Unbundling the Middle Class
#3 in the series: How the Internet Evaporates the Middle
- Unbundling Media
- Unbundling Higher Education
- Unbundling the Middle Class (this post)
- Unbundling Work (in process)
I’m frequently asked by friends who aren’t in hi-tech: What just happened? Traditional media companies are gone. Industry after industry is being changed dramatically by technology: Is no business safe? College is unbelievably expensive: Will it change as well? What are “incubators,” and why are there so many of them? Will Google and Facebook run the world? Why have so many older workers been unemployed for so long? What’s happening to the middle class in America?
And… are all these things somehow connected?
— — — — — — — — — — — — — — — — — —
- “There should exist among the citizens neither extreme poverty nor, again, excessive wealth, for both are productive of great evil….” –Plato (427–347 B.C.)
- “An imbalance between rich and poor is the oldest and most fatal ailment of any republic.” — Plutarch (46–120 CE)
- “The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, is the great and most universal cause of the corruption of our moral sentiments.” –Adam Smith, Scottish political economist (1723–1790)
- “The causes which destroyed the ancient republics were numerous; but in Rome, one principal cause was the vast inequality of fortunes.” –Noah Webster, American editor and writer (1758–1843)
- “A State divided into a small number of rich and a large number of poor will always develop a government manipulated by the rich to protect the amenities represented by their property.” –Harold Laski, British political theorist (1893–1950)
- “I believe that if you want to fight inequality you have to do it starting at infancy.” — Michelle Bachelet, President of Chile
- “Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people.” — Janet Yellen, Chair of the Board of Governors of the Federal Reserve System
- “The perennial conviction that those who work hard and play by the rules will be rewarded with a more comfortable present and a stronger future for their children faces assault from just about every direction. That great enemy of democratic capitalism, economic inequality, is real and growing.” — Jon Meacham, Pulitzer-prize winning author, executive editor at Random House, and former editor of Newsweek
- “The difference between rich and poor is becoming more extreme, and as income inequality widens the wealth gap in major nations, education, health and social mobility are all threatened.” — Helene D. Gayle, President & CEO, CARE
- “There is always inequality in life. Some men are killed in a war and some men are wounded and some men never leave the country. Life is unfair.” — John F. Kennedy, former President of the United States
- “I believe that as long as there is plenty, poverty is evil.” — Robert F. Kennedy Jr., former U.S. Senator
- “Discussions of inequality, after all, aren’t about prosperity, but about petty spite. Why should you care how much money I make, so long as you are happy?” — Ben Shapiro, Shillman Senior Fellow at the David Horowitz Freedom Center, and editor-at-large, Breitbart News
- “Liberals talk about the ‘income inequality’ and the ‘unfairness’ and the disparity of the haves and the have-nots in New York City. Who has been running that city for all this time? Who has created the underclass in this country? It’s the Democrat Party.” — Rush Limbaugh, radio talk show host
Unbundling the Middle Class
Is increasing inequity in America leading to the evaporation of the middle class? Or, put another way, is the American Middle Class becoming “unbundled”?
Determining the status of our Middle Class is critical for the U.S. economy. If we temporarily ignore any moral arguments, economists generally agree that — to have a healthy economy — poorer people need to be upwardly mobile, and those who have achieved upward mobility need to maintain that position, or else there will be fewer people to contribute to economic growth. So, if we have rampant inequity, with many poor people, a small number of rich people, and not much in between, our economy is at risk — not to mention, of course, the well-being of tens of millions of people.
But do we have rampant inequity? Is the Middle Class evaporating? And does it “matter”?
What’s the Middle Class?
First, let’s distinguish between inequity — with economic connotations of unequal income, work opportunity, and chances for advancement — and inequality, which (to me) adds societal connotations related to unequal human rights. Though inequality may be the source of some inequity, let’s focus on the dynamics affecting the economy and work-related issues, and especially as they relate to the Middle Class.
It turns out that defining the Middle Class is as fuzzy as defining the middle of markets (which I focus on in the first two papers of this series). The U.S. Census Bureau doesn’t provide a classic definition, nor is there any commonly-agreed set of statistics defining the U.S. middle class, with estimates ranging from 25% to 66% of the U.S. population. Some economists use household income numbers, which vary based on the number of workers in each household, while others focus on the number of individual wage-earners. Economists — and many who aren’t practitioners of the dismal science — apparently have the same perspective on the Middle Class as Supreme Court Justice Potter Stewart’s famous line about pornography: “I know it when I see it.”
Perhaps the best approach to classification, then, is how people identify themselves. In a Pew research study in 2008, 53% of Americans thought of themselves as Middle Class; in 2014, the number had dropped to 44%. The percentage of those identifying as Upper Class also dropped, from 21% to 15% — while those identifying as lower class rose from 25% to 40%, an increase of over 60% in just six years.
So as far as the Middle Class is concerned, the Middle Class is undeniably shrinking — and that creates a wicked problem.
What’s a Wicked Problem?
It’s tempting to take all of the inequity-related trends separately, but there is rising evidence that they’re all interconnected. And it’s my belief that the technology-charged shifts in our economy — and the resulting change in the fundamental nature of work and learning — together comprise one of the most fundamental wicked problems of our time.
Wikipedia defines a wicked problem as a challenge “…that is difficult or impossible to solve because of incomplete, contradictory, and changing requirements that are often difficult to recognize. The term ‘wicked’ is used to denote resistance to resolution, rather than evil. Moreover, because of complex interdependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems.”
From an individual’s perspective, there are five important questions to ask about any wicked problem.
1. Do you believe it’s actually occurring? (If so, there has to be evidence that you can believe — or will at least admit you believe.) If so…
2. Do you believe it’s a actually a problem? (A problem to some is an opportunity to others — and if we as humans can make more money or feel less pain by ignoring it, we will.) If so…
3. Do you believe there is a knowable source of the problem? (Evidence that you could believe would have to point to this.) If so…
4. Do you believe there are valid actions to take that could contribute to a solution?
There’s also a fifth step: Do you believe you can, should, and will be part of a solution? But I’ll leave that to another paper.
Take global climate change, one of the most controversial issues of our time. Here’s how the question chain works for that particular wicked problem:
- Do you believe it’s actually occurring? If no, you’d stop here: None of the evidence is apparently swaying you. If yes…
- Do you believe it’s actually a problem? If no, you probably are either benefiting from the existence or source of the problem, or you believe others should continue to benefit from it. If yes…
- Do you believe there’s a knowable source of the problem? If no, then you don’t see any sources in the evidence you’ve already accepted. If yes…
- Do you believe there are valid actions to take that could contribute to a solution? If no, it may look too complicated, or you may not have done enough research to know what you could do. If yes…
Well, if you said “no” at any step along the way, it’s not likely you’ll be taking action toward a solution any time soon — unless you believe that even if it’s not happening, the potential risks are so great that it’s still worth taking action.
Applying this approach to inequity, we’ll take each of these steps in turn. I’ll try to approach these as logically as possible. Inequity involves a variety of emotion-charged issues, and any discussion brings up strong perspectives based on core beliefs and values. It’s important to recognize, though, that any dialog is counter-productive if it:
- Falls back on stereotypes, such as classifying the poor as lazy, or the rich as heartless.
- Ignores statistical facts because we don’t like the directions they lead, or chooses only a single set of facts to bolster an existing belief.
- Uses emotion-coded labels to classify potential solutions to inequity (if indeed you agree it exists), such as socialist, elitist, etc.
So, let’s walk through the Wicked Problem chain.
Step #1: Is Inequity Actually Occurring?
Not everybody buys the contention that inequity is on the rise, or that it’s even a real issue. So what does the data say?
From 1979 to 2004, Federal Government statistics showed substantial gains for the top 20% of all earners — and torrid growth for the top 1%. Worldwide, by 2004 just 85 people held as much wealth as the 3.5 billion people at the base of the pyramid.
Then came the Great Recession.
Here’s what wealth concentration is reported to look like since the recession:
- The top 10%: Today receives nearly half of all income (48%).
- The top 1%: Garnered 95% of all income growth from 2009 to 2012; holds more than a third of total wealth in 2010; and today makes 20% of all income.
- The top 0.1% (one tenth of a percent): In 2010, held 15% of all wealth, and today makes almost 9% of all income.
Real income in the U.S. grew by 62% for all households between 1979 and 2007. But most of those gains are skewed toward the top: After-tax income of households in the top 1% of earners grew by 275%, but income growth for the bottom fifth of earners was a measly 18%.
The very rich are reported to be paying less in taxes: “In 1995, the 400 taxpayers with the biggest incomes paid an average of 30 percent in taxes; by 2009, the tax rate of those Americans had dropped to 20 percent.” It’s worse at a state level: According to the Institute on Taxation and Economic Policy, the projection for 2015 is that the top 1 percent will pay an average of 5.4 percent, while the poorest fifth will pay more than double that, 10.9 percent.
“We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both.” –Louis Brandeis, U.S. Supreme Court Justice (1856–1941)
Re-posted from The Atlantic http://goo.gl/VlrT4
The U.S. government’s annual report on the economy states clearly that post-recession income gains have largely bypassed the poor and middle classes, the bottom 80% of wage-earners. A study by Sentier Research found that people at the exact middle of the income charts in the U.S. were making over 3% less in inflation-adjusted dollars than they were at the beginning of the 2009 economic recovery — and families with three or more children were making an average of over 10% less.
Today, about half of all workers in the U.S. make about $26 an hour or less. A recent U.S. census report found that median household income, adjusted for inflation, was about $51,000 in 2012, down about 9 percent from an inflation-adjusted peak of about $56,000 in 1999 — so most adults in the U.S. have seen no income gains since the economy hit bottom in 2009. And more than three out of four Americans — 76 percent — say they’re living from paycheck to paycheck.
About half of all workers in the U.S. make about $25 an hour or less — and more than three out of four Americans say they’re living from paycheck to paycheck.
Our imbalanced income dynamic is sometimes referred to as “the Great Gatsby curve,” after the F. Scott Fitzgerald novel focused on the activities of the rich. Using Census Bureau data, the Washington Post broke down incomes across quintiles, and the results seem pretty clear:
This disparity in the portion of income earned from work — what economists call labor income — is particularly striking. According to the Economist, “Over the past three decades, labour’s share of output has shrunk globally from 64% to 59%.” In fact, there’s a lot of persuasive evidence pointing to the fact that the current level of inequity hasn’t existed for over 100 years. According to the Census Bureau, “Generally, the long-term trend has been toward increasing income inequality.” Russell Hancock, president of Joint Venture Silicon Valley, an organization that counts many brand-name hi-tech firms as members, states flatly, “There’s no longer a middle class. The economy is bifurcated and there’s nothing in the middle.” In the same article, David Autor, MIT Economist, “…points to a ‘barbell-shaped’ job market, with strong demand at the high and low ends and a ‘hollowing out’ of the middle.”
A New York Times article maintains that “The American work force has been growing polarized for decades. On one end, there are highly skilled jobs like writing software or performing surgery, and on the other are service jobs like child care and cutting hair. The jobs in the middle, meanwhile, such as factory work, sales and bookkeeping, are shrinking.” And according to a McKinsey study titled The World at Work, “…the share of national income that goes to worker compensation has fallen, and income inequality is growing as lower-skill workers — including 75 million young people — experience unemployment, underemployment, and stagnating wages.”
Worldwide, the trend is accelerating: A study by the international charity Oxfam projects that by 2016, 50% of all the wealth on the planet will be held by the top 1%.
According to economist Thomas Piketty (PEEK-a-tea) in his seminal book Capital in the Twenty-First Century, wage inequality in the United States is “probably higher than in any other society at any time in the past, anywhere in the world.” In fact, having a Middle Class may turn out to have been a temporary anomaly, with global economies rapidly returning to their historical dynamic of inequality. (Piketty’s theses are explained here in four paragraphs, and The New York Times provides a half-dozen charts, as well as An Idiot’s Guide. And, of course, Piketty has many detractors: A summation on Forbes is here.)
Having a Middle Class may turn out to have been a temporary anomaly.
The contention that a Middle Class lifestyle is no longer broadly attainable runs counter to several long-held American beliefs. The iconic Horatio Alger rags-to-riches myth is baked into our national consciousness (even though this myth is itself a myth, since the protagonists in Alger’s novels never actually achieved wealth: A good job was plenty). Today’s Silicon Valley startup founder is the Alger myth’s modern equivalent. But though stories of hi-tech riches abound, the total number of people benefitting from these windfalls is actually extremely small, compared to the general population. Even the conservative Brookings Institution, in a piece titled “Saving Horatio Alger,” says that “…There are forces at work in America now… that put the country at risk of creating an ossified, self-perpetuating class structure, with disastrous implications for opportunity and, by extension, for the very idea of America.”
A common argument in comment threads for articles on inequity is to point to the achievements of entrepreneurs like Bill Gates, or investors like Warren Buffett, and ask rhetorically why these hard-working people shouldn’t be able to benefit from their achievements. But this is a specious framing. The issue isn’t whether or not a Gates or a Buffett should be wealthy: It’s the fact that, without a healthy middle class, we have an unhealthy economy.
To be fair, there are some who believe that the pure economic numbers don’t tell the whole story. For example, unemployment statistics for the U.S. would seem to indicate that by mid-2014, the economy was fully recovered, with rates in some areas approaching what economists call “systemic unemployment,” to a point where employment numbers are thought to be at their rock bottom. Others maintain that poverty and income levels in the U.S. remain fairly steady. And it’s widely accepted that the percentage of the global population living in poverty has decreased substantially, from 43% in 1990 to 20% today — and according to the Economist, there is an opportunity to help another billion to move out of extreme poverty in the next 15 years. But moving out of extreme poverty simply means is that a huge number of people shifted from one category at the base of the pyramid to another: It doesn’t mean they achieved middle class status, nor that any will achieve it any time soon.
Perhaps the strongest argument that we’re actually seeing decreasing inequality comes from Richard V. Burkhauser, public policy professor of public policy at Cornell, and adjunct scholar at the American Enterprise Institute. In a series of papers, Burkhauser and his fellow researchers argue that lower-income workers have actually done better in recent years than their affluent counterparts. Thomas Edsall, a professor of Journalism at Columbia University, provides an extensive overview of Burkhauser’s approach to the data. But though Burkhauser is widely believed to have expanded the dialog about inequity, Edsall includes a variety of economists’ views that question the analysis.
Some also point to other countries, maintaining that the U.S. isn’t so bad: According to World Bank economists Branko Milanovic and Christoph Lakner, In just 20 years, between 1988 and 2008, the top 5 percent of wage earners in China accounted for 44 percent of all global economic gains.) But according to a 2013 report by the Organisation for Economic Cooperation and Development, “Income inequality and relative poverty in the United States are among the highest in the OECD and have substantially increased over the past decades.”
But are we looking at the problem correctly? In his blog post on Piketty’s work, Bill Gates suggests that rather than analyzing income, we should be looking at consumption — what people spend, rather than what they make. A recent study sponsored by the Institute for New Economic Thinking, however, simply reinforces the same conclusion as income statistics: Though the top 5% of income earners in 1995 generated 28% of all expenditures, in 2012 their spending had spiked to 38%. And since 2009, spending by the top 5% had increased a total of 17% — while spending by the bottom 95% had increased a measly 1%.
So, while you can choose your own data source to determine if inequity is increasing, the data points undeniably to the fact that inequity is occurring, and seems to be growing.
Does that matter?
Step 2: Is Inequity Actually a Problem?
It’s hard to ignore the statistics for the societal costs of inequity. In 2013, over 45 million people lived at or below the poverty line, including 14.7 million children — placing the U.S. 34th in the world. Over 49 million Americans live in “food-insecure” households, with nearly 7 million living with “very low food security” — no consistent expectation of their next meal. And on any given night, over 600,000 people are without a roof over their heads. A UK study points to a range of significant social problems that rise from inequity.
But perhaps you believe these ills are either the necessary consequences of a capitalist economy, or are due to the laziness of the underclass. So let’s look at inequity from an economic perspective.
If you’re sitting at the base of the pyramid looking up, and you’re asked if economic inequity is a problem, your immediate response is likely to be a quote from the highly-regarded economist, Bart Simpson: “Duh.”
However, if you’re sitting in the top quintile, the top 20% of the economic pyramid, you might not be quite as concerned. You’re making over $190,000 per year — and probably a lot more than that. Your investments are likely doing well. You might believe in the trickle-down theory of Reaganomics: You’re a hard worker, and a job creator, and therefore need to make money in as unfettered a fashion as possible, or else you won’t be able to continue to create jobs.
Yet as economist Joe Stiglitz, among others, points out, there are substantial economic costs of inequity. The most basic issue is one of continued economic growth. Though growth is dependent on a variety of factors, it’s widely agreed that over two thirds of the U.S. economy is fueled by consumer spending (though some claim it’s as low as 40%, since consumers often don’t actually pay directly for services like healthcare). If you don’t have a healthy middle class, total consumer purchasing power is likely to be affected. Consumer spending is also directly tied to the total number of consumers, and the amount of money each of them makes. Yet population growth in the U.S. is stagnating, sitting at just 0.71% — the slowest rate since the Great Depression. And in a world where the incomes of the bottom 80% of earners are at best flat (and at worst headed relentlessly downward), it’s predictable that economic growth will continue to be impacted if substantial inequity continues.
There’s also an increasing chance of unrest. In its 2014 Global Risks report, the World Economic Forum (AKA Davos) cites “structurally high unemployment/underemployment” and “severe income disparity” as two of the top risks to global stability. WEF chief economist Jennifer Blanke warns that increased inequity could encourage Arab Spring-like social unrest: “Disgruntlement can lead to the dissolution of the fabric of society, especially if young people feel they don’t have a future.” In a November 2014 speech, Hillary Clinton echoed the sentiment: ““The dream of upward mobility that made this country a model for the world feels further and further out of reach… and many Americans understandably feel frustrated, even angry.” Conservative author Charles Murray of the American Enterprise Institute points to the increasing chance of “two nations” — a “cognitive elite” of the top 5%, and a new “lower class” of the other 95%.
In his blog post on Piketty’s work, Bill Gates stated, “I very much agree with Piketty that… high levels of inequality are a problem — messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.”
It’s in the interests of all, then, to try to determine the potential sources of inequity.
Step 3: Are There Knowable Sources for Inequity?
Economist Stiglitz maintains that “inequity is not inevitable.” Yet one of the greatest challenges with wicked problems is that their sources are often difficult to locate, complex to understand, and interlocking in their dynamics. That’s why they’re wicked.
Wicked problems that have an economic basis — and I’d argue that every large-scale challenge always has an economic basis — exist because of several common dynamics.
- There are people who are making money and wielding power because of the way it works today.
- There are people being profoundly affected who perceive themselves to have less power, or don’t know how to wield the power they have.
- The problem is so complicated, and has so many potential sources and impacts, that attempting to solve them at any scale looks like whack-a-mole — so it’s very difficult to point large-scale resources at a solution.
As a result, when it comes to trying to determine the sources of inequity, the average person — especially the average affluent person — has a lot of incentives to punt. As author Upton Sinclair once wrote, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” — Upton Sinclair, author
But if you’ve come this far, and you believe that inequity is widespread, and is a huge challenge for our economy and our society, then it’s essential to have a viewpoint on its sources. Here are the ones that are commonly cited.
Lack of Quality Secondary Education. “At the root of many American problems lies an ineffective and outdated education system that is failing our students,” says Ben Hecht, CEO of Living Cities, in a Fast Company article. “Inequality and education have always been inextricably linked, and if we don’t fix education, we don’t fix inequality.” And according to Kentucky Republican Senator Rand Paul in a Washington Post article, “America’s educational system is leaving behind anyone who starts with disadvantages, and that is wrong.”
Why is it so hard to deliver secondary quality education in America? In a large survey of spending in America’s public schools, schools in affluent districts were found to spend far more on teacher salaries. As a result, poorer districts can’t attract the same quality of teachers. “Low-income students need extra support and resources to succeed, but in far too many places, policies for assigning teachers and allocating resources are perpetuating the problem rather than solving it,” said former Secretary of Education Arne Duncan. “Too many disadvantaged children living below the poverty line are getting short-changed now.” According to economist Eduardo Porter, “Growing inequality of income… contributes to the residential segregation that cordons off rich school districts from the poor and reduces support for public education among the wealthy Americans who can opt out.”
That disparity in the U.S. is almost unique in developed economies. “The vast majority of [developed] countries either invest equally into every student or disproportionately more into disadvantaged students,” said Andreas Schleicher of the Organisation for Economic Co-operation and Development. “The U.S. is one of the few countries doing the opposite.”
Why is this? While the federal governments of other developed countries on average provide more than half of public school funding, the U.S. only provides 14%. Much of the rest typically comes from local property taxes — which will inevitably generate more money in affluent areas. According to David Grusky, director of Stanford’s Center on Poverty and Inequality, “One fact that everyone agrees on [is that the income gaps between those with different levels of education] account for a good share of the inequality… We know what the solution is. It’s equalizing access to high-quality education. The problem is that we just pay lip service to it.” According to Stanford University professor of education and sociology Sean F. Reardon in a 2011 report, “As the income gap between high- and low-income families has widened… The achievement gap between children from high- and low income families is roughly 30 to 40 percent larger among children born in 2001 than among those born twenty-five years earlier. In fact, it appears that the income achievement gap has been growing for at least fifty years.”
The good news is that “…most states now have funding formulas that either cap or redirect local property tax revenues to state coffers in an effort to equalize public funding between affluent and poor districts.” But affluent communities are responding by funding non-profits that provide direct support to their schools — an option that’s far less possible in poorer communities. “In total, nonprofits linked to schools and school districts raised about $880 million in 2010, up from $197 million in 1995.” Most of that has gone to richer communities. “The inequities in local philanthropic fund-raising, which is unregulated and tax-deductible for donors, mirror the growth in wealth among the richest 1 percent over all, said Rob Reich, an associate professor of political philosophy at Stanford University.”
“America’s education system has become less a ladder of opportunity than a structure to transmit inequity from one generation to the next.” ― Nicholas Kristof, New York Times columnist
Lack of Access to Higher Education. According to Harvard economist Lawrence Katz, between 1979 and 2012, the income gap between a family of two college graduates versus one with high school graduates alone grew $30,000, after inflation. Over adulthood, that’s a stunning amount of money.
But we’re slipping. “Barely 30 percent of American adults have achieved a higher level of education than their parents did.“ It’s getting worse. “Among 25- to 34-year olds, only 20 percent of men and 27 percent of women, both out of school, have achieved a higher level of education than their parents.” And it’s far worse at the base of the pyramid: “Only one in 20 Americans aged 25 to 34 whose parents didn’t finish high school has a college degree.” That’s about a fifth of the average of the 20 richest economies in the world.
And a college education is increasingly become critical. A 2012 Brookings study states that “…In the 100 largest metropolitan areas, 43 percent of job openings typically require at least a bachelor’s degree, but just 32 percent of adults 25 and older have earned one.” As a result, “ A mere 24 percent of all jobs in 2012 are available to workers without at least some post-secondary education.” In 2011, there were 12 job openings within the year for each unemployed worker with a bachelor’s degree or higher — but only 1.6 for those with a high school diploma or less. The report continues, “ The labor force participation rate for those with a high school diploma or less is just 55 percent, compared to 77 percent for those with a bachelor’s degree.” That means that just a little more than half those with just a high school diploma actually consider themselves working, or looking for work: The rest have taken themselves off the table.
But it’s not just access to college that’s needed: It’s also help getting through. According to an article in the National Journal, “Since 1972, the share of low-income high school graduates who start college immediately has about doubled, but half of students who enrol in a post-secondary school don’t complete a degree within six years. For African-Americans and Hispanics, the rate is about three-fifths.” Today, according to FinancesOnline, “…those from the top fifth are now seven times more likely to graduate than those from the bottom.” The National Journal continues, “Yet with these dispiriting trends in cost, completion, and debt, higher education arguably now serves more to stratify than to dissolve class privilege.”
Government Policies. According to a New York Times article by Steven Rattner, who served as lead adviser to a Presidential Task Force for the Obama administration, “Before the impact of tax and spending policies is taken into account, income inequality in the United States is no worse than in most developed countries… However, once the effect of government programs is included in the calculations, the United States emerges on top of the inequality heap.” As reported in Journalist’s Resource, a 2011 Congressional Budget Office report concluded, “Inequities can be attributed to such factors as tax code revisions that favor non-payroll income sources and unprecedented growth in non-labor income such as investment gains and business profits that primarily benefit high-income earners.” In other words, the rich can make more money in more ways than the poor. The article continues, “Federal taxes and assistance programs have historically tended to flatten income inequities by boosting the earnings of households in the lower quintiles while levying higher tax rates for higher earners. This dynamic shifted between 1979 and 2007, as changes in the tax system favored higher earners.”
The Drive for Productivity. Another likely contributor to inequity is the relentless push for corporate productivity. The productivity mantra maintains that corporations — and the economies to which they contribute — must continually generate more work output per worker on an annual basis. This in turn leads to greater profits, and — hopefully — greater stimulation to the economy. But the predictable outcome of the need for increased productivity is reduced income to mid-level and lower wage earners. Why? Any corporation seeking to root out costs will inevitably turn toward its workforce. In a “shareholder-centric” world, what tools are available to corporate strategists looking for ways to reduce costs? To grossly oversimplify, here are three approaches:
- Get by with fewer workers, and ask all those remaining to work harder — hopefully by providing them with tools that help them be more productive, such as productivity software in an office, or robotic assistants on a factory floor.
- Reduce average wages, by paying less, through outsourcing, or by “unbundling” work so that you’re only paying for the work output you need. (More on this in the fourth paper in this series, “Unbundling Work & Learning.”)
- Get by with fewer workers, and replace labor with software and robots.
“I call it the ‘great decoupling’ — of ever-faster technological progress of productivity on one hand and the average worker, the median worker, being left behind.” — Erik Brynjolfsson, MIT Sloan School of Management
The answer for many corporations is actually “all the above.” But increasingly many organizations will use technology to increase productivity, which inevitably means fewer paid workers. Why such a push for productivity? Again, there are many factors, but the greatest single impetus comes from the mandate to increase shareholder value, which former GE CEO Jack Welch has called “the world’s dumbest idea” — an idea, incidentally, first championed by economist Milton Friedman in 1970. If employees — as well as customers and shareholders — aren’t treated as important constituents, then the overall compensation of employees must continue to diminish, in the name of increased productivity to deliver increased value to shareholders.
The Increasing Pace of Change. In the past, our economies eventually absorbed the unemployed, and ultimately were able to provide work for the majority of those whose livelihoods had been disrupted. But the pace of change in today’s society is dramatically different. Technological innovation, especially in the form of artificial intelligence software and robotics, is widely believed to be accelerating — but our ability to adapt to it isn’t necessarily keeping pace. The leading proponents are author Ray Kurzweil and others at Singularity University, who predict an ever-increasing — in fact, an exponential — pace of change.
Source: Ray Kurzweil
In the past, the federal government was able to predict the kinds of work needed in the near future, and field multi-billion dollar training programs like JTPA and CETA. But today, the pace of change means that many workers are unable to adapt to the new skills required, and the government has neither the ability nor the collective will to train displaced workers at any scale.
Capitalism Itself. In his discussion of Piketty’s work, Bill Gates points to the roots of capitalism as one likely culprit. “Capitalism does not self-correct toward greater equality — that is, excess wealth concentration can have a snowball effect if left unchecked,” says Gates (who obviously should know).
It’s also apparently true of corporations. In 2013, corporate profits — stated as a percentage of the overall U.S. economy — was equal to that of 1965, which was the highest rate on record. But for the most part those profits didn’t go into the pockets of workers: overall labor compensation hasn’t been lower since 1948. In fact, most of the post-recession economic gains went to corporate executives, whom Economist Piketty estimates comprise about 70% of the top 0.1%.
And there’s an accelerating separation between the highest and lowest paid. A 2014 Harvard University study found that the average American believes that CEOs on average make 30 times more than the average worker. They’re off by more than an order of magnitude: Fortune 500 CEOs are actually making 350 times more than the average worker. According to a Washington Post article, “The average Fortune 500 CEO in the United States makes more than $12 million per year, which is nearly five million dollars more than the amount for top CEOs in Switzerland, where the second highest paid CEOs live, more than twice that for those in Germany, where the third highest paid CEOs live.”
Mark Carney, governor of the Bank of Canada, warns flatly that “…unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.” In other words: If we don’t focus on people, we run the risk of breaking our economies. “The answers start from recognizing that financial capitalism is not an end in itself,” says Carney, “but a means to promote investment, innovation, growth and prosperity.” When Thomas Piketty points to the dynamics of inequity, he isn’t saying that particular actors are behaving badly: He’s saying the house is rigged from the start, and that capitalism has inequity built into it — by design.
Other Sources. A range of other factors are commonly cited in discussions about the source of inequity. Some point to outsourcing — which is in part driven by the relentless push for globalization. Some claim that the problem is simply a lack of economic growth: the economy isn’t growing fast enough, and today’s level of inequity will diminish if rapid growth resumes. (An International Monetary Fund study counters this, saying, “It would still be a mistake to focus on growth and let inequality take care of itself… because the resulting growth may be low and unsustainable.”)
But the most frequently-mentioned contributor to the unbundling of the middle class is technology.
How Technology & Globalization Help to Unbundle the Middle Class
Perhaps the most masterful job of reviewing the major elements of technology’s impact on inequity has been performed by Andrew McAfee and Erik Brynjollfson in their book The Second Machine Age.“My reading of the data is that technology is the main driver of the recent increases in inequality,” says Brynjolfsson, who is a professor of management at MIT’s Sloan School. “It’s the biggest factor.”
That perception runs counter to the belief by some in Silicon Valley, who have maintained that hi-tech accounts for a significant amount of job creation, and therefore technology can’t be a fundamental source of inequity. Yet, according to Chris Benner, a regional economist at the University of California, Davis, “…there has been no net increase in jobs in Silicon Valley since 1998; digital technologies inevitably mean you can generate billions of dollars from a low employment base.”
How is this possible? According to Stanford’s Grusky, “…the technology-driven economy greatly favors a small group of successful individuals by amplifying their talent and luck, and dramatically increasing their rewards.” Supporting evidence comes from an article in The Daily Beast, which says, “Besides GE, a classic conglomerate, the largest cash hordes now belong to Apple, Microsoft, Cisco, Oracle and Google, all of whom sometimes have more dollars on hand than the US government.“ According to Vice’s Motherboard, in 2013 “Google, Apple, Amazon and Facebook were worth over $1 trillion combined, but employed just 150,000 people.” The same concentration of wealth is true for their entrepreneur founders: “Seven of the eight biggest individual winners from stock gains in 2013 were tech entrepreneurs, led by Jeff Bezos, who added $12 billion to his paper wealth, Mark Zuckerberg who ranked in an additional $11.9 billion while Google founders, Sergey Brin and Larry Page, had their wallets expanded by roughly $9 billion.”
“It just seems so obvious to me [that] technology is accelerating the rich-poor gap,” contends Steve Jurvetson, a venture capitalist at DFJ Venture in Menlo Park, California. Google executive chairman Eric Schmidt agrees. “There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out.”
So are robots eating our jobs?
So are robots eating our jobs? A study in Germany claims that half of all current jobs in that country could be handled by robots by 2034. Futurist Thomas Frey predicts that 2 billion jobs will be gone by 2030. And according to Kevin Kelly of Wired Magazine, “…before the end of this century, 70 percent of today’s occupations will…be replaced by automation.”
Of course, technology-fueled unemployment is nothing new. In 1870, at least 70% of all workers in the U.S. had jobs in agriculture: In 2008, it was less than 2%. What’s new is the extent and pace of automation. Forbes columnist Steve Denning summarized one of the insights from The Disruption Machine, an article by Harvard history professor Jill Lepore: “The disruptions caused by the new technology now — computers, Internet, new materials, and new methodologies–are larger and longer-lasting than in any of the the previous disruptions caused by canals, railroads, steel and the like. There is no sign of any slowdown.”
According to an article by ImpactLab, “Keynes predicted widespread technological unemployment would occur when our means of economising the use of labour exceeded the pace at which we were able to find new uses for it. Moore’s Law, which describes the exponential growth pattern that is present within modern technology, means what Keynes predicted has now, in the 21st century, become reality.” And author Brynjolfsson says, “It turns out there’s no economic law that says everybody is going to share equally when technology brings some of these wonders to the planet. It’s quite possible for some people, even possible for a majority of people, to be made worse off in absolute terms.”
Who specifically will be worse off? A UK study gives pointed analysis to the most likely kinds of jobs to be lost between now and 2033.
A McKinsey study looks at the impact in another way: Its conclusion is that 40% of all tasks could be automated using current technology. That doesn’t mean they will be automated, or that employers will simply atomize 40% of all jobs. But it shows that we don’t need to have any more advances in technology to have a significant impact on the amount of available work.
Economist John Maynard Keynes put it best, in 1933: “Technology unemployment [is] due to our discovery of a means of economizing the use of labor, outrunning the pace at which we can find new uses of labor.” Are we finally encountering the point at which our machines will perform so many human duties that we’ll outstrip our ability to find ways to put people to work?
Given today’s economic climate, it’s safe to say that there are numerous factors that contribute to growing inequity — and that few of these factors are likely to change any time soon, without large-scale actions to intervene.
4. Are there Valid Actions That Contribute to a Solution?
If you’ve gotten this far, I can assume you’ve said “Yes” to each of the “wicked problem” questions — or at least not given up in disgust. After reviewing so many negative trends, it’s easy to assume I’m a pessimist. But I’m actually quite optimistic about our future, if we collectively focus on solutions. And large-scale solutions will only come if those with resources — the affluent, corporations, and the government — work together in concert. As so eloquently put by Robert Reich, a former Clinton staffer now a professor at the Haas School of Business at the University of California at Berkeley, the working class isn’t in the driver’s seat when it comes to these decisions. We need those with money and power to sign up for solutions.
Of course, the challenge with wicked problems is that their sources are often complicated, opaque, and interlocking, so no single solution solves them. I don’t personally have anywhere near the wisdom to suggest what might be the best solutions to inequity. Instead, I’ll list some of the commonly-mentioned alternatives, grouped into two bins: Increasing opportunity, and redistribution.
“I worry about growing income inequality. But I worry even more that the discussion is too narrowly focused. I worry that our outrage at the top 1 percent is distracting us from the problem that we should really care about: how to create opportunities and ensure a reasonable standard of living for the bottom 20 percent.” — Sendhil Mullainathan, Professor of Economics, Harvard University
While much of the dialog related to solving inequity focuses on those who have more giving to those who have less (“redistribution,” discussed below), a core issue is that economic mobility in the U.S. is far more limited than it should be, in comparison to many other Western countries. “America has become the advanced country not only with the highest level of inequality, but one of those with the least equality of opportunity,” says Joe Stiglitz, Columbia University’s Nobel prize-winning economist.
“How to create opportunities and ensure a reasonable standard of living for the bottom 20 percent?” — Sendhil Mullainathan, Professor of Economics, Harvard University
What makes upward economic mobility possible? Commonly-mentioned solutions include better education, increased savings, and sustained economic growth.
Better Access to Higher Education. The link between a college degree and increased future income is undeniable. Yet as I’ve detailed in Unbundling Higher Education, the cost of a college degree is rapidly becoming out of reach for the middle and lower classes. We need ways to increase the ability of the less-affluent to attend and complete two- and four-year colleges — without requiring them to shoulder massive amounts of debt. For example, as the National Journal reports, a study called The “American Dream 2.0” suggests that we should “…consolidate virtually all federal student aid… into budget-neutral block grants for states that commit to providing debt-free higher education for low-income students and interest-free loans for middle-income students. Participating schools would be required to contain costs and boost graduation; students would need to maintain steady progress toward completion. It’s a powerful conception of shared responsibility.” Another radical approach, championed by President Obama: Index college loans to future earnings, and allow students to have the rest reduced or forgiven.
Better Early Education. The statistics supporting the importance of a K-12 education are undeniable: Kids with limited access to quality schooling are far more likely to have significant challenges with upward economic mobility later in life — not just because they won’t be prepared to go to college, but because they won’t be exposed to adequate role models that can encourage them to succeed. Critical mental and emotional development goes hand-in-hand with physical development, and core learning at early stages must occur in tandem as children grow. And while there is significant disagreement as to whether or not pre-K programs have a substantial impact on later achievement, there is widespread belief that early education has a substantial and positive effect on future opportunities.
“Global poverty is a complex web of interlinked problems. There is no one ‘silver bullet’ that will solve global inequality. Multiple contributing factors must be tackled in parallel.” — Adam Braun, Pencils With Promise
Increase Savings — at High Rates of Return. According to Bloomberg columnist James K. Galbraith, “Inequality is driven mainly by capital gains, stock options and the proceeds of venture capital and initial public offerings.” So, as stated by columnist Noah Smith in an article in The Atlantic, “The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.”
Sustained Economic Growth. While a rising economic tide doesn’t lift all boats equally, it still lifts most at least somewhat. Through the Great Recession, nearly all of the economic gains were realized by those in the top 20% of income earners. But post-recession sustained economic growth might — might — eventually help to raise incomes of lower earners, and therefore have an impact on inequity.
But it’s also possible that sustained growth will simply increase inequity more than it increases upward economic mobility, if gains from investment income (typically realized by those more affluent) outpace wage gains. That’s why talk often turns toward redistribution.
In his seismic 2011 article in the New York Times, iconic investor Warren Buffett offered a transparent view of his own finances, pointing out that he had paid a paltry 17% in income taxes the year before. He champions raising taxes on households making more than $1 million — while maintaining that the net impact on the economy would be minimal. “I have worked with investors for 60 years and I have yet to see anyone… shy away from a sensible investment because of the tax rate on the potential gain.. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”
According to economists like Piketty and his frequent collaborator, Emmanuel Saez (sigh-EZ) at the University of California at Berkeley, the simplest and most effective solution is redistribution: Tax the rich more, and give it to the poor.
“Stop coddling the super-rich.” — Warren Buffett, Berkshire Hathaway
Here are some of the frequently-suggested strategies for changing the dynamics of taxing and compensation in the U.S.:
Changes in Tax Policies. America’s tax rates are historically flat — and, as Steve Rattner explains, “U.S. tax revenues, as a percent of G.D.P., are the lowest of O.E.C.D. countries.” Economist Eduardo Porter puts it another way: “In the mid-1960s, government in the United States took about 25 percent of the economy in taxes, roughly the same as in the rest of the O.E.C.D. Today, the share in the rest of the O.E.C.D. has grown by 10 percentage points. In the United States it remains about the same.” (There is also some data to indicate that countries that redistribute wealth through taxation experience faster growth, but the data doesn’t make it clear if that’s a cause or an effect.)
Warren Buffett champions an approach that taxes investment income at the same rates as labor income. Others, such as Bill Gates, point to a consumption tax based on what we spend — which would encourage much higher savings rates. Strong attention is also given to estate taxes, which are levied against estates over about $5 million. Originally devised in the “gilded age” of the early 20th century, by early 2013 it was projected to affect about 0.14% of all households. Bill Gates Sr. famously positions the estate tax as an “economic opportunity recycling program,” offering those with less a greater chance for a better future.
UCBerkeley’s Saez and Nobel prize-winning economist Peter Diamond argue in an influential paper that it’s just good policy to tax the rich at the maximum level possible: Since an incremental dollar means far less to the affluent than to the poor, it makes economic sense to charge them to the limit they could bear. In the current polarized and partisan climate in America, however, there is little political will to even approach this as an element of a solution. “I am very pessimistic about the capacity of the American political system to redistribute income within a reasonable period of time,” Nobel laureate Robert Solow said at a 2014 forum on inequity. “I simply don’t think that legislation either to support the safety net or to tax high incomes stands a chance in the Congress.”
Looking beyond just our shores, the much-discussed solution from economists like Pikett and Saez is a global tax on wealth, ensuring redistribution across borders. Some think it could work: Others think it won’t end inequality, or that the numbers simply don’t add up, or that it’s completely impractical. But the real effect of this suggestion has been to highlight the scale of the problem, and to point out that it’s a challenge that’s ultimately bigger than any single economy.
Guaranteed Basic Income. Increasing taxes on the more affluent generates more money for government programs: How such revenues would be distributed requires additional strategies. In the 1960’s, a guaranteed income was championed by everyone from Martin Luther King Jr. to Richard Nixon. Yet while much of the discussion about a basic income guarantee today focuses on whether it’s politically possible or not, even libertarians and conservatives highlight a growing sentiment that government services to the poor — $1 trillion annually, or about $20,000 for every poor individual — is remarkably inefficient, and consolidating such services could significantly increase their effectiveness and decrease bureaucracy.
Changing Corporate Compensation & Education Practices. Corporations can take on the task of closing some of the historic gulf between the average worker and the average CEO. According to financial reporter Eduardo Porter, “To the extent that widening inequality is caused by the yawning gap between the… pay deals in the executive suite and the stagnant wages paid to those on the shop floor, it might best be addressed at the level of the corporation.” Strategies range indexing compensation within corporations to changing corporate charters to make employers stakeholders as important as shareholders. And since corporations are the ultimate beneficiaries of our increasingly-ineffective education systems — through which their workers are being prepared for the work world — corporations will inevitably need to shoulder more of the burden in the future of training workers for the jobs of tomorrow — and paying higher wages to allow their workers to reduce their dependency on government programs.
An increasingly-discussed option at the base of the pyramid is to increase the minimum wage. There are several compelling arguments for creating a higher floor for basic wages. While some maintain that a minimum wage increase will only accelerate automation. An OECD study states that raising the minimum wage would only have a small overall impact on inequity — but that doesn’t mean it’s not worth doing.
LOOKING TOWARD THE FUTURE
Yet all of the dynamics discussed here — and all of the strategies for trying to mitigate them — are built on a foundation of a single premise — which is that our economy will continue to operate largely as it has in the past. But what if that premise isn’t true?
In the next paper of this series, “Unbundling Work,” I’ll offer a series of thoughts about what needs to happen to completely change the game, and suggest several approaches to redefine how we learn and how we work.
Gary A. Bolles
Co-founder, eParachute, Inc.