For Richer For Poorer

As probably many of you know, there is a cloud hanging over the future of the US and many other countries, the cloud of wealth concentration. There is nothing in life that will not be affected by this phenomenon. It obviously affects our allocation of resources and  it will have tremendous influence on who gets what. It would affect the relations between the social classes and could lead to social unrest if we allow the fissure between the haves and have nots to increase. The following is only one part of an excellent article that speaks to this issue.

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Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes

Oct 13th 2012 | from the print edition of The Economist

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IN 1889, AT the height of America’s first Gilded Age, George Vanderbilt II, grandson of the original railway magnate, set out to build a country estate in the Blue Ridge mountains of North Carolina. He hired the most prominent architect of the time, toured the chateaux of the Loire for inspiration, laid a railway to bring in limestone from Indiana and employed more than 1,000 labourers. Six years later “Biltmore” was completed. With 250 rooms spread over 175,000 square feet (16,000 square metres), the mansion was 300 times bigger than the average dwelling of its day. It had central heating, an indoor swimming pool, a bowling alley, lifts and an intercom system at a time when most American homes had neither electricity nor indoor plumbing.

A bit over a century later, America’s second Gilded Age has nothing quite like the Vanderbilt extravaganza. Bill Gates’s home near Seattle is full of high-tech gizmos, but, at 66,000 square feet, it is a mere 30 times bigger than the average modern American home. Disparities in wealth are less visible in Americans’ everyday lives today than they were a century ago. Even poor people have televisions, air conditioners and cars.

But appearances deceive. The democratisation of living standards has masked a dramatic concentration of incomes over the past 30 years, on a scale that matches, or even exceeds, the first Gilded Age. Including capital gains, the share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago. Even more striking, the share going to the top 0.01%—some 16,000 families with an average income of $24m—has quadrupled, from just over 1% to almost 5%. That is a bigger slice of the national pie than the top 0.01% received 100 years ago.
This is an extraordinary development, and it is not confined to America. Many countries, including Britain, Canada, China, India and even egalitarian Sweden, have seen a rise in the share of national income taken by the top 1%. The numbers of the ultra-wealthy have soared around the globe. According to Forbes magazine’s rich list, America has some 421 billionaires, Russia 96, China 95 and India 48. The world’s richest man is a Mexican (Carlos Slim, worth some $69 billion). The world’s largest new house belongs to an Indian. Mukesh Ambani’s 27-storey skyscraper in Mumbai occupies 400,000 square feet, making it 1,300 times bigger than the average shack in the slums that surround it.

The concentration of wealth at the very top is part of a much broader rise in disparities all along the income distribution. The best-known way of measuring inequality is the Gini coefficient, named after an Italian statistician called Corrado Gini. It aggregates the gaps between people’s incomes into a single measure. If everyone in a group has the same income, the Gini coefficient is 0; if all income goes to one person, it is 1.
The level of inequality differs widely around the world. Emerging economies are more unequal than rich ones. Scandinavian countries have the smallest income disparities, with a Gini coefficient for disposable income of around 0.25. At the other end of the spectrum the world’s most unequal, such as South Africa, register Ginis of around 0.6. (Because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.)

Measure of a Nation

It is often the case, especially in a course of Intro about Macro economics to ask students to investigate the data in order to find out which of all the countries in the world comes closest to their ideal vision of what a society should look like. Well, there is a book that has compared the US with many other countries and has concluded that we come on top in one criteria only: The most billionaires. Read the following book review and comment on it.


In his book, "No Apology: The Case for American Greatness," Mitt Romney laid his cards on the table: "I'm one of those who believe America is destined to remain as it has been since the birth of the Republic - the brightest hope of the world."
Obama's reluctance to acknowledge America's manifest moral and economic superiority is for Romney a telltale of his essential foreignness. "American prosperity is fully dependent upon having an opportunity society - I don't think President Obama understands that," he told the Republican Jewish Coalition last Pearl Harbor Day. "I don't think he understands why our economy is the most successful in the world. I don't think he understands America."
Romney and his fellow Exceptionalists believe that America isn't just envied for its wealth, but for its health; they regard the US medical system (assuming that Obamacare is abolished) as the best in the world. Our public schools might come in for some bashing, but they blame extrinsic factors like affirmative action, political correctness and Democratic Party-friendly teachers' unions for their failures. The best way to guarantee peace, they believe, whether at home or abroad, is by superior firepower. And they harbor no doubts whatsoever that America is the most democratic nation in the world, where everyone has a voice and anyone can become as wealthy as they.
Granted, Romney abides in a bubble of privilege and partisan politics and has long communicated in pre-packaged talking points. But this is a man, remember, who prides himself on his hardheadedness and business savvy. He hasn't always been a politician, after all. He earned his reputation - not to mention his personal fortune - as a management consultant.
One thing that consultant Romney never did, I'd be willing to wager, is take a client's senior executives at their word when they insisted that their company was doing as well as it ought to. He reserved judgment until he'd had a chance to crunch some serious numbers for himself - to scrutinize the company's receivables and payables and inventory levels, to measure its cash flow and see what valuation the market was putting on its stocks and bonds. I'd bet he didn't just talk to senior management either - he put his ear to the ground, so he could pick up the scuttlebutt from lowlier employees on the line, the people who knew how things really worked - and where all the bodies were buried.
He would have checked out the competition, too. Quoting the Bain Consulting Group's founder, Bruce Henderson, Romney notes that:

In order to become a success, a business doesn't just have to do well, it also has to do better than its competitors. Being number one isn't just about bragging rights. Often it means the difference between prosperity and merely hanging on.

At least that's what I imagine. But when you listen to candidate Romney, it's painfully clear that he's never put the country whose management he proposes to take over through remotely the kind of due diligence that he would have insisted on for a private concern. Fortunately for us, others have. Unfortunately for us, the intelligence they provide is not exactly reassuring.
In his new book "The Measure of a Nation: How To Regain America's Competitive Edge and Boost Our Global Standing" (Prometheus, 2012), Howard Steven Friedman, a statistician and health economist for the United Nations and an adjunct professor at Columbia University's School of International and Public Affairs, compared the US' standings on a variety of metrics concerning health, safety, education, democracy and income equality to those of 13 carefully chosen competitor nations: Australia, Belgium, Canada, France, Germany, Greece, Italy, Japan, Portugal, the Netherlands, South Korea, Spain and the UK. All of them are members of the Organization for Economic Cooperation and Development (OECD); all have populations of at least ten million, and mean GDPs per capita of at least $20,000.
Using the lingo of the Boston Consulting Group (where Romney worked before he came to Bain), Friedman rated the top-performing countries as Stars, the worst-performers as Dogs, and the middling performers as Middle Children.
His bottom line? On most metrics, the US is a Dog.
Let's start with life expectancy. Within its competitive cadre, the US is "the clear market Dog ... falling more than one year shorter than the next closest competitor, Portugal. "Back in 1987, the US ranked seventh in the entire world for life expectancy - and it seemed a little scandalous that it wasn't first. Today it doesn't make the top 20. Of course there is geographic and ethnic variation within the US. For example, an Asian-American woman enjoys a life expectancy that's 20 years longer than an African-American urban male's; the average life expectancy in Hawaii is 81.5 years, compared to Mississippi's 74.8, or West Virginia and Alabama's 75.2.
In 1960, the US had the 12th-lowest infant mortality rate in the world. By 1990, it had dropped to 23rd and it was 38th in 2008. Some of this is driven, a little counter-intuitively, by the US' leadership in pre-term births (a testament to advances in neo-natal care). By 2005, pre-term babies accounted for 69 percent of infant deaths. But that doesn't remotely tell the whole story. Once again, geography and ethnicity are complicit. In 2005, African-American infants died at a rate of 13.63 per one thousand births, more than twice the national average.
One of the drivers of the US' low life expectancy is its rate of "amenable deaths"- deaths before age 75 that might have been prevented through effective medical interventions. "Ranked as of 2002-2003," Friedman notes, "our rate of amenable mortality was 109.7 deaths per 100,000 people - more than 50 percent higher than the best-performing countries of France (64.8 deaths per 100,000), Japan (71.2 deaths per 100,000) and Australia (71.3 deaths per 100,000). Another way to view this is to recognize that even if the United States had the lowest infant mortality in the competition, it would still have the lowest life expectancy."
To add insult to injury, the US spends on average nearly "twice as much, and in some cases, up to four times more per capita than our competitors spend on health."
Diet and obesity are two of the culprits that account for the US' terrible cost/benefit ratio, as well as drug abuse (legal and illegal) and violent crime. Most significant is the way we pay for health care - out of pocket or through for-profit insurance providers, which exacerbates the effects of poverty. Pharmaceuticals cost about 50 percent more in the US than abroad, and "the United States is the only country in the competition with a significant percentage of its population uninsured."
Though the US imprisons its citizens at more than four times the rate of its closest competitor, its homicide rate is twice as high. It is ten times higher than Japan's and triple that of France's.
Thanks to the Second Amendment and the lobbying efforts of the NRA, Americans own guns at twice the rate of French and Canadian citizens (the US' closest rivals for gun ownership from within the 13 nations). Once again, ethnicity plays a role: The homicide rate for African-American men in 2006 was 7.5 times higher than of Caucasian males; it was 3.5 times higher for African-American women than Caucasian women.
American adolescents graduate from high school at a rate that is surpassed only by Korea and Canada, but they are low-to-middling performers when they are tested for their attainments in reading, math and science. When the TIMSS (Trends in International Mathematics and Science Study) divided students into groups according to their level of confidence in their math skills, "31 percent of American students expressed high confidence in their math ability, compared with 10 percent of Korean and 6 percent of Japanese students. Yet the American students performed worse than both the high-confidence and medium-confidence math students from Korea and Japan." Friedman dryly notes that "this isn't unique; many other points of our research have shown a disconnect between America's perceived excellence and real-world competitive intelligence."
What accounts for America's educational shortcomings? When you look only at the performance of students from America's high-income schools (in which fewer than 10 percent of students are eligible for subsidized lunches), the reading scores leap to the top. When you look only at schools where three quarters of the students receive subsidized lunches, the scores drop to the bottom. Hispanic and African Americans score below the lowest-ranking country's averages; on one test, African-American and Hispanic-American 12th-graders had the same scores as Caucasian 8th-graders.
What does America spend to achieve these less than stellar results? Much more than any of its competitor nations - 24 percent more than the UK for primary school students, and 10 percent more than the Netherlands for secondary schools (the second-biggest spenders in each category).
Why does the US get so little bang for its buck? Not to bash America's public school teachers, but if they are putting out less effort than they might be, it's worth noting that they are paid less than their colleagues in every competitive nation.
In 1970, the average American teacher made about 175 percent of the national GDP per capita, making the teaching profession a relatively well-compensated profession. By 2008, teachers earned roughly the same as the national GDP per capita, less than one-half that of lawyers and about one-third that of doctors. Just look how this compares to the market star, Korea: It pays its experienced primary school teachers about twice the national GDP per capita. It's much the same at the secondary school level: Experienced secondary school teachers in Korea make about twice their national GDP per capita, while in America they earn about the national average. With these comparatively low levels of compensation, it is not surprising that nearly 50 percent of new teachers in America leave the profession in the first five years.
America spends much more of its educational budget on administration than its competitor nations (each of the 50 states has its own administrative apparatus). Local funding virtually guarantees that the poorest schools will stay poor.
Despite the rapidly rising costs of college educations, American students have less access to financial aid. Thirty years ago, Pell Grants covered about 75 percent of the cost of an undergraduate degree; today they cover only a third. The average student loan debt of a graduate in 2007 and 2008 was $23,186, double the average owed by 1995 graduates.
How do Americans rate when it comes to their political participation? At the very bottom - America has the lowest voter turnout of all its competitors. And how well are they represented? The US Constitution called for a ratio of one national representative per 30,000 people; the overall ratio today is one per 580,000. In contrast, the average level of national representation in the competitor countries is about one for every 85,000 people.
And finally there is income inequality - a metric that has been much talked about in the last few years, most quotably by Joseph Stiglitz, who popularized the phrase "the 1% (the Republican shorthand for this conversation is "class warfare") and Timothy Noah ("The Great Divergence"). The top one percent of US earners accounted for nearly 25 percent of unadjusted income (up from 10 percent in the 1970s). The top one-tenth of one percent of US earners accounted for 7.7 percent of US income, a rate that's much higher than any of the competitor nations.
At the same time, US minimum wage workers earn about 33 percent of GDP per capita, less than their Australian, Belgian, Canadian, French, Greek, Japanese, Korean, Dutch, Portuguese, Spanish and UK peers. The US ranks .38 on the Gini Index of Adjusted Income - higher than any of its competitor nations. The Gini Index for wealth in the US is .80; again, much higher than any of the competitor nations. Race is a factor here, too - African-Americans have about 10 percent of wealth per capita that Caucasian Americans do; Hispanics about 12 percent. And gender: the UN Gender Inequality Index (GII) rates the US worse than any of its competitors.
Where the US does excel is in the production of billionaires: It has almost double the level of billionaires per million inhabitants than Canada and Germany, its closest competitors. Not coincidentally, the US also has the lowest level of tax collection.
In the last chapter of his book, Friedman invites his readers to participate in a thought experiment:

Imagine if we were to announce tomorrow that we are going to establish one of the wealthiest countries in the world. This country would offer a few special features: The rich can get richer than in other countries, but the poor will be comparatively poorer and will have less chance of breaking free of poverty. Those who can afford health care can purchase it, and the rest must rely on emergency care only. Education will be slanted heavily to favor the rich, while the jails will be filled with people mostly from lower-income families.

The fact that the nation we are living in looks much like that already has not made a dent in Republicans' enthusiasm for America's so-called Exceptionalism. Democrats, on the other hand, acknowledge the problems, but they are for the most part unequal to the challenge of doing something about them. How can they, when money buys as much political influence as it does?
The neoliberal regime that rose to power more than three decades ago has succeeded beyond its wildest dreams. Freed from the shackles of regulation, taxation and unions, the portfolios of the wealthiest Americans have soared. In the midst of the gravest economic crisis since the Great Depression, even Democrats are reluctant to champion aggressive Keynesian measures, never mind entertain "socialistic" solutions. Instead of pursuing the kinds of activist approaches touted in a report like Jacob S. Hacker's "Prosperity Economics" ("when all members of a society share in the rewards of advancement - from better health to greater political freedom, from basic economic security to greater upward mobility - society is more likely to prosper in a sustained way ... when the government plays an active role in the economy through investments in education and scientific research, economies are more dynamic and innovative"), they seek to reassure voters that a second Obama administration will be more fiscally conservative and austere than the first. Not that they have much choice in the matter. If Obamacare - a staggeringly generous gift to private insurance and Big Pharma - is as unpopular as it is, it's hard to imagine how any more substantive reforms could ever be accomplished.
Americans - liberals and conservatives alike - are deeply invested in their illusions about their country's present and future prospects. Friedman points out that there are surveys that show that Americans believe they enjoy much higher levels of social mobility than they actually do. "This suggests," he notes, "something more like a religious belief in mobility than a willingness to look at the facts - a belief that permeates all demographic groups in the United States and crosses the political and ideological spectrum."
As one of the nastiest and substanceless presidential campaigns of recent memory moves into full throttle, "The Measure of a Nation" throws a much-needed bucket of cold water on a nation that seems determined to sleepwalk its way over a cliff. One can only hope that Friedman's book will become as much a part of the national conversation as Romney's.