The State Of Our Economy

You’ll find an excellent piece in Vanity Fair written by Nobel laureate economist Joseph Stiglitiz entitled Of the 1%, by the 1%, for the 1%.  I’d like to post several excerpts here today.

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

We’ve seen a steady decline in the quality of life in both the poor and the middle-class over the last twenty five years.  If you look at the current events unfolding, there’s no reason to expect change.  What’s most disappointing is the fact that the wealth the top 1% has been earning has little to do with performance – in fact, especially in the financial sector, it’s been the opposite.  We’ve had a financial system of bailouts, socialized losses yet privatized gains, and their CEOs receiving record bonuses for running the world into the ground.

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

Years ago, after a detailed study in economics, I was tempted to go into the financial world.  I thought about becoming a fund manager of some sort, mainly for the reason Stiglitiz suggested — it’s very lucrative.  I never went through with it though, mainly because I thought it was sleazy.  I would read books on investing and the market and think to myself, “The financial world is corrupt and completely manipulated.  How do any of these activities have anything to do with goods being produced and improving the quality of people’s lives?  All of this is criminal!”  As I learned more, I l figured out that most of those activities have nothing to do with improving people’s lives; they’re just easy ways to earn huge sums of money in an economy where the odds are stacked you. For example, I would read books on how to get real-estate loans for a low interest rate, with no money down, slightly fixing up the properties and then renting them out for more than your minimum payment.  This allowed you to build up lots of free equity, both from the minimum payments, but mostly from the housing bubble which was forming.  During the housing boom, you could’ve made a fortune doing this (and many people did!).  All in all, the method is dependent on the Federal Reserve’s cheap credit policies (Greenspan years), in combination with Wall Street’s mortgage back securities market, which allowed huge sums of money to flow into the mortgage market from investors around the world.  If you can’t find a tenant to rent to, you simply sell the place for a profit.  Considering housing prices were rising so quickly, it wasn’t a problem to sell 20% below market price and still earn a profit.  Other high earning methods I considered included things like acquiring cheap properties via tax liens during the massive defaults in select areas of the country.  The list goes on and on.  It all made me sick to my stomach though.  I couldn’t go through with any of it and be able to look at myself in the mirror.  I felt like a vulture.

But why are intelligent young people considering doing these sorts of things?  Here’s a little of my own story.  Around 10~12 years ago I was earning really good money developing software for various companies.  Back then companies respected software developers and were willing to pay good money for good work.  With time however, websites such as came online, making it easy for companies to find and hire poor foreigners who were willing to work for wages far lower than are reasonable.  For example, a tour company was interviewing various developers to see who they would hire out to do a project for them.  I vividly remember meeting with the president of the company in a local restaurant, and I was given the specifications for the job.  I looked it over and told him I would do it for $800, which really wasn’t that much money.  It probably would have required 15~20 hours of my time.  He then told me, “We’ve found a developer in India who will do the project for $25, yet you want $800!?”  Then he gave me a condescending look and left.  He treated me as if I was trying to rip him off.  I sat in the chair, sipping on my Coca-cola, thinking, “Well, I suppose I need to find a new occupation.  There’s no way I can compete with this.”   Even if that Indian developer was better than me and could do it in half the time (which I seriously doubt), he would have been willing to work for $2 an hour.   I could become a custodian and earn seven times that much!  Why would I want to do difficult computer programming jobs and barely earn anything?  I was still able to earn good money for quite a while, but it became harder and harder to find jobs.

Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

Just the other day I talked about technologies such as OpenCV, which are making the construction and programming of robots easier than ever.  Factory jobs are going to become a thing of the past before too long.  Even cheap overseas labor will eventually become too expensive.  They’ll have robotic arms do all forms of assembly.  But for now, with trade agreements such as NAFTA, the corporations are outsourcing as much of their labor as possible overseas, allowing them to exploit third world labor markets to earn record profits.  How many of us have called Dell tech support only to get a foreigner who could barely speak English?  I’ve heard McDonalds wants to hire foreigners to remotely take their drive-through orders.  And as for all the workers in places like Mexico, their workers are toiling in un-airconditioned factories, given no benefits, and living in slums a few blocks away, barely earning enough money to survive.

And why do we keep hearing, “We’re broke, we’re broke”, yet find ourselves in a new war every other day?  First Afghanistan, then Iraq, then Pakistan, and now Libya.  Who’s next?

America’s inequality distorts our society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means. Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the “all-volunteer” army does not pay enough to attract their sons and daughters, and patriotism goes only so far. Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that. Foreign policy, by definition, is about the balancing of national interests and national resources. With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window. There is no limit to the adventures we can undertake; corporations and contractors stand only to gain. The rules of economic globalization are likewise designed to benefit the rich: they encourage competition among countries for business, which drives down taxes on corporations, weakens health and environmental protections, and undermines what used to be viewed as the “core” labor rights, which include the right to collective bargaining. Imagine what the world might look like if the rules were designed instead to encourage competition among countries for workers. Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about. But the top 1 percent don’t need to care.

My generation has been hit hard by these things and our political efficacy is very low.  We don’t even believe in the system.  Only around 20% of those in my age group (in their twenties) even vote.  Celebrities may make television appearances trying to convince us how “cool” it is to vote, and how it’s our duty as responsible citizens to do so, but when we look at both parties, Democrats and Republicans, they both do the same thing — huge deficits, wars, erosion of civil liberties, and so on.  We see the rich getting richer, and all of us continually getting poorer, year after year – no matter which party is in charge.

Last semester I was told by my advisor to take a civics course, and so I did.  During class the professor lectured that one of America’s core beliefs is “equality of opportunity.”  I disagreed. I don’t see any evidence to support that claim and it doesn’t seem Stiglitiz does either.

…Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them….

Why is this the case?  What’s going on here?

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth. During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. “I certainly hope so,” he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending. The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

I don’t expect things to get better.  The disparity between rich and poor will continue to grow and the middle class will continue to slowly wither away.  I’m sorry for being pessimistic here, but how else should I see it?  Joseph Stiglitiz isn’t the only Nobel laureate economist telling us this.   These are the sorts of things that depress me.  I am fulfilled when I do scientific research, and think about the universe, but then I look back at human society, the greed, the religious conflicts, the wars, the diseases, the poverty, the stupidity, the soon to be mass extinction of nearly half of all species on the planet, the pollution, the rapid overuse of non-renewable resources, the slow erosion of civil liberties, climate change, nuclear proliferation, and so on, I find myself staring at the wall completely depressed.  It doesn’t help when some of the greatest thinkers I admire, such at Steven Hawking, are telling me that there’s a good chance the human species will annihilate itself in stupidity absent a huge effort to colonize space.  If humanity kills itself off in stupidity, I swear, I’m going to find a way to resurrect myself, travel back in the past, and use my zombie corpse to slap all of our leaders across the face.

One thought on “The State Of Our Economy”

  1. I wonder if it’s more a problem with efficiency than anything. As we increase efficiency, we can provide products to more and more people at cheaper and cheaper prices.

    It’s like Google. It employes like 20 000 people and can essentially provide the entire world with all their search, advertising, video… Previously there had to be local book stores, local video stores…

    Now with google, you employ some well paid engineers and business people… and you get whole of money at the very top. But they only take a small amount of money from lots of people.

    Part of this has been amplified by globalization. I’ve been very skeptical of globalization as it sets different laws for different workers.

    It should be illegal to sign a free trade deal with a country with vastly different wage and environmental laws. And I say this from a free market, libertarian perspective. What you’re saying to the American textile worker is: “We the government make it illegal for you to compete fairly with some worker in Bangledesh”.

    Yes, having a minimum wage is *wrong* from a libertarian perspective, but its even worse to have workers face different laws depending on where they live.

    Interestingly, the US faced such ‘wage’ issues internally. How would it cope if a state like New York established a minimum wage… and a state like Alabama did not? Wouldn’t you know, the US actually came up with a pretty good solution. Any product/service crossing state lines must obey the federal minimum wage.

    So why did the US not apply this very sane logic when negotiating trade deals with other countries? It’s perverse.

    I’d say a combination of technology/efficiency along with bad trade deals are causing this issue.

    In the end, technology is going to force us to become more egalitarian. There is no need for massive numbers of accountants to provide a solid tax base to pay other middle class workers well. A few accountants and computers can do the job just as well.

    The *premium* we pay for labor is going to be diminished. We’re going to be driven towards egalitarianism, such that the teacher and the warehouse worker make the same as there is not enough private sector wealth to push that difference. But people have gotten too used to privilege. People talk about equality, but really want privilege. The middle class wants to be ‘higher’ than the working class and so on.

    yes, the top super rich will get richer… as a consequence of efficiency… but there’s too few of them to really lift the rest of us up even if we have a 100% tax rate on them. If you took the CEO of walmart’s salary including stocks… and gave it to every walmart worker… it would result in a mere $10/year extra for walmart employees.

    Worrying about the concentration of wealth at the top ignores the structural changes in our economy and technology that are the real big changes.

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