Hey monkeys,
So Forbes recently released their list of the top Billionaires in the world and there are several, interesting numbers hidden within that list. While I perused the list and read the various views about it, I couldn’t help but think about the issue of income inequality in our society. Coincidentally, I stumbled upon a TEDtalk regarding the same topic and how globalization and technology have the potential to create even greater income inequality. The speaker, Chrystia Freeland, suggests:
One of the things that worries me is how easily what you might call meritocratic plutocracy can become crony plutocracy. Imagine you're a brilliant entrepreneur who has successfully sold that idea or that product to the global billions and become a billionaire in the process. It gets tempting at that point to use your economic nous to manipulate the rules of the global political economy in your own favor. And that's no mere hypothetical example. Think about Amazon, Apple, Google, Starbucks. These are among the world's most admired, most beloved, most innovative companies. They also happen to be particularly adept at working the international tax system so as to lower their tax bill very, very significantly.
Let's start with technology. Those same forces that are creating billionaires are also devouring many traditional middle-class jobs.When's the last time you used a travel agent? And in contrast with the industrial revolution, the titans of our new economy aren't creating that many new jobs. At its zenith, G.M. employed hundreds of thousands, Facebook fewer than 10,000. The same is true of globalization. For all that it is raising hundreds of millions of people out of poverty in the emerging markets, it's also outsourcing a lot of jobs from the developed Western economies.
I’m actually on the fence here. I can see both sides of the issue and I’m not entirely sure I can think of a solution that would actually solve the problem. Part of the problem is that it has many moving, interconnected parts and we would have to answer some tough questions to truly solve this problem. Nonetheless, I wanted to open this up for discussion. What do you monkeys think? Any thoughts, concerns, opinions or criticisms?
The problem is rather simple, corporations are beholden to shareholders that demand month over month profit increases. This leads corporations to slash and burn as many American workers as possible, since our standard of living is much greater and workers in American demand higher wages.
In China wages have been increasing at 10-12% a year in certain industrial sectors, the minute that it becomes financially sensible to leave China, companies will. Vietnam is the next hot spot for manufacturing.
So what we have is a race to the bottom where middle class sustaining jobs leak and run toward the cheapest country.
I've studied theories on competitive advantage and how global trade allows countries to produce what its best at producing thus benefiting the entire world.
However when you change the scope of the argument and ask "It may be good for the world, but is it good for america?"
The answer is obviously no, since Americans cannot compete with cheap labor from abroad. Nor can you make the argument that all Americans will suddenly become engineers, entrepreneurs, doctors etc.
Those not intelligent enough will still need a way to earn their living, but that's harder and harder for the average American in today's time.
Thus naturally as global trade continues to increase, the share of Americans unable to support themselves will increase and thus lead to an increase in welfare etc.
Global capitalism has not been good for middle class Americans.
So many companies got their start here in America, yet they show no loyalty to those who live here. Take IBM for example, they've slashed American headcount for many years now, that there are hardly any Americans left that work for IBM.
But you can't expect loyalty from corporations, the profit incentive to outsource is too strong.
This is where regulations and laws are needed. In India for example, after they won their independence, very strict regulations were put into place that foreign goods were not to be allowed and this lead to an increase of a strong manufacturing base.
There are two solutions:
Solution 1: Use government to increases taxes/tariffs so that cheap labor abroad offers no competitive advantage to American Corporations thus taking away their incentive to offshore jobs. They may lead to less productive efficiency, but will give Americans the chance to earn a living wage where they can afford food and basic necessities and get themselves off welfare.
Solution 2: To start employee owned companies that are not open to outside investment, a worker cooperative like the one here in Spain that employs 100,000 people http://www.mondragon-corporation.com/eng/about-us/
And establish consumer co-ops communities that are self sufficient to a large degree, so that the farmers supply the food and the workers going to the factory around the corner are making the farm equipment while the miners are digging the ore.
A self contained environment where GE, IBM, etc become irrelevant. Mondragon for exmaple has its own bank and university and gas stations etc, thus the people in the surrounding area rarely have to worry about its jobs being sent anywhere else, since all the products are consumed by the local economy
Now since the politicians in power dem or repub are being paid large sums of money to run their campaigns its unlikely that any government action is going to take place.
Take Elon Musk for example, his space X produces rockets makde 100% in America, and hopefully will edge out Lockheed and Boeing.
Multinational corporations are great for the world but bad for America
Great post and analysis. It seems like you have put a great deal of thought into this. Rhe one concern I have is regarding solution 1. Don't you think it's a little unrealistic for the government to pass those regulations given the huge corporate lobbies?
"In India for example, after they won their independence, very strict regulations were put into place that foreign goods were not to be allowed and this lead to an increase of a strong manufacturing base."
A strong manufacturing base? You are way off here. The onerous regulations of India have hurt its economy very badly. In 1991 there was a drastic reduction of regulation and that has lifted millions out of poverty. If only some more reforms were to take place, hundreds of millions would benefit from the job creation.
Your analysis can be easy countered with the obvious fact that most of the jobs that we're being outsourced went to India and China thus this boom you are pointing out to in India is the exact cause of the problems here in America.
You're making a false equivalence that opening up the American economy will also result in more jobs like it did in India.
Regardless of what you say, India's manufacturing grew as a result I it's protectionist actions. It opened its economy after pressure from multinational corporations who understood there was a large pool of educated and cheap labor to be used for more profit.
Thus it was opened and jobs exported to India, you cannot claim the same will or has happened in America after it opened it borders.
Your argument is childish and false
I like the insight you draw that multinational corporations are good for the world but bad for the United States.
Yes absolutely, I mentioned
"Now since the politicians in power dem or repub are being paid large sums of money to run their campaigns its unlikely that any government action is going to take place."
So solution 1 is probably not practical.
It's a very tough problem that doesn't have any easy solution.
I'm patriotic by nature and seeing the hardship of middle class Americans bothers me quite a bit. I know Americans are hard workers and we are bright and we have done great things in the past. I don't like seeing my country suffer.
Definitely. It's hard to watch but in time, I think we'll find a solution.
Another driver is the decrease of power for the average American worker. That is, a decrease in union participation. Corporate america has been squeezing more and more of each worker, while giving them less and less each year. I don't know how most Americans don't take issue with this. The CEO and executive pay is increasing year over year, while the people actually doing the work get laid off, and increased working hours (and responsibilities). Heck, a lot of people don't even make enough to sustain themselves. The rich pay the politicians to put policies in Washington that benefits them, at the expense of the middle class. There's a very good documentary on this issue called "Inequality for All". I challenge all the people in this forum to watch it and comment on it.
I agree. It's something that I hadn't factored in but it's definitely part of the problem. Executive pay is moving along rapidly and while some are deserving of such pay, I think a vast majority of the workforce is suffering stagnating pay. It's tough to change though because I think the change has to come from within
Read the book Plutocrats: Rise of the Global Elite. It's amazing and hits on related topics.
I've actually heard a lot about it. I'll check it out in the upcoming weeks. Thanks! What do you make of the growing income inequality?
Just watched an interesting documentary on the subject called "Park Avenue." It's on Netflix and worth checking out.
I'll check it out soon. Unfortunately, House of Cards is dominating my netflix time haha
Pt. 1 The Problem
Companies essentially have 2 types of costs: labor and capital. Imo the current situation and future horizons can be summed up as follows:
In order to compete with other companies, it's necessary for firms to try and become as efficient and cost-effective as possible.
The capitalist (or manager) can squeeze labor but there's a price floor to wages such that at a certain point, the manager won't be able to attract any workers. The only other way to cut costs is to invest in technology.
However, as new technologies gets adopted industry-wide, it's necessary to constantly seek out ways to produce more cheaply and efficiently, which consequently has the effect of increasingly displacing human labor. (Side note: I believe this is what largely drives technological progress, science is not a benevolent march towards reason and progress as it's often viewed).
This trend will hit a breaking point when production outstrip the ability for workers to consume. Mass unemployment and a glut of low-wage workers will result in a huge hit to consumption. No matter how many goods and services gets rolled out on the supply-side, the consumption/production cycle cannot continue if no one is buying anything.
There will be huge income disparities and inequality as owners of capital can claim an enormous portion of the profits since machines are doing most of the work and you don't need to pay machines. There will be huge populations of people that are left out of the production cycle.
We are already seeing trends of this happening as more and more goods/services are being aimed towards the upper class: http://www.nytimes.com/2014/02/03/business/the-middle-class-is-steadily…
But it's probably only a matter of time before the economic forces that usurped blue collar jobs will do the same to white collar jobs (example: lawyers today, higher education industry looks increasing under threat as well), as well as the outsourced (once American) blue collar jobs in the developing world once they catch up and adopt efficient means of production themselves. In other words, using the example from the article, cheap fridge aimed at middle class turns into expensive fridge aimed at upper class, turns into uber expensive fridge for uber wealthy class. Fact of the matter is, the customer base is shrinking and you can only do so much to turn a fridge into a luxury fridge. At the end of the day, you'll have more and more fridges with less and less people with money to buy it.
Therefore, even the wealthy will eventually feel the pain as no company can survive without customers. It's evident just glancing at the American cultural landscape that our nation is one that's built on consumption. The Chinese economy heavily depends on the insatiable need for Americans to consume.
At this point the system will need to change, no amount of policy can address the structural problems of a capitalistic system that doesn't rely on human labor.
End of pt. 1, some more side notes:
I'm not a Marxist or Communist but the above predictions were laid out by Marx in Das Kapital, so he deserves the credit. It's just a prediction but I don't think it's unlikely and I think he was right about many things, many of his insights into culture/capital/history are brilliant. He wrote many articles in Europe while Lincoln was fighting the South during the civil war and his analysis into American slavery is very interesting, I'd highly recommend it to anyone curious about that topic (it's also fascinating from a historical perspective to visit a time when Lincoln was a controversial figure who Marx was writing an op-ed about in European publications).
A major theme in his writings is the idea of dialectical materialism (borrowing from Hegel). It's a simple concept but also somewhat difficult to conceptualize, similar to people having trouble with evolution. In fact the two are highly related. The basic premise is that the economy is out of our hands. It evolves from organized chaos and is very much decentralized. As ants and bees have no idea of the superstructure of their own labor, neither do humans. Case in point: mercantilist writers and intellectuals in Britain emerged well after the wheels of trade and urbanization were already well in motion. Has powerful implications: that economic forces precedes culture and intellectual thought.
Related TED talk for those wanting a better analysis: http://www.ted.com/talks/susan_blackmore_on_memes_and_temes
It's clear that Putin is still stuck in the old cold war-world view, but I think we underestimate how entrenched America still is in cold war mentality as well. I had to go out of my way to try and get exposure to Marx in college and it wasn't in an economics class but a philosophy class. I really think he deserves a role in our curriculum. His ideas have influenced me but that doesn't mean you have to be a communist. I'm also heavily influenced by the bible but I'm not a Christian and don't believe in God. There are real nuggets of wisdom in all these great works.
Pt. 2 The Solution
Purely speculative and more just food for thought but this is where I stand at the moment.
I think a natural progression from technologically driven inequality is more socialism. I especially liked an article I read from German (or Norwegian? too lazy to search for it) professor advocating for abolishing all entitlement programs like medicare, social security, food stamps, unemployment, etc., and just handing out a $20k check every year to anyone that's living and breathing.
For one, the administrative costs would be far lower than all these entitlement programs (checking who's eligible, paying off the army of consultants/lawyers/financiers that has to get involved, the even greater army of government workers to carry it out, etc.). Would there need to be nuances like a population cap? Maybe, but speaking in broad strokes, the important thing is that it addresses the problem that we are more technologically advanced and efficient than ever in human history yet avg working hours hasn't really changed in the past century, despite the predictions made by many influential economists like Keynes. When can we reap the fruits of our labor?
I think as it is, lot of work is just "made up" and superfluous. Like high fashion marketing or a lot of job titles that have "social media" in it. I'm not writing off these jobs but do we really need that many of them?
I like that we are such a meritocratic society and we emphasize the "eat what you kill" American mentality. It's hard to stomach (for me as well), the idea of someone getting $20k for doing nothing but just being alive.
However, I don't think most people are that lazy. I think most people will take the $20k and use it to better themselves, strive for something better or pursue personal interests/creative endeavors. I don't think this minimal safety net will kill innovation. It just helps people from truly falling through the cracks and living in poverty.
As a matter a fact, you could see it as this person having a job, which is to not go to jail. Sure, some people are just evil but I think the great majority of people are born good and are pushed into a life of crime by poverty and a lack of opportunities. It costs >$20k to keep a person in prison, why not just see it as payment for not going to jail.
It's not all positive, one can paint a darker scenario where we turn into fat cows being herded around by machines like in Wall-E. But I believe history and time is cyclical. That neither capitalism nor socialism are inherently good or bad, but that it all depends on the context. That both will come and go like waves in the ocean. But that's a whole different topic.
Loved the post. Interesting that you brought Marx up. I've always wanted to learn about him and his principles. The progression you laid out in your first post seems well thought out and logical to me. One thing I do wonder about is the timeline of the events and if the masses will rise against the growing disparity despite their best efforts. It's a tough predicament because in some ways, it might be a pivotal moment for us as a species and civilization. It'll be interesting to see how it plays out and if we find an innovative solution to it. I hope it happens in my lifetime for sure
People will always work in their self interest, so it is not surprising to hear that the most innovative and admired companies work the system in their favor.
It doesn't surprise me either but at some point, someone has to give in. Just from talking to a lot of people around the world, I know that there's growing frustration about the disparities. They see themselves working hard, every single day and dedicating their lives to their work but not being able to crack the next social class or rung. Don't get me wrong. I'm not taking sides here but just playing devil's advocate to see what people think
The National Bureau of Economic Research (NBER) published a very interesting study relating to "assortive mating" and income inequality. A link to an article in the Economist, referencing the study, is provided below.
http://www.economist.com/news/united-states/21595972-how-sexual-equalit…
"Nowadays, successful men are more likely to marry successful women. This is a good thing. It reflects the fact that there are more high-flying women. Male doctors in the 1960s married nurses because there were few female doctors. Now there are plenty. Yet assortative mating (the tendency of similar people to marry each other) aggravates inequality between households—two married lawyers are much richer than a single mother who stacks shelves. A new study* of hundreds of thousands of couples investigates the link."
"The wage gap between highly and barely educated workers has grown, but that could in theory have been offset by the fact that more women now go to college and get good jobs. Had spouses chosen each other at random, many well-paid women would have married ill-paid men and vice versa. Workers would have become more unequal, but households would not. With such “random” matching, the authors estimate that the Gini co-efficient, which is zero at total equality and one at total inequality, would have remained roughly unchanged, at 0.33 in 1960 and 0.34 in 2005."
"But in reality the highly educated increasingly married each other. In 1960 25% of men with university degrees married women with degrees; in 2005, 48% did. As a result, the Gini rose from 0.34 in 1960 to 0.43 in 2005."
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