The Symptoms Of Wealth Inequality Are Visible In All Parts Of American Society- The American Inequality Series #4

The (Not) Working Class: Homelessness

Over 22,000 children live on the streets of New York- a stunning statistic, the highest since the times of the Great Depression. The problems don’t end outside the walls of the Big Apple- the 22,000 children in NYC form part of 1.2 million across the United States. 

Homelessness is one of the major signs of extreme poverty, caused by the dropping economic standing of the poorest in society. 

The problems of homelessness go further than the obvious- of course we don't want to see people forced to live on the streets- but it can have further implications on society as a whole, often causing both societal and economic problems such as drug abuse and crime.

Homelessness certainly matters- the speed an effects of its growth provide real threat to American society, particularly those edging closer to losing their homes. It is a prominent sign visible to all of the growing level of economic inequality present in the US.

The Middle Class: Wage stagnation

The causes of wage stagnation go further than just the recent economic crash- wages of most Americans have actually stagnated for the last few decades. 

This stagnancy in the face of a boost in productivity, and general economic growth (averaging 3.27% since 1947) in previous decades is surprising; had wages kept up with economic growth since 1970, the median household income would be around $92,000. In 2012, the US Census Bureau reported the median household income to be just $51,371.

Increase in productivity has also failed to lift average wages- between 1979 and 2012 the median worker’s productivity has risen 74.5%; yet their wages have only gone up by 5%. 

Of course, technology has also played a role in this productivity boom.  Computers have revolutionised word processing, the internet communication and so on- so one could perhaps expect it to bring a drop in working hours, resulting in more leisure time. But according to Erik Rauch of MIT, “if productivity means anything at all, a worker today should be able to earn the same standard of living as a 1950 worker in only 11 hours per week”. 

An 11-hour working week is unheard of today- suggesting today’s workers are working harder, producing more than their 1950s counterparts by far- yet their compensation is not proportionately higher.

The minimum wage has also been stagnant. 5 states are yet to even establish a minimum wage. Currently the highest minimum wage is available in Washington, at $9.32, set at the turn of 2014, but according to a 2012 study by the Centre for Economic and Policy research, even this is too low. The study, setting inflation and productivity as benchmarks, concluded that if the minimum wage had kept pace with productivity and inflation increases since the year minimum wages peaked, 1968, the figure would have reached $21.72 per hour- over double that of the highest in the USA. 

It seems apparent that wages for the general population has failed to keep pace with economic growth and productivity- so where has the extra capital created by a growing economy gone? Fig.1 shows clearly; the top 1% has benefited disproportionately, enjoying an increase in salary of over 240% between 1979 and 2009.

The Upper Class: The 1%

While the wages of most of the population stagnated during the economically relatively non-turbulent years, the resistance of the incomes of the wealthiest could be observed just in the recent economic crash. The average CEO salary dipped in 2008, but it was back up on its feet by 2010- back to 243 times the wage of the average worker.

Questions have been raised over these huge salaries- mainly the question over whether they really deserve it. Under a true meritocracy, people would be paid according to a mixture of their effort, production and influence- so do CEOs really work 243 times harder than an average worker, or produce 243 times as much? Many would argue that CEOs have it easier than the worker- enjoying the power to delegate work more than doing it- but perhaps the CEOs themselves would argue the salary is more a reward for the hard work they have done to get to that position, rather than their current activities alone.

The ‘1%’ of wealthiest Americans have become the faces, to many Americans, of the problem of wealth inequality that is present. After all- how can the USA, a country with the most billionaires in the world (515, far ahead of second-placed China with just 157) have at the same time one in seven people living in poverty?

Has Neoliberalism Failed America? The American Inequality Series #3

The practice of neoliberal capitalism in the USA has been the focus of much debate. In this third instalment of The American Inequality Series, we will take a look at two of the key tenets of neoliberal capitalism: the beliefs in the right of the free-market to rule the economy, and in the idea that the pursuit of self-interest will lead to the best outcome for society.

Scottish icon Adam Smith, the 'Father of Modern

Economics', laid the foundations for much of

neoliberal economic theory.

Free markets rule

An idea that has dominated Western economics for quite some time now is marginal productivity theory- the idea of the competitive, regulation-light free market being the best instrument for aligning productivity, social benefits and private returns. Essentially, those who have skills that help them to be more productive will be in more demand in the competitive market- thus their ‘price’ (income, job benefits) will be higher than those incapable of being productivity. 

This meritocratic system is what most people would like- but the key question here is how to achieve this, and marginal productivity theory answers that the free market is most effective in doing so. So to examine their claim further, what are the tenets of free marketism in the USA? Is there a ‘laissez-faire’ approach, where markets are given total free reign, or a more regulated way to keep competition alive?

A popular argument against regulating fast food chains such
as McDonalds has been that the free market will itself find the
best solution over time.

Well, as is often the case, there is no definitive answer. US economic policy is not entirely coherent (no nation’s policy is); for example, observing the lack of regulation over fast food, that has contributed to the quadrupling of adolescent obesity between 1980 and 2012, one would think America is running a free market almost fully dependent on the ‘invisible hand’, that guides resources to where they are most needed by itself. Yet a glance at antitrust laws such as The Clayton Act, that bans the monopolistic practice of merging market dominators, suggests the contrary. 

Individualism

Perhaps the most retold saying of Adam Smith is his thoughts on us as consumers, 

how "it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest".

Theory states that the businessman inevitably has the contentment of his customers in his own self interests- if he doesn’t make the customer happy, the customer will not return to him and thus the businessman will lose out. So following his self interests will benefit both himself and his customers.

The internet is held often as an example of such a successful self-regulating market where companies such as Google and Facebook have succeeded of their own merit, while others such as ask.com and Myspace have felt the consequences of failing to appease the market.

However, free markets have been seen by many to be against the interests of the ‘customers’. Allowing American companies to outsource employment is a pertinent example. Free international trade has allowed companies (particularly in the primary and secondary sectors) to hire cheaper employment in places like China, resulting in a wave of job losses in America. In the decade 2000-10, US multinationals sent 2.4m jobs overseas, simultaneously putting 2.9m Americans out of work.

Gates' Microsoft dominated the computer market during
the 1990s. 

Monopolies such as that of Microsoft over the IT market in the 1990s highlighted further free market failure- a lumbering giant was unrestrained from crushing competition such as Netscape, resulting in a lack of choice that prevented any market self-regulation from taking place. If people didn’t like Windows or Internet Explorer, there was nothing else they could choose- they had to deal with it, without the democratic power free market theory promised.

Paul Samuelson (the first American to win the Nobel Prize in economics), claimed how “utterly mistaken was the Milton Friedman notion that a market system could regulate itself”. And while free market has arguably created the environment for new businesses to prosper, it has failed to live up to its promise of market democracy- as recent monopolistic activity and the loss of domestic employment have shown, the consumers have little power over the market.

Are Profit-Motivated Businesses Bad For Society?

So in an article from a while ago we went through some of the benefits of privatisation- the main conclusion was that, in the main, privatisation leads to an increase in efficiency by replacing ambiguous, short termist political motives with one distinct motive- to make profit.

But this motive itself is one that is strongly debated over. Private businesses are pushed more than their state equivalents to turn over profits- but is this something that benefit those stakeholders outside of the company as well as those inside?

The pro-profit motive argument claims that free markets create environments that encourage profit-seeking competition. For example, in the British department store industry, which the state has little involvement in, competition is visible- Debenhams, John Lewis, House of Fraser and so on are competing to gain the highest profits. The contrary is perhaps visible in the British healthcare industry- the state-owned NHS dominates this market, and thus there is little (albeit growing) competition for profits in this sector.

Apple and Samsung's rivalry has brought
rapid advancements in mobile technology.

Though it is arguably not the only means to do so, market competition is key in bringing improvements and allocating resources efficiently in the economy. The global technology market has been a great example of this: Apple and Samsung have constantly been battling over the past 5-7 years over their mobile phones, and what has resulted is an unprecedented rapid development of mobile technology. Look at how far the iPhone, for example, has developed since its release in 2007. The current iPhone 6 is thinner, lighter and of better quality material than the original iPhone- yet it is decisively faster and more advanced. Competition with Samsung's 'Galaxy' phone drove Apple to proactively seek better technologies for every single generation of iPhone, which has brought us advancements in almost every aspect of the phone.
These companies have had to keep up with market demands- if they released a product few people liked (like the iPhone 5C), they would be damaged by it by a drop in their profits; they would by their competitors and over the long term marginalised, or even worse driven out of the market. RIM (producers of Blackberry phones) have seen this- they saw huge success in the 2000s but they failed to keep up when the iPhone came.
Apple and Samsung created huge advancements in the tech industry with the primary motive of chasing profits. They have shown the potential positive effects of profit-making motives.

However, this idea of competitive market democracy brought about by the importance of profits is not always appropriate.
An industry where there is a monopoly is one example of this- this company is desensitised to most activities of the market, because it has no competitors to protect itself against. More on the idea of the monopoly can be read in this past article.

Questions can also arise with regards to whether these motives work in certain areas of the economy. Healthcare, for example, is seen as something some see as a right to citizens of a developed country, rather than something they should have to pay for. Privatised healthcare in the USA has seen some rocky results. In principle it is a dangerous idea (what if you have a car accident and wake up to foot a bill you can't pay for?), and in reality it has followed suit. The cost of insurance (as these 21 graphs illustrate in detail) is far too much in comparison to other nations, meaning many in America aren't insured- and for these people a single health accident has the potential to destroy their lives not just health-wise but financially.
Private hospitals such as those in the USA face a dilemma- should their primary motive be to turn profits or heal patients? The answer is more often than not the former, resulting not just in the inflation of healthcare costs that we've seen but occasionally irresponsible behaviour- it's opened the door to doctors prescribing excess amounts of expensive medicines, suggesting unnecessary appointments; generally practices that are not so helpful to the patient but helpful to the hospital's finances.

The Big Mac: High margins, high calories.

Profit-seeking has had visible socially negative effects in the food industry- particularly in fast food. It is far easier for companies to cut down costs than to try to increase income, and born from this came much of the artificial junk food we see today. Healthy, organic food has become something of a premium in the food industry, as the influx of Big Macs, with their far higher profit margins, have dominated the fast food market. Seeking profits, companies such as McDonalds and Burger King have sacrificed quality in their products. They have sought to make a cheap (and not so cheerful) product that has damaging impacts on the healths of those who consume it, rather than making a product that adds genuine nourishment value to consumers. Financially, their current activity is incredibly sound- but in the real world? Not so much the case.

So while there is a valid argument for private profit-seeking opening up industries to market competition and all its benefits, this is something that is perhaps not applicable to the economy as a whole. With regards to healthcare, profit-seeking is a dangerous motive to have when the primary motive of any such establishment should be to cure their patients. Similar problems arise with fast food businesses, which damage the customer's health but bring in lucrative profits.
As it often is with economics, there is no straight answer. With different industries come different situations, and thus profit seeking has the potential to be both extremely beneficial and damaging to society as a whole.