of foreign ownership of American income-producing assets,12 but the netownership by a country's own citizens of such assets both domestically and abroad is criticallyimportant if income-flow from capital is in the future to play a primary role. To the citizens of a givencountry, 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 toremind ourselves that everything beneath the airplane is, in its replenished form as some of itwears out or becomes obsolete, in the process of passing from one generation to another within avery few years. As ownership of income-producing property becomes the preeminent source ofincome, 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 thewidening gap over time: Kevin Phillips told how "by 1990 corporate chief executives, whose 1980compensation had been 30 to 40 times higher than that of their average worker, were being paid


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sums 130 to 140 times greater."13 But a news report in 1997 indicated that even that spread hadwidened: "The average CEO made 209 times the pay of factory workers in 1996. That's way upfrom 1980, when CEO's made 42 times as much as factory workers. 14 A report by LawrenceMishel on the Economic Policy Institute web site in 2009 tells of the continued multiplication, andgives 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 isnt necessarily pegged to performance.Business Weeksaid in 1990 that the salary of the CEO of ITT doubled to $11.4 million even thoughthe company's share price fell by 20 percent and its income from operations by 30 percent. 16 In 1996Business Weektold how "the CEOs of the 20 companies with the largest announced layoffs last yearsaw 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 paythem handsomely if things don't go well. The American public was scandalized in 2008 by theamount of executive compensation in firms that were integrally involved in the economic debacle andeven 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 founddiscomfiting "the unfortunate coincidence between the rising uncertainty and belt-tightening that isfacing most corporate employees and the increasingly generous compensation packages and thesecurity 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 thesefacts. No doubt demagogues will arise to take advantage of class envy as it grows, but the polarityshould 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 byindividuals 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 eventhe 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'sbookThe 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 atthe 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 holdtheir 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


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can get along nicely now with maybe a dozen champion performers in each area of humangiftedness."19

People will continue to enjoy such things as melodramas performed by local talent, or theirown city's symphony orchestra even though they could stay home and listen to the LondonPhilharmonic. 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 peoples income has suffered either stagnation or decline. The devotedly pro-free marketFoundation for Economic Education's Hans Sennholz acknowledged in 1996 that "no matter how youmay 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 ofAmericans was becoming extremely wealthy, the top 5 percent somewhat wealthy, with the result thatthe top 2.7 million Americans (the top 1 percent) had as many after-tax dollars to spend as the bottom100 million.21

Earlier, we quoted Richard Freeman's article in theHarvard Business Review. It shows howlong the growth of wage polarity has been underway for him to have said in 1996 that "in the past twodecades, 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 workershave gained in comparison with younger workers. Professionals and executives have gained incomparison with clerical workers, machine operators, and laborers... These changes have occurreddespite huge gains in employment... [T]he rising tide of inequality has been accompanied by stagnantreal wages."22

The growing dependence by families on two incomes that we commented on earlier hasmasked this stagnation, allowing their standard of living to remain relatively unaffected. KatherineNewman has said that "the wholesale entry of women into the labor market is practically the onlything that kept the average middle-class family afloat. With men's wages stagnating and the cost ofliving rising, it was women to the rescue."23 Kevin Kearns of the U.S. Business and Industrial Councilsays "the social impact on the United States has been widespread and often devastating. A singlewage 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 sufferedgreatly...."24

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

Looking ahead to the new century, Paul Kennedy wrote that after nearly five decades ofunprecedented global economic growth, the world heads toward the twenty-first century with morethan a billion people living in poverty [his emphasis] an awful enough figure until one realizes thatthose 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 relativelysatisfactory $750 or a comfortable $1,000 each year levels that would horrify inhabitants of theFirst' World."25


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These numbers will grow even worse as information-age technology's displacement of workmore and more hits the peoples of the less developed countries. Harald Malmgren says "in the newtechnological environment, the traditional reliance of some nations on natural resources may turn intoan economic nightmare."26 The poverty levels represent untold tragedy for the people directlyinvolved. 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 willmultiply 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 muchdiscussion of the effects, now and prospective, of this on society. Billions of dollars have been madein drug trafficking, for example. What are the sociological and political effects? Will that wealthbecome the "old money" of the next generation, with its holders becoming the social and politicalleaders of their time? Similar questions can be asked just as well about the wealth accumulatedthrough 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 particularlyidentifying with any one country? (We see such an elite already. But what we see today may benothing compared to what will exist tomorrow.)

Retirement stock funds became the public's most significant asset before the catastrophic fallof the stock market that greatly reduced the value of such savings, but surprisingly most Americansdidnt have them even then. Economist Robert Kuttner traced the growth of stock holdings between1983 and 1992, seeing a near-doubling. But he observed that "most of these holdings were smallpotatoes. The top 5% of all households owned fully 77% of equity holdings, including individualshares, 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 laws selective treatment that has favored someand not others. Before I retired as a professor, the tax law allowed college professors to put 17 percentof their income into tax-deferred retirement investments. I long assumed that everyone else is giventhe same opportunity, but they werent. Legislative decisions about taxes in the United States havebeen divorced from equal treatment in establishing such perquisites.

Little in the world is left unchangedby the forces at work. Here are some additional areas of impactthe literature discusses:

Changing values and lifestyles. In 1970 Alvin Toffler looked ahead to "rising affluenceand transience," which he said will "ruthlessly undercut the old urge to possess." In place ofpossessions, "consumers begin to collect experiences as consciously and passionately as they oncecollected 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 acornucopia of choice; few roots, but many niches; a shattering of consensus, without a new oneforming; and the rise of many subcults.28

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


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The impact on lifestyles suggests that inward-looking cultures, no longer able to maintaineffective isolation, will be under constant existential challenge. Greider tells how in Malaysia "thegovernment would like to maintain Islamic principles and protect people from Western values, butwhether the government likes it or not, the people are becoming westernized." The new technologyhas 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."29Ancient 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 andbloody war spreading across Scandinavia... The bikers' weapons of choice are not six-shooters. Theyare automatic weapons and rocket-propelled antitank grenades... Indigenous clubs of Hell's Angel'sand Bandidos, organized as overseas chapters of motorcycle gangs in the United States, fight forhonor, revenge and territory in the drug trade... Contrary to popular image, these... are not beer-bellieddissolutes... 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 thatso many corporate executives no longer feel loyalty to anyone but themselves, they would do well tosee 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 fromclassical into medieval civilization: enclaves of civilization are becoming housed in wall-offcommunities, as wealthy neighborhoods are protected by security systems and guard houses. Asunderstandable as such withdrawal is, there is perhaps nothing so symbolic of the polarization.

ENDNOTES


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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."44. "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, 1999.1512. The Mishel report appeared at www.epi.org16.Business Week, May 30, 1994, p. 102.17.Business Week, April 22, 1996, p. 103.1815. 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 theNew York Times News Service.22

. Richard B. Freeman, "Toward an Apartheid Economy?,"Harvard Business Review, September-October1996, p. 115.2320. 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.

sme ch11 polarization

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