Class Warfare Blog

August 31, 2011

The Social Compact is Broke and Getting Broker

Filed under: Economics,Politics — Steve Ruis @ 10:26 am
Tags: , , ,

An article in a recent Time magazine which addressed the extensive riots in London, England used the tag “they should have seen it coming” regarding British officialdom because the Gini coefficient for Britain was 0.32, the second highest in Europe. The Gini coefficient is a measure of income disparity with 0 being perfect sharing and 1 being absolute plutocracy. In other words, they claimed that British officials should have realized that the frustrations of the poorer segments of British society were bound to boil over at some point. What the article failed to mention is that the Gini coefficient for the U.S. is rapidly closing in on . . . wait for it . . . 0.5. Let the riots begin!

Seriously, I want to make the case that this, income disparity, is the most significant internal problem facing the U.S. in decades. And it is the only problem that our politicians should be working on right now.

Signs the Apocalypse is Upon Us
You’d have to be dead or completely politically oblivious to have missed the fact that the middle class in this country has had little to no improvement in income in over forty years. Here is a graphic, courtesy of dshort.com, stating the obvious.

The “quintiles” mentioned are one fifth of all incomes in the U.S. Note that the bottom three quintiles, representing 60% of all incomes in the U.S., have barely changed in 45 years. This in itself is not catastrophic except that the top quintile is doing very well, the top 5% is doing extremely well, and the graph would have to be extended a great distance upward to graph the top 1%’s income growth. In other words, there has been a great deal of wealth created in the past 45 years, but you haven’t shared in it. It has been scooped up by the already very wealthy.

This is not unprecedented. There have been periods in this country where similar income disparity has existed. And it has been the role of government to provide rules requiring more equitable distribution of wealth. I can hear conservatives cringing over the use of the term “equitable distribution of wealth” because to them it means the same as “confiscation.” I will attempt to explain why this is incorrect.

Part of the social compact that is collapsing is the unwritten rule that, if American workers became more productive, they would benefit accordingly. So, lets look at American worker productivity over a similar time period. Here is a recent graph (from the Real-World Economics Review Blog, a worthy WordPress blog):

I don’t want to get bogged down in the details here, especially the green lines on the graph. Other details I don’t want to get bogged down in include facts like businesses invest capital in more productive equipment, so these productivity gains are not entirely due to individual worker effort, etc. What the purple line shows is that from the late 60’s to roughly 2010, the same period as the previous graph, worker productivity more than doubled. This means the same work could be done by half as many employees, or twice as much work could be done by the same number of employees at the end of this period. Obviously companies profit more on these terms as labor costs are a big ticket item in any business. The old social compact was that labor would share in the gains. How much of a share is debatable. There were times post WWII that productivity and wages were in lock step, obviously such is not the case now in that labor is getting almost no part of the gains from increased productivity.

May I Have the Envelope, Please?
So, what happens if this continues? Are there any brakes on this runaway train? Right now wealth is accumulating at an alarming rate in a very small segment of the population. That segment is flooding politicians with money and seems bent on not yielding any of its advantages. Government, the only Great Equalizer available, is under unrelenting attack by these moneyed interests.

The questions are: will people learn to vote their real economic interests instead of the phony ones promoted through big doses of political money? Will populist politicians seize a moment to carve out a new niche in politics to offset the effects of rampant greed? Will the idea of American, the so-called American Dream (work hard, play by the rules, succeed), survive?

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