FACULTY OF EUROPEAN STUDIES AMERICAN STUDIES 3RD YEAR

American Inequality
Contemporary American Economics

Paper by student andru Carmen Gabriela

Thesis Statement This research paper is going to deal with the following quote: The reality of rising American inequality is stark. Since the late 1970s real wages for the bottom half of the work force have stagnated or fallen, while the incomes of the top 1 percent have nearly quadrupled (and the incomes of the top 0.1 percent have risen even more). While we can and should have a serious debate about what to do about this situation, the simple fact American capitalism as currently constituted is undermining the foundations of middle-class society shouldnt be up for argument. Throughout this paper, I will be discussing topics such as the American inequality, American wages or how Capitalism has interfered with the wealth of society, based on Paul Krugmans words.

Introduction The author of the previously mentioned quote is Paul Krugman, a famous American economist, teacher at Princeton University and writer for The New York Times. Krugman obtained the Nobel Prize for Economy in year 2008. By the statement mentioned in the previous paragraph, the author tells us that American inequality has considerably grown since couple of decades ago and that it is more visible now. For exemplifying this, Krugman refers to the fact that since the late 70s, wages have either stayed the same or they fell. In the same time, the top 1% of society has almost quadrupled their income. The top of the top of society, which exists in proportion of 0.1% has a bigger income than that. Hence, it is a logical deduction that the American social classes have changed for most of the people. The majority of the Americans live worse nowadays than they did before the 70s. It is a little surprising to know this nowadays, in the 21st century, as the world has suffered difficulties throughout the two World Wars and in the Cold War Period. Alongside history we can also trace the existence of some serious financial crises that affected the world population. One may think that governments have learned their lessons based on past events so that they take the necessary measures to prevent such situations as economic inequalities even more in the United States. However, according to Paul Krugman, American Capitalism did not manage in providing these much needed measures. Worlds dominant market system is the industrial capitalism or, as it is called, the advanced market. The United States and Western Europe involve in their economic system levels of government regulation that are not described exactly as capitalist. The American system is considered to be capitalist based on the principles of free market and lack of restrictions on economic activity1. The term capitalist was coined by Karl Marx German economist and social theorist - in the 19th century. He wanted to describe a system formed of a small group of people who have capital, money or the necessary means. These people should make the most important economic decisions2. Since then, the term has been altered and adapted according to current times. The financial crisis from 2007 was an important moment that had its merits in achieving such statistics. But, is it enough a reason so that the foundations of the middle class be destroyed? How come the economic difficulties havent reached up to the 1% of the rich population of the world? It is common knowledge that there are economic differences everywhere. People cannot be all poor or all rich or in the exact middle. The United States of America represent the true meaning of a democracy. This country is not based on Karl Marxs ideas of an imagined society with a world divided into two classes: the bourgeois and the proletarians.
1 2

Robert L. Bradley Jr.;Roger Donway, Capitalism, Socialism, and the Middle Way. A Taxonomy, pp.71-72. http://economics.about.com/od/howtheuseconomyworks/a/us_capitalism.htm, accessed on the 1st of February 2014.

Part I: American Capitalism The economic system is an input in the economic process, as it has a considerable impact on the end economic results. People, nature, enterprises, social inputs, economic inputs, geographic inputs and politic inputs are the elements that form the economic system. All these have an impact on the final result. The product of the economic system is represented by wealth, pollution, social, economic and political effects. An output of the economic system is also peoples happiness3. I may add that this is, probably, something more commonly met in the United States, for it is the country that has always been searching the public good and peoples happiness. Capitalism has its origins on liberty of property, liberty of labor and freedom of enterprise. The ideology the system of Capitalism is based upon is Liberalism. The essence of this ideology is characterized by free market, state non-interference in economy and private interest of the economic agent. The economic foundations of Capitalism are the market, the price, currency and the division of labor. Modern society could be characterized through mentioning advanced technology, division of labor and money use. In shorter terms, Capitalism is based on two essential principles, namely, private property and freedom of exchange4. American Capitalism means economic strength and power, wealth, productivity and profits. However, it also means income inequality. Therefore, Capitalism has been regarded as being different from other economic systems. Capitalism allows the people who own or manage productive resources to make their own decisions; that is one reason why the productivity of the system works it is related to its economic organization based on independence. Competition is, also, a very important factor to consider. American economy has changed in the last half of century. Labor unions and organizations of workers have grown to be more important5. Could Capitalism lead to the disappearance of the middle class? Krugman tells us that American capitalism as currently constituted is undermining the foundations of middle-class society. However, I believe that this system could be saved. In theory, Capitalism does not suggest the idea of undermining the foundations of middle-class society. I agree that these present times are times of crises, but these could be overcome. Economic inequality could be seen as a threat to the state security. Distribution of property and incomes is unequal in capitalism. This occurs because of differences between people, differences that could be corrected by the state6. However, this would mean an interference with the capitalist principles. Wrongly applied, these could do more damage than good. Capitalism has grown to be so popular as a system that many of the theoreticians have failed in observing the faults it has. For instance, modern Capitalism tends to let states interfere in order to subsidize the issued areas and let them stay put. In the current economic crisis period, the U.S. government financed General Motors with billions of dollars, although the company was on its road to bankruptcy. Capitalism is not founded on integrity, justice or correctness; it is founded on greed 7. If we add the fact that human needs are unlimited, it is easy to think of the end results of the combination with greed these would be disastrous. Cooperation between states is something that the capitalist system agrees upon. Regarding the international relations, for example, in 2010, French president Nicolas Sarkozy asked the United States
3

Radu Barna; Drago Pun, Sisteme Economice i Financiare n Lumea Global, Editura Fundaiei pentru Studii Europene, Cluj-Napoca, 2009, p 19. 4 Radu Barna; Drago Pun, Ibidem, pp. 20-22. 5 Milton Firiedman; T. K. Galbraith; David McCord Wright, What is American Capitalism, University of Chicago Round Table, 1953, pp. 1-5. 6 Radu Barna; Drago Pun, Op. Cit., p. 51. 7 http://www.business24.ro/macroeconomie/criza-financiara/marea-hiba-a-capitalismului-nu-se-imbogateste-cine-merita1466114, accessed on the 1st of February 2014.

to work with Europe for the economic protection and the change in the world government. According to Sarkozy, the capitalist system is one that lacks rules and regulations. The French president also mentioned the death of capitalism because of this lack on the economy market8. If what is causing the death of this system is the lack of regulations, maybe governments should do something in this respect but not by interfering too much. Part II: Causes of Inequality Apparently, based on household income, the U.S. has the highest income inequality among any other country in the developed world, such as Sweden, Norway or Japan9. I believe that this is something to worry about, but not in the sense of the poorness of people, which, based on some articles I have read, is not that worrying, but based on the differences between the 1% Paul Krugman talks about and the other 99% of the American population. As previously mentioned, the American economist says in the discussed quote about the rich of the world. Who represents the top 1% that economist Krugman tells us about? It appears that the majority of the taxpayers are executives, managers or supervisors. The following occupations are in the next areas: medical, financial, law, IT, sales, real estate, business operations, entrepreneurial field, government, social service or piloting10. Krugman gives as reference point the late 1970s. In the period of the 70s, the Fed left the economic system in a monetary discount. This should have caused an unnoticeable rise in unemployment. Then, inflation should have stopped and the economy would have been back to the natural. However, as Paul Krugman said according to the real business cycle theory, the Feds policies should not have had any effects11. There were several problems that affected the world during the 70s. For example, the Vietnam War (lasting in the period 1954-1975) has ended. Another event happened in 1973. This year was marked by an oil crisis. Therefore, the U.S. economy was in a bad position, the country meeting a recession period. What followed were energy shortages, high inflation and unemployment. High demands and low supplies of jobs, rise of prices, lack of trust in the bank system were issues describing the late 70s. It appears that there were three main reasons for which the inflation period had begun. Firstly, until de 80s, no influential policy makers arrived at the Federal Reserve. Secondly, policies taken in the 60s were bad for the economy of the 70s. The third cause was due to the fact that great depression made it hard to believe that the business cycle was fluctuating12. If these where the causes of the 70s hardships, how come ever since the situation got worse for the majority of the Americans? I could not help, but wonder if, indeed, Capitalism has made things like this. Apparently, poverty and inequality are strongly linked. Poverty is part of the income inequality.. According to Krugman, the wage stagnation is one reason for the poverty people live nowadays. However, it seems that the antipoverty programs are working and have long term benefits 13. Therefore, I must declare myself to be in favor of the existence of similar programs against income inequality. Another famous American economist is Nouriel Roubini. He anticipated the collapse the United States went through in 2007. He also predicted the worldwide economic recession that begun in the
8

http://www.business24.ro/barack-obama/stiri-barack-obama/sarkozy-piata-fara-reguli-este-moartea-capitalismului1473125, accessed on the 1st of February 2014. 9 http://www.businessinsider.com/new-charts-about-inequality-2011-11?op=1, accessed on the 1st of February 2014. 10 http://www.businessinsider.com/new-charts-about-inequality-2011-11?op=1, accessed on the 1st of February 2014. 11 http://krugman.blogs.nytimes.com/2009/07/30/the-lessons-of-1979-82/, accessed on the 1st of February 2014. 12 http://elcoushistory.tripod.com/economics1970.html, accessed on the 2nd of February 2014. 13 http://www.nationalreview.com/agenda/368136/paul-krugman-connection-between-poverty-and-inequality-reihan-salam, accessed on the 1st February 2014.

same period. Roubini recently said that capitalism goes through a self destruction period, agreeing, in such way, with Karl Marxs statements that said that the capitalist system may fall apart. For the German economist, there were only two major social classes: the bourgeois and the proletarians. Marx predicted that the proletarians, the workers will fight against the superior class, because they will be dissatisfied for having to sell their work in order to live14. Therefore, many predictions have been made in order to find out what to expect. According to other economists opinions, in the 1990s, some economic circles in the United States have formed the New Economy movement, leading to a rise in the GDP of the country. Productivity was raising and unemployment was close to nothing15. However, this lasted for a short period of time, as the difficulties that the American nation faced were soon to follow with the 9/11 events and the War on Terror that begun afterwards. On the other hand, there are people who disagree with the existence of economic inequality. These argue that the current lifestyle is much more different than it has been 20-30 years ago16 in the sense that todays lifestyle is wealthier and people have more needs nowadays than several years ago. If we base our analysis on this difference, it is clear that due to technological development and to other fields expanding their domain of activity, the world has developed. In the same time, human needs have developed. However, the existing inequality in the American society is measured according to todays needs. There were, of course, several factors that contributed to the rise of inequality in the U.S. One of them is the decline of unionization. Another factor that has contributed to the rise in inequality is the downward pressure on low skilled wages coming from a rising share of imports in GDP. The other factor that helped the inequality is the coming from an increased population share of low skilled immigration17. This shows that the U.S. has not overcome its issues with immigrants. Part III: Possible Solutions I strongly believe that the issue of American inequality could be solved. As a democracy, the United States should do what is best for its citizens. Hence, I believe that by adopting the necessary regulations to be imposed on businesses, investors or enterprises, this problem that the American society is confronting at current time could be cleverly fought against. The advantages that the United States have are represented by their resources, technology and science, their currency and their culture18. Therefore, the Americans have something to base their hopes on. Americans are characterized by unity and prosperity. Hence, I think they have a chance in overcoming this current situation. Another possible solution I may refer to is the one similar to the anti-poverty programs. If these already exist and function, then there could be implemented similar projects for the purpose ofantiinequality. Hopefully, the present presidential administration could manage such situations. Also, I can think of the securitization of jobs, better insurance programs in case of unemployment provided by the state, programs for the elderly and for the youth who have difficulties in finding jobs.

14

http://www.business24.ro/nouriel-roubini/stiri-nouriel-roubini/nouriel-roubini-capitalismul-se-autodistruge-1494423, accessed on the 1st of February 2014. 15 Radu Barna; Drago Pun, Ibidem, p.221. 16 http://cafehayek.com/2014/01/no-one-of-sense-would-pine-for-the1970s.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29, accessed on the 1st of February 2014. 17 Robert J. Gordon; Ian Dew-Becker, Controversies about the Rise of American Inequality: a Survey , National Bureau of Economic Research, Cambridge, May 2008, p.10. 18 Radu Barna; Drago Pun, Op. Cit., p. 283.

The consequences of the economic inequality and of poverty can be very serious. In this sense, a series of cultural movements may appear in the following period of time. These problems are being felt by the majority of people, fact that affects the American population as a whole and what it represents. If the mass-media gets involved in the issues affecting the American nation, then, we will probably soon see exaggerations on this topic or TV shows that illustrate life as it is now from an economic point of view. The more pessimistic of the predictors of the future of American capitalism said that it will finally collapse. Economist Paul B. Farell mentioned that at first, American Capitalism will collapse. Then, the Capitalism worldwide will follow. As interesting as this perspective may be, I believe that it is unrealistic, because a system as great as Capitalism cannot collapse this soon. However, if it were to collapse, probably, some of the people would be pleased to know what will follow. Maybe the following economic system will bring better days and the end of this too obvious inequality. According to the same source, Capitalism was worked by new challenges that constantly appeared in a too rapid way. Economist Farell acknowledges the need of newness in the economic system. Wall Street had its contributions as well19 is what other sources believe. Of course, one may believe that it is all because of Wall Street. Given the historys course, many relate to the financial issues by remembering the Great Depression from the 30s. Wall Street is a business and all businesses have their risk. There are risks according to each businesss size. This is something to bear in mind. Part IV: Taking Actions Nowadays, the presidential administration of Barack Obama has admitted the problems the American nation is facing regarding the economic situation. In the state of the Union address, U.S. President has promised to approach the issue of inequality and take action in this respect 20. President Obama drew attention on this particular issue by mentioning it in the state of the Union address. This shows that the president and the citizens of America are concerned with this fact and are willing to do something about it. It appears that the percentage of the employees in the United States declined from 27% in 1979 to 19% in 1986 and to 14% in 2005. At the same time, the real minimum wage was declining21. In Obamas state of the Union speech previously mentioned, the president says that he appealed to Congress to approve a rise in the national minimum wage. At present moment, this wage is $7.25 per hour. Obama intends to raise the rate of federal contract workers to $10.10 per hour. If so, I cannot help but wonder if this is a clever measure in the times of financial crisis we are living now. According to 2010 data, half of the United States population had 1.1% from the national wealth. At the beginning of the 21st century, in 2001, the American population had 2.8% from the national wealth, while in 2007, they had a percentage of 2.5%. The same document issued by the American Congress Research Center shows that the wealthy have become wealthier. In 2010, the top 1% - that Krugman mentions in the quote proposed for discussion - had 34.5% of the national wealth. The 10% of the wealthier Americans had, in 2010, 74.5% of the national wealth. The economic crisis separated even clearer the difference between the wealthiest and the poorest of American people. It appears that Democrat president Barack Obama is trying to fight against these issues, mainly caused, supposedly, by Republican president George W. Bush and his state legislatures22.

19 20

http://jovonk.info/2009/11/20/analisti-capitalismul-american-se-va-prabusi, accessed on the 1st of February 2014. http://www.bbc.co.uk/news/world-us-canada-25917009, accessed on the 2nd of February 2014. 21 Robert J. Gordon; Ian Dew-Becker, Op. Cit., National Bureau of Economic Research, Cambridge, May 2008, p.9. 22 http://dreptitate.net/2012/07/20/populatia-americana-fata-in-fata-cu-inegalitatea-sociala/, accessed on the 1st of February 2014.

At an event hosted by the Center for American Progress, Obama admitted that the economic inequality in the United States is what drives all his actions in the Office. The U.S. President believes that the large gap between the very few rich and the very many poor can be covered by increasing the minimum wage and by increasing the level of education. The strengthening of unions, reduction of payments gap between men and women and making college more affordable are the priorities on Obamas list. Another plan the President has regards the creation of Promise Zones in struggling areas throughout the country. A spokesman for House Speaker John Boehner, Brendan Buck said that Obamas economic policies promote government reliance and not economic mobility fact that may inconveniently interfere in private business. According to the president, African-Americans and Hispanics are more affected by the income inequality from a social and economic perspective. However, the reducing of this inequality should help all Americans, not particular races or particular social classes23. Clearly, the Obama administration is concerned with the issue of inequality. Efficiently, he has already been thinking about required needs in order to save the American dream. This has been made one of presidents top priorities for his second term in Office. If Obama manages in implementing the programs that he has presumably thought about, then the United States of America have a good chance in surviving and overcoming the times of crisis they are facing. If this happens, we will get to see one of the most efficient Presidents of the American nation. Conclusion The topic of American inequality has drawn increased attention in the last period. Whatever is that brought this economic inequality in the United States - and in many more other countries - cannot be the result of one single factor. There are clearly a number of reasons that brought about poverty. Some may think that one of the factors was state interference and some may believe that state noninterference led to this issues happening. However, I believe that by adopting necessary state regulations, these social inequalities could be weakened. I am not in favor of state interference in private economic business. Still, if the measures to be taken are reasonable, I believe that there could be a lot of benefits. Capitalism has always been criticized. I think that this happens due to the fact that people feel the need to blame someone for the economic difficulties they find themselves in. As in any other area of study, there are two sides to any story the ones who agree or the ones who criticize. The ones who search for the problems will find them. If economists say that the capitalist system is undermining the foundations of middle class society, we may choose to believe them or not. I consider that a middle class will always exist. We cannot and may not compare ourselves to the top 1% or the top of the top 0.1% regarding our wealth. If we do so, we may find out that we are all sadly very poor. To conclude my presentation, I may say that inequality is, indeed, the defining challenge of our 24 time , as American economist Krugman put it. Obama also mentioned this in his latest state of the Union address. The American leaders need to find something to fight against this challenge. The American nation has to become again the democratic successful nation it is thought to. Even more, the American dream has to be preserved and well maintained fact that, I believe, will be accomplished

23

http://www.usatoday.com/story/news/politics/2013/12/04/obama-income-inequality-speech-center-for-americanprogress/3867747/, accessed on the 2nd of February 2014. 24 http://economistsview.typepad.com/economistsview/2013/12/paul-krugman-why-inequality-matters.html, accessed on the 1st of February 2014.

soon enough so that we do not remain in this vicious circle of income inequality and economic issues that lead to a variety of social problems.

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