Blindfolded in Freefall: The Unreported Causes and Impacts of Income Inequality

I: Introduction

II: Unseen Fault Lines

III: The Crisis of the Current Order

IV: Solutions and Conclusion

I: Introduction 

Irish writer Oliver Goldsmith blended art and economic reality in his 1770 poem The Deserted Village when he wrote: "Ill fares the land and to hastening ills a prey, where wealth accumulates and men decay." Today, the people of United States witness a level of inequality of wealth and income not seen since the so-called "Gilded Age." But just as Mark Twain subtitled his namesake 1873 novel, the story of the Gilded Age is "A Tale of Today."  There is a lively debate about this topic in public life. However, almost without fail, people are missing the point. Unfortunately but not unexpectedly, American public discourse has largely ignored the major causes and effects of income inequality. This misplacement of focus distracts attention from ultimate solutions to the disparity problem.

What everyone does know is that America faces a gigantic inequality problem. In fact, researchers from UC Berkeley reported in 2013 that the concentration of wealth in the top few percent of earners has "surged" since 1970. In fact, we now find ourselves in a situation where the richest one percent of the country owns 40% of the wealth of the country and makes 23% of the income. The last time that the chasm in this country between haves and have-nots was so wide was in 1928. And of course, it would be an understatement to say that things did not turn out perfectly then. Moreover, 2012 was the first year in all of American history in which the bottom 9-out-of-10 earners made less than half of the country's income (Saez). The vast majority of the country agrees that this level of inequality is in some way "bad," whether immoral or unsustainable, and those who disagree hold a contention simply too preposterous to consider.

This essay will explore the widely untold causes and impacts of income inequality in this country. Accordingly, in part II, I will examine the roots of the widening gap, and in part III, the effects. In part IV, I will explore some solutions to our ailment with the causes in mind.

II: Unseen Fault Lines

What is perhaps least surprising about the inequality debate is that the reported causes are perfectly flipped across the party line. But both of the mainstream political camps believe that the problem is federal economic policy. The Republican Party contends that regulation is holding the free market back, and that individual determination is the way from one side of the divide to the other. The Democrats, on the other hand, believe that a lack of regulation from the federal government has spawned the chasm, and thus the solution is pure Keynesianism. Some players on both sides have gone so far as to claim that federal income tax levels are the problem. Nobel Laureate economist Paul Krugman argues in his 2012 book End this Depression Now! that a burst of government spending can solve the disparity problem (Krugman, in passim). It seems clear to me that all of these arguments fall flat in the face of basic macroeconomics. 

The first thing that must be established when examining the true cause of the great wealth divergence is that the federal government does not have an economic magic wand. Hyper-partisanization of the news media causes public discussion of the income divide to focus on hot-button issues like taxes, government spending, and financial regulation. However, these factors are negligible, almost humorous, when considering the much more significant "unseen fault lines" of our economy. The most logical factor to examine today is population. More specifically, the overwhelming cause of income disparity is the stagnation of real wages, which, in turn, has been caused by the saturation of the labor force since the 1970's.

To begin, we need further historical context.  In the whole of United States history, wages rose, adjusted for inflation, every decade from the end of the Civil War until the 1970's. However, since that time, wages have stagnated. Professor Richard Wolff of the University of Massachusetts, Amherst reports that median wages were higher in 1978 than they are today, of course adjusting for inflation. Moreover, worker productivity has continued to rise since that time, despite the freeze in pay. For instance, the manufacturing sector now earns more than three times more profit than it did in 1970 (Wolff, in passim). Overall, profits have soared while wages lie limp. This departure of profits from wages is clearly the source of income inequality, as the working class of this country, which today lives in freefall,  gets its money from wages, while the so-called "haves" get money from profit. Such is the classical dichotomy between the European proletariat and bourgeoisie, which accurately applies to the situation today. The more interesting question arises when we ask why wages have stagnated.

Source: Economic Policy Institute

As previously hinted, the stagnation of wages has happened as a response to shifts in population. The economic principle of supply and demand holds that as the rarity of a commodity goes down, so too does the price. This law also applies to the labor market: as the number of workers increases, the employer's necessity to pay higher wages is reduced. Three long-coming workforce population changes all came to fruition in the 1970's, having a disastrous effect on our economy: the replacement of many human workers with machines, the outsourcing of formerly American jobs overseas, and the mass entry of women into the workforce.

The first phenomenon for examination is that the replacement of human workers by computers reduces demand for workers. Since the onset of the "Computer Revolution" in 1957, set off by the invention of the computer network, industries have rushed to automatization, in the stead of human beings. In computer science, Moore's Law holds that, basically stated, the capabilities of computers will double every two years. This, in turn, reduces the cost of computer operations. In fact, Professor Carl Fray of Oxford University wrote in September 2013, that "the cost per computation declined at an annual average of 37 percent between 1945 and 1980...[and] 64 percent between 1980 and 1990." Such a drastic shift from people to machines has led to the outright extinction of many jobs. Casualties include telephone operators, grocery store stock-keepers, assembly line workers, and so forth. (Fray and Osborne) YouTube's own CGP Grey has presented a thoughtful and easily-digestible analysis of this phenomenon.

Next, the increasing corporate preference of cheap, overseas workers to US workers in the past few decades decreases demand in the American labor force. Currently a shell of its former self, the American labor rights movement was once a force to be reckoned with. All too often, pundits moan about those "greedy, meddlesome" labor unions, clearly not knowing where the eight-hour work day, weekend, pension, minimum wage, and end to child labor all came from. The action of workers united, with leaders such as Eugene Debs and Cesar Chavez, has won the American working class a generally acceptable quality of life. However, these victories are expensive for the capitalist class, which is always looking for a way to maximize profits. With the advent of global communication and transportation technology, such as telephone, email, and airplane, it is now feasible for corporations to forego the success of American workers, instead exploiting those in countries like India, China, and Malaysia. Linda Levine of the Congressional Research Service reported in January 2011 that: "Major US companies, initially responding to heightened competition from Japanese and European multinational corporations, opened facilities abroad during the 1970s and 1980s that turned out goods formerly produced by comparatively well paid, often unionized US factory workers" (Levine, 3-4). It only makes economic sense. Why would any company pay Jerome in Chattanooga at $7.25/hour or Sally in Seattle at $15/hour, when all along they could have been paying Sanath in Mumbai at $0.23/hour minimum wage? It is further estimated by the CRS that just in the US service sector, just between 2003 and 2008, five million jobs were removed from the US market to be moved abroad. This represents a devastating evisceration of the labor force.

The final workforce population shift is, by far, the simplest. Because of varied factors, be them the second-wave feminist "Women's Liberation" movement, or simply the need for a second income because of already stagnating wages, women began entering the US labor force in droves in the 1970's. The Bureau of Labor Statistics reports that between 1970 and 2011, the number of working women grew by 36 million people, or 15% of the population (BLS, 17). Such a gargantuan influx of supply demolishes any remaining demand for labor.

The moral of the story, so to speak, of examining labor population is that demand from employers for workers has disastrously fallen. Now, instead of companies competing for workers, workers compete for jobs. The labor market is now saturated with workers. Because the demand in a saturated market will never rise, wages have frozen, while profits continue to increase. Thus, the working class and the owning class fly apart, while the previously existing "middle class" is torn asunder. The fact that the causes of this divide are unreported makes it impossible for us as a country to truly address the issue.

IV: The Crisis of the Current Order

Once again, with regards to the most serious consequences of income inequality,

the mainstream imagines that the president and Congress are in some sort of divine Pantheon—that once again, every issue is a matter a federal government policy. Despite this fantasy, the calamities of personal debt and political oligarchy simply cannot be solved by a wave of Barack Obama's pen. Rather, they are both direct results of income inequality. 

In December 2007, the American economy tanked, and it has not recovered since. As a result of a bursted housing bubble, the financial sector fell off a cliff. As a surprise to absolutely no one, the Republicans and Democrats presented different explanations for the problem. The Democrats say the nefarious bankers tricked the public into taking garbage loans, while the Republicans blame subprime borrowers for defaulting. However, the one thing on which both teams agree is the factor that they gloss over: personal debt. Both parties acknowledge that the crisis was set off by some incarnation of personal debt, but it perplexes me why Republicans and Democrats alike never ask the question of exactly why our working class felt it necessary to take on so much debt in the first place. As Mark Twain quipped in The Gilded Age, "That is a peculiar condition of society which enables…this remark: 'I wasn't worth a cent two years ago, and now I owe two millions of dollars'" (Twain and Warner, 171).

The answer to this question is the very stagnation of wages that was detailed in part I. The underlying theme of the American psyche is the so-called "American Dream." That is, that with a potion of sweat and elbow grease, every successive generation can have a higher quality of life and higher level of consumption than its parents did. Americans, after decades, began to define themselves by their material achievements. This culturally ingrained perception was not washed away when wages stagnated in the 70's. As Professor Richard Wolff explains, "[Our working class] could not and did not forego rising consumption. It found other ways to cope and thereby laid the groundwork for one part of the current crisis" (Wolff, 3)

We coped by dramatically expanding our borrowing of money. If we could not make the money, we would take out a loan. The American working class now lives in a rampant credit card culture. The Federal Reserve Bank of San Francisco finds that: "U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income" (Reuven and Lansing).  By the time that the financial crisis began, the American people were literally under water; they owed more than they had in disposable income. It was just a matter of time before we had taken out so much more debt than we could afford. Eventually—say, 2007—the leverage façade would collapse, and recession would emerge. Therefore, the most fundamental cause of the debt-fueled depression in which we find ourselves is income inequality from wage stagnation.

Source: Federal Reserve Bank of San Francisco

Even more egregious than our personal debt addiction, the American political system is trending toward oligarchy. Oligarchy is defined as a government controlled by a small group of elite individuals, while a democracy is a government controlled by the masses. Perhaps obviously, when the concentration of wealth surges to the top, the elites will have increased control over politics. The United States is a fantastic example of this. Our oligarchs include Sheldon Adelson, George Soros, and the infamous Koch Brothers. After construction of the constitution by the Supreme Court that allows corporate money to be protected as speech, most notably in the case of Citizens United v. Federal Election Commission, politicians in this country have been completely taken over by their donors. More than two billion dollars was spent in the 2012 presidential election, and approximately 95% of federal elections are won by the candidate with the most money (Hickey).

The correlation between donors’ interests and legislative results has also been empirically documented. A 2014 study by researchers from Princeton and Northwestern University examined scores of policy decisions since the 1980’s and concluded: “Majorities of the American public actually have little influence over the policies our government adopts...In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose” (Giles et al., 37). It logically follows that our oligarchy will only further solidify if income inequality continues to increase.  

IV: Solutions and Conclusion

Yet another bothersome trait of the mainstream is their love of "Band-Aid" fixes. According to the Democrats, what is the solution to income inequality? Raise the minimum wage to $10.10, of course. Maybe spend more money on public schools. It is not as if we just got stupider as a nation since 1970, and the minimum wage has been raised several times, to no permanent avail. The Republicans, on the other hand, still cling to their "trickle down" economic theory, which was called "voodoo economics" by their very own George Bush. With the vast amount of cash already surging to the top, the "trickle down" would have become a "deluge down" by this point if only the Republican theory actually held any water. As a country, we need to prefer ultimate solutions.  

Ultimate, fundamental solutions, by definition, attack the root source of the problem. Therefore, we must establish this cause of income inequality, which we did in part I. The broadest, most significant cause of the great divergence is the contrast between stagnating wages and rising profits. So how do we stop wage stagnation?

Wages have stopped rising as a result of fallen demand for labor, in relation to the labor supply. Can we fix the problem on the supply side? 

It would be socially unjust to prevent women and immigrants from entering the workforce. Only the most reactionary thinkers would propose that. Also, halting computerization retards the progress of technology, which is a definite benefit to humanity. Finally, a ban on outsourcing jobs could theoretically be enacted, but such a provision would be devilishly hard to enforce. Even if US companies did end up stopping their employment of Third World citizens, American workers would still be at a global disadvantage. Clearly, we cannot quell the skyrocketing supply of labor. That leaves demand. 

Under our current system–the very system that spawned this crisis—demand for labor is determined by employers, who will only pay a certain amount of workers a certain amount of money, so that they stay as profitable as possible. Economists call this the "Law of Surplus Value." In order for wages to continue rising alongside corporate revenue, this set up must inevitably be changed. The clearest improvement would be to eliminate the demand-restricting  employer. 

The majority of people who have been soaking long enough in the backwash of the mainstream will panic at this proposal, before properly understanding what it really means. Firstly, eliminating the employer does not mean eliminating employment. What this alternative entails is the removal of the "owner" position. A company under the current system has several employees doing jobs while the employer controls the fruits of their labor just by virtue of having bought whatever means they use in their work. Any actual task which employers might do notwithstanding, the "boss" contributes nothing by simply possessing the means of production. Instead, we could organize our businesses in such a way that they would be owned by all the workers who actually create the enterprise's success. 

Such a "cooperative" enterprise would not fall prey to all of the ills detailed in part I precisely because the workers would be fulfilling their own interests. If corporate decisions were to be made in this democratic manner, no workers would decide to fire themselves in favor of some child factory workers in China. No workers would lay themselves off to avoid paying health benefits. If workers made decisions that effect themselves on their own, it is inconceivable that working people would take any action which would harm them to spare a dime. And moreover, the fundamental cause of income inequality, identified to be the divergence of profits and wages, would be erased. Wages and profit would become inseparable. There would be no more people on top of the corporation demanding that the workers give up money for the owner's profit. 

"How would such workplace democracy actually work?" the mainstream might ask. This is not an earth-shattering difference, in reality. In the status quo, most corporations are governed by a board of directors, the most prolific stockholders. The board meets periodically and votes to determine company matters. Now, instead of directors gaining a stake based on a monstrous amount of wealth, the board of directors could be composed of the workers. The entire company could decide what course of action was the most beneficial for all. Of course, a large body of laborers could not decide every single matter of minutia. Managerial positions would still be a necessary ingredient in the corporate structure. However, managers ought to be elected and recalled democratically so that they can be assured to act in the best interest of the workers as a whole. Cooperative businesses bring the justice of democracy into the place where we spend most of our adult lives: the workplace. 

Though they are certainly far from the majority, cooperatives, or "co-ops," do indeed exist today, and many of them are successful. The largest cooperative corporation in the world is the Mondragon corporation, a global enterprise based in the Basque region of Spain. This federation of smaller co-ops, which works mainly in the area of industry and finance, has a revenue of more than $15 billion, and it employs nearly 75,000 people, the most of any company in northern Spain (Mondragon, in passim). For many working families, Mondragon has been a savior. Because of a 2008 bursting property bubble, not unlike our own, Spain's labor sector has gone down the drain. Unemployment peaked in the first quarter of 2013 at an astounding 27%, higher than the American Great Depression. It stands today at 24% (Trading Economics). However, the Basque region, dominated by the worker driven Mondragon co-op, has the lowest unemployment in all of Spain, at 16% (El Pais). This astounding achievement is due to the fact, as explained in the company's mission statement, that Mobdragon's chief priority is giving people jobs. When workers are in control, they simply will not fire themselves if other courses of action are possible.

Democratic enterprises end disastrous income equality by stopping the "surge" of this country's wealth into the hands of a few, and by reversing the trend of companies to stop hiring people. It dissolves the division between the haves and have-nots.

Even if Republicans, Democrats, and their surrogate news media continue to miss the mark on the income inequality issue, the causes thereof will not disappear. Quasi-feudal wealth relations such as the status quo are indefensible and unsustainable, both economically and socially. If America was a human body, the economy would be the cardiovascular system, and income inequality is a massive tick that sucks all the blood to one place. If the mainstream refuses to address the issues, we must take the economy into our own hands. And there is no better way to do so than to literally take the economy into our own hands—all of our hands.

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