Wealth Inequality, Signs of a Broken Economy

During his June 26, 2017 interview with Judy Woodruff of PBS NewsHour, Warren Buffet said, “If you go to 1982, when Forbes put on their first 400 list, those people had a total of $93 billion. They now have $2.4 trillion, a multiple of 25 for one. This has been a prosperity that’s been disproportionately rewarding to the people on top.” Later he says, “The real problem, in my view, is – this has been – the prosperity has been unbelievable for the extremely rich people.”

On this topic, David Brooks wrote in a New York Times article, “There is a structural flaw in modern capitalism. Tremendous income gains are going to those in the top 20 percent, but prospects are diminishing for those in the middle and working classes”. To which professor Gabriel Zuchman of UC Berkeley tweeted a graph showing that in fact these tremendous income gains are going to the top 1%. With the largest amount of income growth going to the top .001%. While real annual income growth for the vast majority of Americans has been flat or negative.


 

The idea of income inequality is not a new concept, as with all things macroeconomic, over time the measure of income inequality expands and contracts. However, the current trend seems to be picking up steam. Based on another UC Berkeley professors findings, Emmanuel Saez, in 1982, the highest-earning 1% of families received 10.8% of all pretax income, while the bottom 90% received 64.7%. Now, three decades later, the top 1% received 22.5% of pretax income, while the bottom 90%’s share had fallen to 49.6%. These are all similar findings and illustrate a growing frustration within society.

Does all of this data indicate that there has been a breakdown in the U.S. economic model? Based on Labor Department reporting the economy is essentially at full employment. However, significant wage growth has not occurred for the vast majority of Americans. I don’t believe this is an issue of timing, check back in a couple years of sustained full employment and it’s possible that the trend illustrated on the chart above will reverse, but I’m not confident.



Our economy in experiencing a fundamental change that has been building steam over the past 30 years. I believe the chart above shows that sometime during the 1980’s (the greatest decade) our economy reached “peak human”, since then the use of technology has been eroding the U.S. wage base. It’s often said that technology has been increasing the productivity of work over the entire history of man, technology only increases wages and the number of jobs. This was likely true for the entire history of the world, until now.. Previously technology has never replaced our unique cognitive abilities. Meaning up until now technology has been a tool, but over the past few decades technology has become the means of production, marginalizing a big percentage of the workforce into low wage service industry jobs.

In the 1920’s the US reached peak horse, up until that time a variety of technologies were created to increase the productivity of the horse. When horses spoke of technology, they told each other that innovation will only increase the number of jobs that horses can do. Since the 1920’s however there has been a sharp decline in the equine labor market, due to the invention of the car. Horses can still find jobs, but they don’t pay what they use to. The human wage base will continue to erode as well, I believe it’s inevitable, until most of the worlds wealth will be held by the owners of technology. Policies need to be crafted to minimize this impact, however the theme of David Brooks article cited above is very much on point. The motivations of world leadership is not motivated at this point to move in that direction.

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