musings on music and life

August 6, 2015

Inequality

Filed under: Books — Tags: — sankirnam @ 11:36 am

I’m now making my way through The Price of Inequality; although I am not done with the book, I can say that so far it has been very interesting. Economics books can be notoriously dry, but since I am very interested in the subject (for many reasons), I am able to power through. Inequality in incomes and wealth disparities in the USA are getting worse every year – for an excellent visual illustration, see this video:

Shocking. Stiglitz attributes this to the policies that the rich (in particular the 1%) have enacted to keep their coffers overflowing. He singles out the Republicans for constantly endorsing tax cuts as well as fiscal and monetary policies that favor the rich. Stiglitz states that the insane wealth disparity we see today started with the Reagan tax cuts, which were based on Supply-Side Economics and the (now largely discredited) Laffer Curve. The wealth that was supposed to “trickle down” from the rich did not do so; they used whatever they were able to save from the tax cuts to further line their pockets. Until I read this book, I did not realize that the Reagan tax cuts lowered the top marginal tax rate from 70% to 28%!!

Aladdin-disneyscreencaps.com-5032

Inequality in wealth is not good for the overall health of a country. Government policies are supposed to be able to prevent such things, by “redistributive” methods such as taxation and socialized healthcare. In earlier decades, the terms “socialism” and “communism” had negative connotations, as the US was neck-deep in the Cold War with the USSR. Nowadays, the word “redistribution” has also achieved similar status, which is due to the inordinate power the rich now have thanks to economic policies favoring them. This NYT op-ed article about the aftermath of Hurricane Sandy has a few choice quotes illustrating the consequences of inequality (even though this is from 2012, it is still relevant):

“It’s manifestly silly (and highly polluting) for every fine home to have a generator. It would make more sense to invest those resources in the electrical grid so that it wouldn’t fail in the first place.”

“Is crime a problem? Well, rather than pay for better policing, move to a gated community with private security guards!

Are public schools failing? Well, superb private schools have spaces for a mere $40,000 per child per year.

Public libraries closing branches and cutting hours? Well, buy your own books and magazines!

Are public parks — even our awesome national parks, dubbed “America’s best idea” and the quintessential “public good” — suffering from budget cuts? Don’t whine. Just buy a weekend home in the country!

Public playgrounds and tennis courts decrepit? Never mind — just join a private tennis club!”

To see the extreme of income inequality, look at South Africa, where the rich live in mansions surrounded by high walls topped off with barbed wire, and protected by armed guards. Already we can see the beginnings of this in the various gated communities in suburbs in America. We don’t have to let things get as bad as they do in South Africa before we realize we have a problem here. Unfortunately, the passing of necessary preventative measures is stymied by the gridlock in Congress.

So what is my interest in all this? I’ve always been interested in studying economics; when I was an undergraduate, I actually wanted to double major in it, but then decided not to, simply so I could graduate early. This is something I regret to this day – while I may have graduated in a little over 2 years, I missed out on a lot of key experiences essential to undergraduate life, and so when I think back on it, my undergrad years seem like a very boring extension of high school. Anyway, part of the reason for the lousy job market for chemists (which I am experiencing first-hand) is inequality. CEO’s and other big corporations have become obsessed with furthering profits on a quarterly basis, rather than focusing on improving the underlying R+D, which has a much longer timeframe. And so, one of the ways that CEO’s and other executives can maintain quarterly profits is by continually slashing R+D. This seems like a classic “chicken and egg” conundrum – if one keeps slashing R+D, one will not have products to sell in the future, but at the same time, one has to sell the existing products to make money for R+D. At the same time, while salaries for the average worker or scientist have not noticeably improved (in some measures, PhD chemist salaries are decreasing by constant dollars and PPP), executive salaries are skyrocketing. Simultaneously, globalization has made the job market incredibly competitive and salaries are on a race to the bottom. US universities take in large number of foreign students every year for PhD work, and companies here also preferentially hire foreign workers or H-1 visa holders, because they can be paid less.

To finish off, here are some illustrative passages from the book:

In a world of globalization, creating market value had become entirely separated from creating employment. […] And even when there is investment in the United States, it’s not necessarily investment related to job creation: much of the investment is in machines designed to replace labor, to destroy jobs

[…] social protection can make for a more productive society. Individuals can take on more high-return, high-risk activities if they know there is a safety net that will protect them if things don’t work out.” *This is a similar argument used for keeping the tenure system in universities, interestingly enough.

[…] too many of those at the top don’t want to contribute their fair share to the “public goods” that are necessary if our society, and economy, are going to function.” *Similar to what is stated in the article I linked to above.

[…] if employers don’t pay workers a decent wage, if a society provides so little opportunity that many people become alienated and demotivated, then that society and its economy won’t work well.

[…] free mobility of labor without tax harmonization is an invitation to a race to the bottom” *This is especially relevant today given the buyouts and M&A’s of big corporations in order to relocate to tax havens, where they can pay lower tax rates, at the expense of the American worker.

EDIT (3/9/2016): I just finished watching this excellent movie by former Secretary of Labor Robert Reich on this very topic. It is really well made, and Robert Reich makes some very good points over the course of the documentary. I do have one major point of contention, however. One of Reich’s arguments is that education is the key to strengthening the middle class and improving the economy, and he points out that higher education massively expanded in the United States from 1950-1970 (thanks mainly to the GI Bill). It is pointed out that inequality has increased since the 1980’s and that the ‘economy’ has been doing much worse since then. However, while most other economic indicators may have been going downhill, education rates still increased; today, we have the best educated and most highly qualified workforce in the history of our species on the planet! Yet millennials and people in my generation are still struggling to find gainful employment. There are plenty of PhD’s who are either unemployed, underemployed, or desperately looking for work. If education is the magical panacea to long-term economic stability, then why do the most educated individuals in this country struggle for employment? Superficially, Reich shows that economic downturns are correlated with lower college enrollment, but I’m not sure that’s the case; I’m sure there are statistics that show otherwise. It could be this superficial (and otherwise incorrect) consideration of the relationship between economic growth and higher educational enrollment that has led to the expansion of the H-1B program, and the displacement of otherwise qualified, highly-skilled domestic workers from their jobs.

 

Edit 2 (5/16/2016): An excellent discussion by John Oliver on this very topic!

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3 Comments »

  1. Here’s a trail triggered by a post from last year on whether wealth inequality in the US is ‘someone else’s problem’ or a ‘first-world problem’ or ‘our problem’.
    http://bit.ly/LTPHLA
    http://bit.ly/12s86GB

    Comment by Arvind Iyer — August 11, 2015 @ 9:06 am

    • Interesting, thanks! Didn’t know that Rajini was a follower of Lee Kuan Yew.

      Comment by sankirnam — August 11, 2015 @ 9:14 am

      • Here’s one statement to that effect.

        Comment by Arvind Iyer — August 11, 2015 @ 6:37 pm


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