Sustaining inequality

The chart below comes via OECD. I have selected the U.S. (red), Sweden (green), and Denmark (purple). The OECD average in each metric is labeled blue.

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The typical measure of inequality is the Gini Coefficient, or Index. The higher the ratio, the higher the level of inequality. You’ll note that U.S. inequality significantly exceeds the OECD average and far exceeds inequality levels in both Sweden and Denmark. The same contrasts appear in the other two measures. The last metric represents the ratio of the top 10 percent of household income to the bottom 10 percent. Again, the U.S. is the severe outlier.

Inequality in the U.S. is on the rise, reaching its highest levels since just before the Great Depression.

gini index us since 1947

The OECD recently published In It Together, the third book in a series, about inequality. The authors conclude that inequality retards economic growth, suppresses social mobility, and wastes human capital.

This is hardly news to those who have been paying attention. But despite countless books and essays and reports telling us how bad things are, inequality continues to rise. How much higher and for how long can the trend continue?

It seems to me that U.S. inequality is now thoroughly embedded in both the economy and the political system, the result of a vicious cycle in which economic power begets political power, which begets further economic power, ad infinitum. In other words, it may be nearly impossible to disrupt the trend, notwithstanding calls for revolution to the contrary. Our ancestors revolted once, but current generations seem unable to muster the political will to do so again. And it would likely require a revolution, rather than an evolution, to disrupt the vicious cycle.

Money, we should understand, sides with the reactionaries. For every progressive gain in this country, and there have been several (e.g., Social Security, Medicare), conservatives have countered in systematic efforts to chisel away the achievements. Now that corporations are persons and dollars know no bounds, reactionaries have the upper hand. That’s certainly true among the states, where conservatives now dominate.

Suppose, however, that the continued accumulation of wealth in the hands of a few, which is good in the near term for the rich, creates an inherent instability. If inequality retards economic growth, for example, or foments further discord among the rabble, there will be diminishing returns for even the wealthy. Yes, they will continue to extract almost all of the output from the economy (as Piketty informed us), but it will be an economy that produces far below its capacity as it gradually shrinks.

real gdp to August 2014

Can those who have created and so far sustained such a system unwind it? Can Wall Street be the solution rather than the problem? Of course not.

Yet, we must also acknowledge that Congress, the best that money can buy, cannot regulate or legislate a saner alternative. After all, its members depend on Wall Street and corporations for their livelihood. They’re part of the vicious cycle.

The remaining option is self-destruction. If the economic-political system cannot resolve its own instability, it will reach a crisis point. Then, and perhaps only then, will the Rest of Us prosper. Ugly scenario, I admit.

But Americans are ignorant of history and immune to its lessons. Few anticipated the Great Crash, and those who did hardly mattered. When it hit, jarring sensibilities and shaking foundations, America was ill-prepared to face the consequences. So, it endured decades of misery and pessimism, coping in fits and starts until WWII. In war’s aftermath, the country enjoyed relative prosperity on the strength of financial regulations and economic and social safeguards. The halcyon days didn’t last long; reactionaries were too keen on dismantling the New Deal and the economic achievements it enabled. The rich weren’t rich enough and the poor too few. That had to change. And so it did.

I began this post with international comparisons. There is a reason for this. America need not reinvent the wheel. There are countries that do it better, much better in fact. The challenge is to get from where we are, and are trending further, to where we need to go. I would prefer a path that does not require a crisis. But I see neither revolution nor evolution in the cards.

It’s a blind march to probable oblivion.