Why Do We Have So Much Inequality and Why Are Workers Screwed Today?

While being bored at work, I drew a scheme of the way how the capitalist economy worked, and even though I had developed a clear sense of the kinds of problems that plague us, I was once again reminded very clearly and simply what the problem is. The essential problem, which has not really changed during human history, is that a few elites hold onto most of the economic resources and try to make sure that it stays this way, even if they actually do not earn it and many people still live in poverty. Why is inequality growing as the rich are getting richer, while workers are being screwed, unemployment is high and wages are stagnant or falling in some cases?

The capitalist economy has at its basis the exploitation of labor. Workers get paid less than the value they produce for their employer. Whatever value the worker produces less the wages he gets is called the surplus value. That surplus value is absorbed by the capitalist employer so he can make investments to generate more profits in the future. That is the simple Marxian model. If you add the growth of the financial sector to that, then it becomes somewhat more complicated, because of the fictitious value that is embedded in financial capital. In that model, an increasing share of the economy gets swallowed up into the financial sector, leading to cartels and monopolies, and fewer resources are devoted to real goods producing industries, because their relative profits are lower. The financial model of the economy has been developed by Rudolf Hilferding (“Finance Capital” 1910).

The reason why the exploitation of labor is so interesting to study is naturally because very few economists, social scientists, politicians, businessmen and journalists bother to analyze the economy in this way, and since we may consider the exploitation condition to be so central to our current economic order, it is only appropriate to want to analyze it. Unfortunately, what is more likely going to happen is to have people accept the current social order, and focus on smaller problems to blame for whatever problems that exist.

But it is not just intellectual satisfaction, which encourages the critical study of capitalism. The current economic system produces an enormous amount of wealth, but also produces an enormous amount of inequality and poverty. We are producing more food than there are people on earth, and yet 842 million people suffered from chronic hunger from 2011 to 2013 (World Food Programme 2013). The richest 85 people in the world own as much wealth as the poorest 3.5 billion people combined (Wearden 2014). Among OECD countries, the share of national income going to workers decreased from 66% in the 1990s to 62% in the 2000s (Economist 2013). In the United States, 95% of all income gains between 2009 and 2012 went to the richest 1% of society (Cronin 2013). These data points make it very clear that wanting to critique the system is urgently necessary in order to think about policies that can ameliorate these glaring social problems that confront us in the twenty-first century.

Inequality itself is an important subject to study as well, because there seems to be growing evidence that rising inequality may contribute to lower rates of economic growth, since much of the capital is siphoned off into speculative investments in the financial sector, which are not productive, and the very wealthy consume only a small share of what a broad middle class would consume if it were still strong. But the middle class is weak because inequality is so huge. Less investment in the real goods and service producing industry and low levels of aggregate demand are really bad signs for workers across the world, because that puts a downward pressure on employment and wages, which is superbly ironic, because the income paid out as a result of work and labor is the main way for workers to share in the gains of productivity and economic growth. Since the data tells us that the labor share of income is declining, while the capital share is increasing, we should not be surprised that income and wealth inequality has increased correspondingly.

I provide an explanation for the rise in inequality and the loss of economic status of workers.

  1. Globalization: with the development of information communication and transportation technology, the capitalists of the world were now able to exploit global labor and natural resources and are no longer dependent on their respective nation-states, thereby making local labor in rich countries redundant, which puts a downward pressure on wages and, in some cases, employment.

    Globalization has many meanings, and a whole academic literature is devoted to study this subject from various different angles. It is not just the expansion of McDonalds or Hollywood culture across the whole world, though it carries that cultural and consumer aspect as well. The key factor I want to focus here on is the availability of cheap labor anyplace in the world. Of course, capitalists won’t go anyplace, because otherwise dirt-cheap sub-Saharan Africa would have full employment by now. There are certain institutional features that also have to be right for investors to come in, but East and Southeast Asia and Latin America have thus far provided that stable framework for foreign investments, and the collapse of the Soviet Union and the prevalence of anti-socialist and anti-statist rhetoric (see Fukuyama’s End of History (1992) argument) have certainly helped in pushing forward this neoliberal framework of making global labor available for multinational corporations, who can sell their cheap-labor goods to developed countries, and take on more profits.

    Some people would object that not only was globalization bad for US workers, but it was also good for US consumers, because the products are sold cheaper. There is a small amount of truth to that statement. One of the things that had completely taken me by surprise when I came to the US was that many of the clothing items were shockingly cheap (all import-ware), while locally sourced services like education or health care remained really expensive. But aside from that direct comparison, we should notice as well that many goods are still more expensive than they could be, and that has to do with the market power of a few really big firms. Baran and Sweezy (1966) describes this state as ‘monopoly capitalism’, and we certainly do live very much in a monopoly capitalist world. This is the long-running tendency of capitalism, and has certainly been intensified as a result of globalization and the associated competition of various producers. Competition is the key pillar behind liberal economics, but leads ultimately to consolidation.

  2. Technology: While globalization only leads to the displacement of local labor, which has created all kinds of nativist sentiments among the Western working class, technology has the potential to be globally labor-displacing. There is a possibility that with increasing innovation we see the displacement of labor on a global scale. The farmer example comes to mind here: one farmer used to be able to feed himself and his family at most. Now, one farmer produces enough food for himself and 100 other people, which allows those other people to do other jobs.

    It is feasible today that workers find other things to do when the machine displaces them, but given the high rate of unemployment and low labor participation rates in many developed countries, I very much doubt that the regular economy continues to have much demand for these displaced workers.

    Some people would object that we can’t go that far in displacement, because technology- while being error-free in routine tasks- is often very imperfect in cognitive-level tasks, but I would not underestimate the potential of rapid improvements. Sooner or later the factor labor becomes too expensive in the eyes of the capitalists, and if the opportunity for displacement exists, then capitalists will at least want to try it.

    Some people object that it is possible for technology to be labor-complementing rather than labor-substituting, but that is only true for a small group of jobs, like doctors, who use electronic medical records, or teachers, who teach online courses. What we really see is the disappearance of middle class jobs, especially if they are of a routine nature, leading to labor polarization (see Autor and Dorn 2013), which is characterized by a schism between a small pool of high-wage jobs and a large pool of low-wage jobs, and almost no jobs in between. The high-end jobs remain hard to automate, and so technology, if it is used, remains labor-complementing. Low-wage jobs, on the other hand, are also either hard to automate or it is feasible to automate but not economically reasonable, since the cost of the machine exceeds that of low-cost labor.

    In the mean time, the winners of this arrangement are clearly the owners of the technology, such as Bill Gates or Mark Zuckerberg, who can use their technology and earn billions of dollars in monopoly profits, while the companies they control hire only very few people (low labor overhead means more profits for owners). Many technology vendors are also selling their products to corporations to help them monitor and control their workers, which in a very Taylorist sense, may be good for productivity and the bottom line, but is very alienating for the workers involved.

  3. Financial deregulation: since the deregulation of Wall Street, many of these financial firms have massively expanded their scope such that more and more parts of the economy are shaped by very short-term profit maximization considerations at the expense of more prudent long-term financial thinking, such as investing in worker training and higher wages to attract better talent. Firms are under permanent cost pressure as the financial firms and investors increasingly dictate the decisions that they have to make, including downsizing, layoffs, and more low-wage and contract work arrangements. That naturally increases inequality (see Kalleberg 2011, p.28).

    As financial ‘innovation’ leads to more ways to produce revenues for financial firms they directly compete for investor money that would have otherwise gone to real-goods and service producing industries (which does not include the finance sector, which at most is an intermediary in the economy). The firms are, therefore, even more inclined to maximize profits, pay out a high amount to shareholders and do share buybacks, which does nothing to expand business operations and hire workers. Weak overall demand for labor leads to a downward pressure in wages, and more inequality.

    Another piece of the tragedy is that as financial sector profits exceed those of the manufacturing and other employment-intensive and productive industries, many of the most talented people in the country are flocking to work for those same financial firms that provide them with really high wages, even though they are of no direct benefit to the economy or other workers at large. The amount of social waste that is associated with this capturing of young talent is incalculable (Tankersley 2014).

    Finally, financial deregulation has allowed more speculation in all kinds of sectors, but most importantly in housing and residential investments. Those speculative investments make a few very wealthy owners that can snap up many properties really wealthy, but does nothing for many people, who can not afford these houses. In the short time, when, in fact, such a strategy of giving mortgages to people who could otherwise not afford it had been pursued in the early-2000s it led to the biggest financial crisis since the 1920s. The resulting recession, bank bailout and austerity measures have led to even more redistribution from the bottom to the top of society (Blyth 2013). Student loan debt, credit card debt, housing debt, medical debt, and government debt are higher than ever, and that, by necessity, benefits the rich creditors.

  4. It takes money to make money”: The people that have benefited from the first three points can use their wealth and re-invest it to produce even more income and assets. Piketty (2014) used the example of the university endowments of major Ivy League universities to show that the big university endowments have seen percentage returns in excess of those of the smaller universities, which means that the big endowments are getting bigger faster than small endowments. That is not really surprising, because people that own a lot of capital have more opportunities for investment, and they would still earn more even if their percentage gain were somewhat smaller. A 5% gain on a principal of $100 million ($5 million) is still larger than a 10% gain on a principal of $100,000 ($10,000). Needless to say, this tendency reinforces and exacerbates already existing inequality. It completely flips around any kind of meritocratic argument. You have heirs like the Walton family that literally have to do nothing, but let their investments mature and collect billions of dollars a year in dividends (while paying their Walmart workers starvation wages).
  5. Political power of the rich: The people that benefit from the policies in the first four points want to cement their economic wealth by attaining political influence. They buy politicians, legislators, presidents, judges and administrators to make sure that they get even more money with favorable tax and subsidy policies, and that there won’t be any pro-poor redistribution policy anytime soon (studies show that the poor and middle class virtually have no influence over US policies: Page and Gilens 2014, and that the rich rigged the political institutions to benefit themselves: Hacker and Pierson 2010). The story of the Koch brothers, who are spending hundreds of millions of dollars in campaign contributions to promote a right-wing agenda of corporate tax cuts, environmental pollution, and anti-labor policies clearly reveals the intent of the billionaire class to retain and reinforce the status quo of extreme inequality (“Koch Brothers Exposed” 2012; video link).

    It is really ironic that the wealthy, who are already swimming in capital, are receiving so many tax breaks, which has a highly regressive impact and does nothing to stimulate job creation, as the supply-siders passionately argue. The supply-side argument, leaning on the French economist Jean-Baptiste Say (1803), is that if we give tax breaks to wealthy people, they will invest more savings into firms that will use it to expand hiring. But there is no clear link between these two activities. The reason for hiring labor is the demand for products, and rich people will not increase their demand for products with an increase in tax breaks, and if so then only marginally.

    What happens if tax breaks goes to rich people is first that executives are more encouraged to pull capital out of the firms, and transfer it to their own bank accounts, which by definition is a removal of capital from the productive sector. With an increase in wealth going to the rich managers, more capital is tied up in the speculative financial sector, since that is where the relative returns are higher than in the traditional investment in firms, where real job creation can be found. It would, of course, be a stretch to suggest that cutting taxes on the rich will lead to less job creation, but it would be foolish to suggest that these tax cuts will lead to more job creation. The empirical data suggest no correlation between tax cuts for the rich and the rate of job creation (also read Johnston 2014).

The fundamental economic problems that we are facing are, therefore, of a socio-political nature. Capitalists are capable to use current property structures to concentrate society’s resources into their own hands, even though they don’t contribute to the national wealth, and even though many people in the world are living in poverty. Contrary to what some classical liberals suggest, there is no way how market forces can naturally ensure a just distribution of society’s spoils. Marx and Engels had called for the abolition of private property. They meant that if all workers are responsible for wealth creation, all workers should similarly be entitled to control that property. This demand is not very unreasonable. It certainly does not make sense to have many workers work hard, and give almost the entire spoils to a few people at the top. The problem with Marxist ideology has never been the substance of the argument, but the feasibility of its implementation. All workers can barely control the finances of a company, so in the Leninist form of “really existing” socialism, the state has done that job on “behalf” of the workers.

Critics of a more communitarian form of economic life usually complain that the government allocation of resources creates an even more grave form of inequality, namely that between the high officials, who want to control their population at all costs, and that of the entrepreneurial population that wants to make things better, faster and more efficient for society while earning a profit. I will agree that it does not make sense to concentrate resources into the hands of a few government officials, but it is questionable whether the current economic order produces very different results than what we have seen in authoritarian socialist states. Besides, even in the most repressive socialist states, initiatives to create public employment and guarantee universal education and health care are the pillars of socialist policy, which may not have allowed the people in those states to become rich, but at least give them a minimum standard of living.

In the current neoliberal era, we see, on the contrary, that even the most basic gains of the social democratic movement, whether it is retirement security or health care provisions are sacrificed for the sake of the profit maximization of big companies. Pretenses about protecting the interests of the population, whose wages and benefits are destroyed and removed, are no longer being made. The billionaire class that wants to maintain the current irrational order for as long as possible, essentially support a diversionary propaganda campaign on three different fronts, which I will examine in part:

  1. Blame the victim: Ronald Reagan made a big deal out of the “welfare queen” who used multiple identities to bilk the government for welfare money to convince the white working class to support Ronald Reagan for president and make cuts in social welfare programs. There is certainly some truth to denouncing this one woman, who has committed serious welfare fraud (see Levin 2013), but this is an exception to the rule. Most welfare recipients are living in poverty, and certainly do not relish their situation.

    A conservative Republican Party took over Congress in the mid-1990s, and Bill Clinton signed the welfare reform bill into law, which converted the old welfare program into a new welfare-to-work scheme, which mandated welfare recipients to go to work at rock-bottom wages, and provide employers with a readily exploitable source of labor. In addition, lifetime benefit eligibility was tightened to five years (Gatta 2014). The economic impacts of the welfare cuts should not be underestimated: by forcing poor people into the labor force, it tends to push down the reservation wage, i.e. the minimum wage the employer has to pay workers to induce work, and so many more people crowd into the low-wage sector, making it even harder for current low-wage workers to get ahead.

    In any case, the blame-the-victim strategy of the powerful interests in this country can not solve any social or economic problems, but they can rouse certain segments of the public to focus on the victims. How reasonable is it to put the victim of the robbery in jail rather than the robber? There are two more lines of division in US society that deserve special consideration: immigrants and African Americans.

    Immigrants, mostly from Latin America and various parts of Asia, have created a lot of fears among the native population that jobs can be lost, and/or that these immigrants live on the dole and milk the welfare state. If both ideas are held simultaneously, then it is, of course, an internal contradiction. How can people take jobs and suck on welfare at the same time? This statement would make sense among the domestic working poor, that do receive subsidies while they are working, but these are domestic and not foreign workers. For foreigners without permanent resident status or naturalized citizenship it is not possible to receive public benefits, contrary to popular wisdom.

    Politicians are, therefore, very open to more illegal immigration, even though they won’t say that explicitly, because these undocumented workers provide low-wage labor to their employers, pay taxes to the government, but are not eligible for government benefits. Are immigrants going to lead to local job losses? I did not find any conclusive study that supports this argument. Over the short run a large influx of workers in a particular sector will probably lead to some increase in local unemployment, but the benefits also tend be greater because immigrants also create demand in the local economy, and that supports jobs.

    African Americans in the US have been an oppressed and discriminated against minority, and the Ferguson, Missouri incident, where a while police officer killed an unarmed black teenager leading to huge public outcry, is a case in point of the simmering racial tensions that are alive in US society. There have certainly been significant gains in civil rights of blacks since the 1960s, and the fact that many public sector jobs, city halls and even the White House are occupied by black people can attest to those gains. But these gains are far from enough. The median white family in the US has 13 times more wealth than the median black family (Kaufman 2014). The youth unemployment rate for blacks (21.4%) is much higher than the national average (14.2%) (NPR 2014).

    And this economic inequality has to breed social tension. When white workers are screwed by their employers, then black workers are even worse off. Many black kids drop out of school and see no economic prospects ahead of them, and so they spend more time on the street. The city then sends in the police to increase monitoring of black people based on past precedent of discrimination and crime incidents. The shooting of Michael Brown became a mere matter of time, and the simmering racial tensions then come to the fore. What then happens is a confrontation taking place between whites and blacks with whites accusing blacks of resorting to crime, welfare and bad behavior, while blacks complain about police brutality and discrimination from whites. As Gunnar Myrdal (1944) had described a long time ago, racial tension has been the “original sin” in the United States, and makes a more generous social policy more difficult to accomplish. But in order to ameliorate racial tensions it is precisely necessary to create a multiracial coalition to oppose the oligarchy and demand social policies that benefit people of all races.

  2. Focus on social issues: The powerful people use social issues like abortion, gay marriage, gun ownership and religion to distract the people from the economic issues confronting them. Social issues often contain a moral nature. The views that people form about those issues is very much shaped by their family background, their friendship and social networks, and their own ideas of how society should look like. Political leaders have difficulty in adjudicating these differences in viewpoints, and I don’t really find it reasonable to bring the people to make a clear and unambiguous choice here. Views will naturally evolve, and policies follow societal norms with some time delay. Thomas Frank (“What’s the Matter with Kansas”, 2005) had written on this issue.
  3. Entertainment: There is no method that is more effective for the powerful than to have the powerless not care about politics at all. Politics is a subject that is not very easy to contemplate, and when one does it, it does take time and effort in order to understand it well. But it is much easier to watch mindless TV advertisements and be consumers of mass media. In the Roman Empire, bread and circus was an important way of keeping the people distracted such that they don’t dare to challenge economic inequality. The people need bread to survive physically, and they also need to watch gladiators kill each other so they can have a “good” time. People need food stamps and football games today.

We have essentially two options going forward. We will either establish a new policy consensus where policies to benefit the mass of the people, like a higher minimum wage, public jobs program, a strengthening of social programs, free education and medical care, secure retirements etc., or we will continue on the current path of a growing oligarchy and risk a massive increase in social tensions.

The realistic assessment in the immediate future is that the oligarchic tendencies are going to increase, but it can not continue indefinitely, though not for purely economic reasons. Piketty has already shown us that extrapolating from purely economic trends, more and more wealth will be concentrated with the few large capital owners. But the increasing oligarchic tendency, interestingly, is no longer compatible with a traditional capitalist economy that relies on overall growth in consumption and wages. In an environment where growth opportunities are diminished, the pressure for more capital to be drawn away from the real-producing sector is becoming more acute as more capital becomes transferred to maintaining capital assets like housing property and land.

Since economic trends do not bode well for downward redistribution of income and wealth in the immediate future, the changes in policy have to occur on a socio-political level. In other words, people have to demand a change in policy and in institutions and organize in groups to bring it about. For people to demand those changes, I anticipate that we need more immiserization of the population and we need another major financial and economic crisis, which given the continued deregulated nature of the financial markets is certainly very likely. The short-term impact is a political radicalization of the population, which can be exploited by the most savvy political interests. There is a risk that people will be radicalized into fascism, which the Germans can speak of with first-hand experience. But there is also a possibility for left-wing political forces to gain a big audience. Whether it is Syriza in Greece or Bernie Sanders in the US, there is certainly great hunger in the population for more progressive political change.

We need a political organization of the losers, consisting of workers, unions, unemployed, women, seniors, youth, racial and ethnic minorities, religious institutions etc., and they have the obligation to go out on the streets to demand the kinds of changes that benefit the masses. If there is a critical mass on the street, then even the most fancy repressive apparatus of the state will not be sufficient to disperse the crowd.

This also gives the opening for part of the elite faction, which is sort of skeptical of the current system despite profiting from it, to take the sides of the common people and take leadership positions via democratic elections. They need to have the consciousness about the problems and possible solutions, and they need to have the commitment to carry out these principles. One might think of Teddy and Franklin Roosevelt as examples in US history. The scope and effectiveness of the implemented political changes will naturally depend on the ability of the public to keep the pressure up against the political elites. The oligarchs will never be eradicated in any society, and they will try to regroup to find ways how to re-establish the status quo ante, as we have seen with the unraveling of the New Deal era reforms since the 1980s.

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