Destructive impact of extreme inequality

The American middle class that once was more than half of the country’s households has declined to about 40% of the households, mostly due to many falling into poverty. It is projected to continue to decline. Median income has been falling since it peaked in 1999. This is happening despite growing economy and rising profits – because increasingly larger share of the wealth flows to the top, especially the upper 0.1%.

In 2014, Emmanuel Saez and Gabriel Zucman from National Bureau of Economic Research published Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data (at: http://gabriel-zucman.eu/files/SaezZucman2014.pdf). Wealth concentration has been high early in the 20th century, fell for fifty years, and started rising again thirty five years ago. While the relative wealth of the top 0.1% tripled, the share of the bottom 90% was cut almost in half. By 2012, these lines intersected: the top 0.1% of the US households had as much wealth as the bottom 90%. The top 0.01% – only 16,000 families – have more wealth than the bottom 130 million families.

Also in 2014, Michael Porter and Jan Rivkin from Harvard Business School published their The Economy is Doing Half Its Job study (at: http://www.hbs.edu/competitiveness/Documents/an-economy-doing-half-its-job.pdf). They found a troubling divergence in the American economy: while large companies and a minority of highly-skilled individuals prosper, small businesses and middle- and lower-class individuals are struggling. Their conclusions are blunt: such a divergence is not sustainable.

Extreme economic inequality is proven to lead to political inequality, “oligarchization” of the political order. Similar, although not as extreme, trends appear in other developed countries. The global inequality is getting worse (source: http://www.theguardian.com/public-leaders-network/2015/jan/25/davos-2015-overriding-pessimism-over-growing-inequality). The last time such wealth disparity existed was during the 1925 – 1937 period. We all know the upheaval that followed. Perhaps it’s no accident that many hedge fund managers are buying airstrips and farms in remote places, thinking that they need a getaway (source: http://www.theguardian.com/public-leaders-network/2015/jan/23/nervous-super-rich-planning-escapes-davos-2015).

How will the emerging Internet- based and robotics technologies affect the rising inequality? Past industrial revolutions disrupted existing economic models but benefited societies in the end. However, there is no guarantee that the outcome of the ongoing technological revolution will be the same. Unlike in earlier economies, in the digital age even a small relative advantage often leads to an absolute domination – the “winner-takes-all” markets. So far, the result has been acceleration of inequality: in just the past ten years, the wealth share of the top 0.1% jumped over 50% while that of the bottom 90% dropped by 25% (source: Saez and Zucman). Technology is bringing about a very different world and the question is whether we’ll adapt our policies to benefit everyone or continue with the status quo where more and more people lose ground and face a possibility of another upheaval? Erik Brynjolfsson and Andrew McAfee raise these issues, and warn of consequences of not taking action, in their bestselling The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologieshttp://www.secondmachineage.com/.

This post by no means argues for a utopian equality. Some degree of inequality is our natural state. But this does not mean that we can ignore the growth of inequality as benign. Throughout history, economic stratification commonly resulted in collapses and revolutions. To quote from a recent study:

“Collapses of even advanced civilizations have occurred many times in the past … the two features that seem to appear across societies that have collapsed: the stretching of resources due to strain placed on the ecological carrying capacity, and the division of society into Elites (rich) and Commoners (poor) … Given economic stratification, collapse is very difficult to avoid and requires major policy changes, including major reductions in inequality …”  Safa Motesharrei, Jorge Rivas and Eugenia Kalnay, Human and Nature Dynamics (HANDY): Modeling Inequality and Use of Resources in the Collapse or Sustainability of Societies, 2014, http://www.sciencedirect.com/science/article/pii/S0921800914000615.

This time is never different.

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