Considerations

New York Times colum­nist Bob Her­bert points out a dis­heart­en­ing trend on how the finan­cial cri­sis is increas­ing the gap between the rich and poor.

A rig­or­ous new analy­sis for the Rock­e­feller Foun­da­tion shows that Amer­i­cans are more eco­nom­i­cally inse­cure now than they have been in a quar­ter of a cen­tury, and the trend lines sug­gest that things will only get worse…

The team’s find­ings were grim. Sim­ply stated, more and more fam­i­lies are fac­ing utter eco­nomic dev­as­ta­tion: com­pletely out of money, with their jobs, sav­ings and retire­ment funds gone, and nowhere to turn for the next dollar.

Eco­nomic inse­cu­rity has been increas­ing for at least a gen­er­a­tion and per­haps longer, with very dan­ger­ous lev­els being reached in this lat­est recession.

There are many rea­sons for the increased inse­cu­rity despite the obvi­ous effects of the ongo­ing eco­nomic cri­sis. Banks have been rip­ping off their cus­tomers. Defla­tion, if it occurs, will hurt the poor and middle-class the most since they have less sav­ings that would increase in value in a defla­tion­ary envi­ron­ment. More peo­ple are default­ing on credit cards and other unsus­tain­able lev­els of debt. Com­pa­nies are hoard­ing cash instead of hir­ing addi­tional labor or pur­chas­ing capital.

While the gen­eral trends are bad enough, the spe­cific data on the increas­ing gap between the rich and poor is out­right depressing:

•    61 per­cent of Amer­i­cans “always or usu­ally” live pay­check to pay­check, which was up from 49 per­cent in 2008 and 43 per­cent in 2007.
•    66 per­cent of the income growth between 2001 and 2007 went to the top 1% of all Amer­i­cans.
•    Only the top 5 per­cent of U.S. house­holds have earned enough addi­tional income to match the rise in hous­ing costs since 1975.
•    In 1950, the ratio of the aver­age executive’s pay­check to the aver­age worker’s pay­check was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
•    As of 2007, the bot­tom 80 per­cent of Amer­i­can house­holds held about 7% of the liq­uid finan­cial assets.
•    The bot­tom 50 per­cent of income earn­ers in the United States now col­lec­tively own less than 1 per­cent of the nation’s wealth.
•    The top 1 per­cent of U.S. house­holds own nearly twice as much of America’s cor­po­rate wealth as they did just 15 years ago.

•    More than 40 per­cent of Amer­i­cans who actu­ally are employed are now work­ing in ser­vice jobs, which are often very low pay­ing.
•    For the first time in U.S. his­tory, more than 40 mil­lion Amer­i­cans are on food stamps, and the U.S. Depart­ment of Agri­cul­ture projects that num­ber will go up to 43 mil­lion Amer­i­cans in 2011.
•    Approx­i­mately 21 per­cent of all chil­dren in the United States are liv­ing below the poverty line in 2010 — the high­est rate in 20 years.
•    Despite the finan­cial cri­sis, the num­ber of mil­lion­aires in the United States rose a whop­ping 16 per­cent to 7.8 mil­lion in 2009.
•    The top 10 per­cent of Amer­i­cans now earn around 50 per­cent of our national income.

Many free-market enthu­si­asts on the far right — and I do sup­port cap­i­tal­ism myself — see no prob­lem with the increas­ing wealth-gap. After all, as long as peo­ple become suc­cess­ful through legal means, what is the wrong in that? Every­one is free to com­pete in the mar­ket; some win, some lose. But they miss a cou­ple of impor­tant points.

First, a lot of wealth trans­fer from the poor and mid­dle class to the rich is through means that are uneth­i­cal at best and out­right fraud at worst. Sec­ond, an unre­strained free mar­ket leads to a col­lapse of the mar­ket itself. A text­book exam­ple is legal action against monop­o­lies. In the­ory, a sin­gle, suc­cess­ful com­pany will even­tu­ally dom­i­nate a mar­ket to the point where no one else is able to com­pete — and this leads to higher prices and lower qual­ity sim­ply because the firm will be able to do what­ever it wants. At that point, the gov­ern­ment will act to restore the mar­ket to equi­lib­rium by break­ing up the com­pany and cre­at­ing var­i­ous com­peti­tors largely on equal foot­ing. Back to square one.

The same is true in soci­eties — an extreme wealth-disparity between the rich and poor is a mar­ket fail­ure of soci­ety. When the rich con­trol most of the money, invest­ments, and cap­i­tal, the poor and mid­dle class are then unable to com­pete and increase their eco­nomic stand­ing because the mar­ket is stacked against them. The rich have a monop­oly as well — but this time on wealth.

Just as gov­ern­ments need to pro­tect a func­tion­ing mar­ket by break­ing up monop­o­lies, so too does the gov­ern­ment need to act to ensure that the gap between the rich and poor does not become too extreme.

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