(Spoiler alert: Economics) Income Inequality Enters the Political Consciousness

[nadinbrzezinski]

In November of 2011 young and old in the United States took over public plazas across the country. They pitched tents, they set food canteens, they held General Assemblies, and they used lending libraries to talk over politics and economics and to activate each other politically. They did not come to the plazas because any of them wanted to overthrow the government. They came because they wanted that political and economic system to work for everybody. The message of hope and change of the 2008 election affected them at a deep level and some had a deep sense of betrayal.

I had the chance during those heady months to talk to many of the Occupy San Diego members. I heard from many of them a single theme: The System, the economy and the political system, was not working for them. The evidence, they said, was all over, and obvious if you cared to open your eyes to reality. They were angry because the Government bailed out the Banks, while millions lost their homes. They were angry because they spent tens of thousands in College, but there were no jobs.

Another thing happened during those months. A phrase entered the lexicon of most Americans, and the political class. “We are the 99%” became a scream of defiance and a declaration of self identity. Americans, as others have observed, have no sense of Class. So to expect the rise of class consciousness in the classic Marxist sense way would have been silly.

http://nadinabbottblog.wordpress.com/2014/06/26/income-inequality-enters-the-political-consciousness/

I am sorry, but recreating massive posts with links and all is difficult, but I will post the whole post without links under this

[nadinbrzezinski]

1. Full post, no links

June 26, 2014 (San Diego)

In November of 2011 young and old in the United States took over public plazas across the country. They pitched tents, they set food canteens, they held General Assemblies, and they used lending libraries to talk over politics and economics and to activate each other politically. They did not come to the plazas because any of them wanted to overthrow the government. They came because they wanted that political and economic system to work for everybody. The message of hope and change of the 2008 election affected them at a deep level and some had a deep sense of betrayal.

I had the chance during those heady months to talk to many of the Occupy San Diego members. I heard from many of them a single theme: The System, the economy and the political system, was not working for them. The evidence, they said, was all over, and obvious if you cared to open your eyes to reality. They were angry because the Government bailed out the Banks, while millions lost their homes. They were angry because they spent tens of thousands in College, but there were no jobs.

Another thing happened during those months. A phrase entered the lexicon of most Americans, and the political class. “We are the 99%” became a scream of defiance and a declaration of self identity. Americans, as others have observed, have no sense of Class. So to expect the rise of class consciousness in the classic Marxist sense way would have been silly.

This will come as a surprise, but it was not just Occupiers who raised this issue of inequality and unfairness. On the other side of the aisle, as most things in this country are that divided, came another populist movement. The Tea Party was a reaction to government overreach, and started as a reaction to the Affordable Care Act, and resistance to Federal Mandates. They started on this road before the Occupy Wall Street movement, but both came from the same populist well. Anybody who cares to sit down with a member of the Tea Party and listen, will tell you that there is the same populist anger, and blaming in this case the government.

On the surface they seem to be opposed to each other. Occupy blames the banks. Tea Parties blame the government. In the end, both are angry at the same things. This is the deep dysfunction that exists and benefits the upper percentiles of income. On the other hand, the country has seen a hollowing of the economy. The middle class has been under attack since the 1990s, and the attack has picked up speed. That middle class has not recovered either from the 2008 crisis, and while the jobs in raw numbers have come back, the type of jobs that have returned are not as well paying as they used to be.

We also have a chronic long-term unemployment that has destroyed the prospects for many formerly middle class people who were near retirement. This has created anger, and whether it is expressed in the Tea Parties fighting big government, or the Occupy Wall Street blaming the banks, at its core they are deeply connected. This is now starting to take center stage at the policy level.

One of the places where this is starting to show is in States of the Union Speeches. This year President Barack Obama called for raising the minimum wage and for pre-K universal education. The other place this is starting to show is in the less read Economic Report of the President.

Like budgets this is also a political document. This document makes allusions to rising inequality in both the introduction, which is signed by the President, and Chapter Five. The document does not pull any punches and it does tell us that inequality exists:

“The nature of rising wage inequality started to change around the early 1990s, becoming increasingly concentrated in the top end of the wage distribution. The ratio of the 90th to the 50th percentile of the wage distribution continued to grow at roughly the same rate it had since the early 1980s, whereas inequality at the bottom (the 50-10 ratio) declined somewhat after the late 1980s. Piketty and Saez (2006) find that income gains have increasingly concentrated in the top 10 percent and top 1 percent since the 1980s. The result has been a “polarization” or a “hollowing out” of the wage distribution, with relative wage growth in the bottom and especially the top of the wage distribution relative to the middle” (Page 95)

This quote mentions the time frame for the problems starting. What it does not mention is free trade. The North American Free Trade Agreement was signed in 1992 by Canada, the United States and Mexico. It is not a coincidence that the nature of the income and earning distribution started to change in the 1990s. And we have other places that have noted this relationship.

Early on we saw this critique by International Monetary Fund Economists. They wrote:

“During the same period, in the advanced industrial countries, the demand for more-skilled workers has increased at the expense of less-skilled workers, and the income gap between the two groups has grown. There is no doubt that globalization has coincided with higher unemployment among the less skilled and with widening income inequality. “

“This growing inequality reverses a trend of previous decades (by some estimates going back as far as the 1910s) toward greater income equality between the more skilled and the less skilled. At the same time, the average real wage in the United States (that is, the average wage adjusted for inflation) has grown only slowly since the early 1970s and the real wage for unskilled workers has actually fallen. It has been estimated that male high school dropouts have suffered a 20 percent decline in real wages since the early 1970s.”

We knew as early as the 1990s that these economic policies would lead to widening income gaps. Yet, the policies at the top continued apace. We continued with the World is Flat of Thomas Friedman mentality, thinking it was going to be good for all.

As the nineties continued apace and new trade deals were signed, we also had the deregulation of the banks and got rid of the Glass-Steagal Act that was a product of the Great Depression. Banks were told to do whatever they wanted to make money, and they did. The safety nets were taken off. To their credit, they did, and things that were not done since the Great Depression were done. We also got new ways of doing business, such as high risk mortgages and derivatives.

Then the 2008 crash came. This crash was the worst crash since the 1929 Crash, even recognized in the Economic Report to the President:

“Real output per hour was 99 percent higher by the end of 1972 than in 1947, while real average hourly earnings (GDP deflator) grew by 73 percent.Figure 5-3 shows that since the early 1970s, the paths of labor productivity
and average hourly earnings diverged more widely. As a result, by the end ofSeptember 2013 real output per hour was 107 percent higher than at the endof 1972, but average hourly earnings had only grown 31 percent.8

Since the 1970s, these trends generally have been worse for lower income households than for higher-income households (DiNardo, Fortin, Lemieux 1996; Piketty and Saez 2003; Lemieux 2008; CEA 2012; Haskel,Lawrence, Leamer, and Slaughter 2012).9 In particular, the income growthin the top percentile of the income distribution has been much stronger than other percentiles.”

This recognition of the problem of inequality at the level of the NEBR is important. There is a growing awareness that this is happening. And while there are policy recommendations in there on how to deal with the problem, such as investment in human capital (access to universal Kindergarten education for example) is there, it is not recognizing the heart of the problem.

More recently in an article titled “Globalization and Unemployment:THE DOWNSIDE OF INTEGRATING MARKETS” in Foreign Affairs we read a broad recognition of the problem:

“But the structural evolution of the global economy today and its effects on the U.S. economy mean that, for the first time, growth and employment in the United States are starting to diverge.”



The American economy is seeing a fundamental transformation. It is no longer working for many of it’s participants. Growth, and employment are no longer linked, and this is leading to inequality. In the end, this can lead to social instability.

“The challenge for the U.S. economy will be to find a place in the rapidly evolving global economy that retains its dynamism and openness while providing all Americans with rewarding employment opportunities and a reasonable degree of equity. This is not a problem to which there are easy answers. As the issue becomes more pressing, ideology and orthodoxy must be set aside, and creativity, flexibility, and pragmatism must be encouraged. The United States will not be able to deduce its way toward the solutions; it will have to experiment its way forward.”

I find myself going back to those conversations with members of Occupy San Diego. There is a feeling that the economy is not working . There are many problems with it, especially if you are in the middle of it. The middle classes are getting hollowed out.

We go back to the Report to the President. It admits the problem. At a policy level it is telling us, we are having a problem. It is not a new problem, yet the solutions are the usual prescriptions. We will increase our investment in human capital. We will get universal Kindergarten education, we will invest in jobs, in energy, but the core problem, the structural changes in the economy brought by globalization are not spoken off, or even acknowledged.

These structural changes are quite serious. Two recent econmists stand out as giving a prescription to the problem. One is Thomas Pickety, who has been working on inequality for decades. His recent popular work, Capital in the Twenty-First Century, has become a tour de force. It is through his work that I finally understood the wrong-headed assumptions of Free Trade Agreements.

“the magical Kuznets curve theory was formulated in large part for the wrong reasons, and its empirical underpinnings were extremely fragile. The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.”

This theory was a product of the Cold War, and economies still reeling psychologically from the stresses of both the Great Depression and the two world wars. These were also economies with regulatory constraints. In United States, the Glass Steagall Act prevented investment banks from buying regular banks. This was one of the causes of the Great Depression. When the Glass-Steagall Act was repealed in 1999 with the Gramm–Leach–Bliley Act that the environment for the Great Recession was set in place. It was one of the tools. The other were systems that protected critical national industries.

Free Trade agreements is based on the often told tale that this will raise all boats, but this has yet to happen with any modern free trade agreement, This is a matter of belief, not reality, and is driving economic policy, in both parties. Instead, we are seeing increasing inequality as it relies on Economic Determinism.

To this Pickety writers:

…one should be wary of any economic determinism in regard to inequalities of wealth and income. The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war. Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance.

It is ideology, not fact. It is time to put ideology to the side and rely on facts.

Joseph Stiglitz was among an early crop of current critics, and some of his work came from talking to the same Occupy Wall Street crowd, but in a globalized economy he also talked to people abroad, like the Indignados. He concluded “In a world of globalization, creating market value had become entirely separated from creating employment.”

He did not come to this from the outside of Policy Making since he served in the Clinton White House as a member of the Economic Advisory team for the President. Yet, these days he is seeing the effects of some of those early policy positions and in his talks with Occupiers and Indignados alike, he knows that the economy, and the political system are not working for many of them.

Stiglitz is even clearer about it. He writes: “The majority of Americans have simply not been benefiting from the country’s growth.” This, as he correctly points out, is creating a lot of insecurity and that led to the Occupy Wall Street movement, as well as increasing discussions on inequality and their effete on stability As we saw above he is not the first one to point this out.

Inequality is rising, and it has finally entered the consciousness of the political elite. That said, the prescription for what both the economy and the political system need, are not what it is being suggested. We are still stuck in a model where those with money have a lot more weight in what happens to the economy and political system than those who do not. In effect, there is a sense that both the political and economic systems are broken.

The political elite has kept on a one track mind, and still believes in free trade agreements. It is not that globalization is bad necessarily. It is the form is taking. The events of 2011 were the moment though that the elites were forced to understand the danger of what is happening. Time will tell if there are changes. But given our elites continue to work towards more high level economic integration, without listening to the populous, this is risking stability in the long run, and not just in the United States.

[malaise]

2. Good read

This is Hayek and Friedman gone mad.

[nadinbrzezinski]

3. I mentioned one, not the other.

The world is flat is a nice read if you want simplified Austrian school

[Populist_Prole]

4. Excellent, bookmarked for later reference as well.

You can always tell when you hit the 1 percent where they live by the way they react to inequality as a front and center issue. They go into full code red alert.

[nadinbrzezinski]

5. I still had to hit my notes from 2011

to refresh my memory, but I took careful notes back then, which I was glad for.

I have spoken ever since with members of the local Tea Party and our lovely libertarians. What amazes me is that all actors are pissed, but their diagnosis are different. OWS was far more dangerous since they were closer to the diagnosis.

[Populist_Prole]

6. You're so right. That's why the crackdown on OWS was so visciously executed by the PTB

Because OWS was in fact barking up the correct tree. The PTB really does know the gun brandishing, screeching, flag waving teabaggers are morons; however, they directed all their anger at the wrong people or parties...barked up the wrong tree and were thus no immediate threat to the plutocrats.

[nadinbrzezinski]

7. One of the two correct trees

the problem is that the second tree is far easier to manipulate, and we have seen how well they have been manipulated.

I talked with one of the early founders of the TP. He came to OWS to speak and chiefly warn about preventing the power structure from co-opting them. He was barking at the tree of political corruption in general. The Koch's took the movement and well, the rest is history.

That conversation, not with me, the leaders, led to some incredible GAs that had some party aparatchicks sent packing. I had a first hand look at history...

[socialist_n_TN]

8. The populist anger on both sides is actually correct in both points.........

That's the big problem under capitalism. The owners not only own the means of production (read: the livelihood of the rest of us), but they also own the government. Which is also why populism of the right or the left will never correct the ultimate problem. You have to take power in the workplaces yes, but you also have to take political power too.

Marx, Engels, Lenin, and Trotsky knew this. Just because Stalin degenerated it with his Cult of Personality doesn't change the fact of this necessity.

[nadinbrzezinski]

9. I am starting to see more and more of what might be called

neo-neo-neo marxist thought. I will not call it that way. I am sure others will not, and some of it is refinement and improvement of Marx (See Pickety), but it is what it is.

[socialist_n_TN]

10. Piketty is a Menshevik......

at best. He's like all those Occupiers who blamed everything on "the System" and then refused to name the system. Piketty still thinks you can "tax the rich" into a more equal system. You can't. At least not over the long term. Capitalism ALWAYS historically shook off the chains of regulation after a relatively short period of time.

Regulating capitalism is like riding a hungry tiger. It's difficult to do and you're always in danger of being eaten.