Category Archives: inequality

“Animal Farm” and Life in the former Soviet Union

“All animals are equal, but some animals are more equal than others” – I read this Orwell’s masterpiece after I have left the land of victorious proletariat and was struck by how well it captured the essence of the Soviet order.

In fairness, life in the Soviet Union was not too difficult if one followed the rules:

  • Accept the corruption. There are different rules for little people and for big people
  • Outwardly, accept the political correctness. Of course our Soviet society is the most fair and inclusive. Be careful what you say,  surveillance is ever present. Differing opinions deserve no respect, only condemnation. If someone disagrees that’s because they are bad people with ulterior motives
  • Most of the problems are created by an officially sanctioned enemy that possesses almost mythical powers (it was, of course, the United States back then).

From what I read, life in the Nazi Germany also was OK for most people that followed the “rules” and didn’t belong to one of the officially persecuted groups. At least until Herr Hitler decided to get some “lebensraum” in the East, wars tend to turn out not how one plans. And Nazis had their all-powerful enemy in Jewish women and children.

Are we getting to be like the Soviet Union? We are not there yet but for someone who came from behind the Iron Curtain the trajectory is not encouraging:

  • Some are more equal than others? Check. Top 0.1% have as much wealth as the rest of the country – do you think your view matters as much as that of Qatar’s sheik paying Bill Clinton $1MM for 5 min of his time (really, Bill?). And what do you think would have happened to a “little person” that was grossly negligent with the government’s confidential information? If you have any doubt that he or she would have paid a much higher price than just saying “I accepted responsibility”, I want to have whatever you are smoking. But we’ve gotten so cynical about corruption at the highest level, we just shrug it off as expected. Different rules for different folks.
  • Political correctness, lack of tolerance for differing views, massive surveillance? Check. Do you really believe that the government respects your privacy? And if you prefer a different political candidate, you are a “deplorable” (Clinton), a welfare leach (Romney), racist (Obama) or sexist (Clinton). Tolerance and ability of self-critical evaluation were not common traits amongst Communist Party bosses. These traits seem to be missing in many US politicians now.
  • Officially sanctioned enemy with mythical powers? Check. Anything we don’t like is Putin’s fault. Jullian Assange’s WikiLeaks have been exposing the corruption of ruling elites for a long time, but now we know that they’ve always been Putin’s agents hell-bent on destroying Hillary Clinton (the case that their disclosures has never been showed to be falsified is so-o-o irrelevant; really, why bother with facts?)

I can go on and on. The media that doesn’t even pretend to be objective. Disappearance of the middle class. Government agencies such as IRS targeting political opponents of the regime. Even previously respected FBI is being tainted. The national debt is totally out of control. Inequality is reaching critical levels.

But most of us know that something’s broken. That’s why we just saw two deeply flawed candidates – Sanders and Trump – take the establishment to the edge even with the deck of media and political and financial interests stacked against them.

No, we are not like the Soviet Union yet. But as Orwell showed us, a transformation from a democracy to oligarchy and to outright tyranny is gradual. We are in the oligarchy stage now. The trend is not our friend.

Each of us chooses what to do. I personally decided to vote Libertarian. This is not about 2016: I live in California and it’s going for Clinton by a huge margin. It’s about getting a party not called Democratic or Republican over the 5% limit to qualify for electoral funding in the future. We’ve had the same two parties for over 150 years. At this point I question whether either of them truly represents us “little people”. It’s time for change. The real one, not the “hope and change” we were sold in 2008. In the meantime, I’ll keep my fingers crossed that the likely President Clinton won’t push us into war with Russia and China. I mean, I don’t see their soldiers on our borders while there are plenty of ours near theirs.

Life and Fiction

The Outer Circle, the last part of The Counterpoint Trilogy, is set in 2024. Some of the events described there seem to be taking place much sooner. In the book a populist third party politician is rising by blaming other countries – we have Donald Trump (at the moment he is running as a Republican but he already indicated he’ll consider an independent run). In the book, a mainstream political candidate thinks he is above the law – we have Hillary “what e-mails?” Clinton. In the book, China is experiencing internal problems and a conflict is brewing in the South China Sea – we see problems in China and increasing China vs. US tensions in the South China Sea. In the book, corporate and government surveillance is pervasive – we have the latest most popular computer operating system monitoring everything you do and the issue of government surveillance was a hot button in the Republican debate. In the book, blockchain technology powers thriving underground economy – we see hundreds of millions flowing into blockchain-related startups. In the book, continental Eurasia coalesced into an economic superpower driven by the China–Russia rapprochement and non-Western financial structures – we have beginnings of the new “Silk Road” and the Asian development bank.

I am not claiming any particular insights. The trends are in the open if we want to look beyond the immediate surface. When only 20% of people trust our government to do the right thing, populists will rise. When a privileged political class emerges and special interests rule – as more and more people notice – politicians start considering themselves above the law. When government and corporate leaders think that only criminals desire privacy, they don’t worry about taking yours away – and people react by trying to protect what’s left of their privacy. When we act in an imperial fashion, other countries will form blocks to oppose us.

The spectacle of Donald Trump is all over the media. Could you have imagined him being a front-runner ten years ago? He is likely a precursor of a coming storm. Study after study shows that if there is one thing that Americans hate, it’s unfairness. When millions suffered through the Great Recession but those that caused it walked away with hundreds of millions, it’s not fair. When the inequality keeps rising and the middle class steadily erodes, that’s not fair. Vast majority of the Americans now believe that we are on a wrong track. Our ruling elite seems to be missing the point that popular discontent is building. Like many others before them, they must think that the populace will be sated with bread and circuses (and we do have the endless entertainment “circuses” galore). Like those others, they will be wrong. Major dislocations rarely go smoothly and dangerous people often come to power during times of discontent.

More on Impact of Extreme Inequality

In the earlier post I talked about dangers of extreme inequality: economic problems, “oligarchization” of the political order, unrest. The Spirit Level by Wilkinson and Pickett argues that high degree of inequality – more so than absolute levels of per-person income – lead to lower societal trust, increased instances of mental illness, higher mortality, obesity, lower educational performance, higher crime and reduced social mobility. They show statistical correlation based on the data from the World Bank, the World Health Organization, the United Nations, etc.

As any controversial topic, their study found detractors as documented in the link provided. Complex subjects always do. As the famous saying goes, “there are lies, damned lies, and statistics.” Still, in the end the numbers and their conclusions appear to be valid: extreme inequality damages societies. I’ll re-iterate that this is not an argument for imposition of equality but rather a reminder that this pendulum have swung too far the other way. I think that most of us intuitively understand this.

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.