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Inequality in the US

by Elliot Campbelton
June 2020

For 40 years, the U.S. led global economy has produced an enormous improvement in human welfare. Since 1981, the proportion of the world's population living in extreme poverty on less than $1.90 per day has fallen from 42 percent ,to 10 percent. But in countries with advanced economies, inequality of income and wealth has surged. Nowhere has it surged more than in the U.S. where reliance on free market forces has been strongest. That magnifies rewards for those at the top and leaves most others behind. 

The trend helps those with higher levels of education and hurts the less educated. It lifts residents of major cities while leaving those in small towns behind. For growing numbers of Americans it's just harder to get ahead. Why is this happened and what are the consequences?

Here are four causes. 

One : The digital revolution creates enormous wealth for those with the skills and preparation to take advantage. But it eliminates what economists call "middle-skill jobs." Computer software and industrial machines now fill roles from clerical tasks to routine manufacturing that once produced middle class incomes for workers without college degrees. One of those forces is technological progress that has increased the value of abstract problem solving, interpersonal communication or organisational skills. These are things that highly educated workers tend to be very capable of and simultaneously has devalued a lot of cognitively intensive but repetitive tasks in offices and production lines. In so doing it has hollowed out the set of job activities available to non-college workers and pushed them arguably downward into personal services, food services, cleaning, security and transportation where their skills are more interchangeable with other workers and where there is less of a return to experience over the employment lifecycle. In short it may be said the system has created a great world for the highly educated and a much less economically secure and inviting world for people who don't have high levels of education. 

Two : Competition from emerging economies like China's combined with reduced trade barriers have further reduced prospects for workers without advanced skills. This has had devastating consequences in sectors such as textiles, furniture and leather goods.The biggest economic story of the last 50 years has been China's rise. China going from a poor and backward country in perpetual political and economic crisis to a frontier manufacturer with a well-educated, highly available and skilled labor force, using modern technology, marching up the productivity curve from the 1980’s. This in no small part is due to the size of its population and the natural resources held there, but this only tells part of the story. The decision to allow free mobility of labour, to adopt Western technology and foreign direct investment were key factors in accelerating Chinas growth. The side affect of this would be that it had a dramatic accelerant effect on the rate at which competition entered the U.S. market for manufactured goods, comcominent with the increased rate of decline of U.S. manufacturing employment. Over the course of the next 7 years (to the 90's) about 20% of all U.S. manufacturing jobs disappeared. This was compounded by the financial crisis, causing an additional fall of 11%. Effectively one-in-three manufacturing jobs no longer existed that had existed around 2000. 

Three : Breakthrough firms such as Apple and Amazon now attract revenue across the world. Proof that building an internet enabled product, gives rise to larger earnings than in a previous generation. At the same time, domestically, the share of workers represented by labor unions has dropped by half, shrinking their power. The lowest paid workers have seen the buying power of the minimum wage drop as the government has not increased it to keep pace with inflation. Fewer than 70 percent of men with a high school degree or less are working. The eroded value of the minimum wage in many cases, the decline in unionisation, hurt workers bargaining power in ways that amplified their already weakened bargaining power as a result of competition from technology and cheaper labour abroad. 

Four : The shifting power balance has rewarded the wealthiest through policies in government and private institutions. From tax changes that increased their income to college admissions procedures that opened doors for their children above others. The market incentives inequality creates for hard work and risk taking helps make America's economy dynamic but it also imposes costs. While some inequality is unavoidable, the problem comes when dynamism gives rise to dynasticism, preventing the next generation a fair shake.

The results : Voters have thrown out the party in control of the White House or one chamber of Congress in six of the past seven national elections. A result of the economic malaise that has given rise to the social malaise and cries to upending the capitalist system.