The immigration bill brought forward and apparently likely to pass demonstrates an unattractive new political trend in the United States: the end of the classless society for which the U.S. has been famous and the opening of yawning political as well as economic gaps between rich and poor.

Traditionally, the United States has been economically unequal, but without a sharp divide between rich and poor in the political arena. Democrats represented the South, minorities and unionized labor, while Republicans represented small business and the professional classes. The truly rich have always been more or less evenly divided between the parties. Thus, except for a brief period in 1932-46, the U.S. never had a real class-based politics.

One economic force was always likely to change this; the steady increase in inequality seen in the United States since about 1969. The household Gini coefficient of income inequality has risen from 39.7 in that year to 46.9 in 2005 – extrapolating that trend would suggest a figure of 47.3 by today.

At around 40, the Gini coefficient was close to the optimal level. Unlike in egalitarian Scandinavia it left enough incentive in the society to ensure that entrepreneurship and hard work were fostered, but yet it did not cause divisions between classes. At 47, it is approaching the level prevalent in Latin America, (Argentina 52, Mexico 55, Brazil 60) which has historically exhibited a politics characterized by deep alienation between classes, producing as rulers an unpleasant collection of corrupt oligarchs and irresponsible leftists.

The counterproductive Latin American politics appears to result from excessively high inequality. The important driver is that the conditions of the classes are so radically separated, and the likelihood of poor people working themselves into the middle class so distant, that politics ceases to be a process of attempting to produce a better society and instead becomes a corrupt search for rents. The elite control the system for most of the time, diverting public resources to their own use and securing re-election by offering state handouts to the impoverished masses. The masses in turn have no incentive to vote for a party that might allow them to better themselves, so regard politics only as a process by which handouts are produced. The “Christian Democrat” parties so common in Europe, to some extent represented historically in both major parties in the United States, never really appeared in Latin America.

This does not appear to be purely a cultural problem. Similar pathologies appear in Africa, when the society gets rich enough to have wide divisions of wealth, in the Middle East, to the extent democracy exists there, and in certain Asian societies such as the Philippines, with the highest Gini in Southeast Asia at about 48. It is particularly worrying that there are no recorded cases of a middle-income or wealthy country with a democratic government successfully emerging from a Latin American income distribution. Once such a distribution is entrenched, economic growth slows to a crawl (productivity growth in Latin America is well under 1% per annum and in some cases negative) and the pathological social system becomes permanent.

H.G. Wells postulated in his 1895 “Time Machine” the ultimate destination of a Latin American–style social system. In his future 800,000 years hence the human race has divided into two species, the eloi, who do no work and live only for trivial aesthetic pleasures and the morlocks, sub-men who work underground keeping the mechanical civilization running. Wells’s fantasy seemed far-fetched after 1920, as equality increased and the working classes became both educated and comfortably off. However the fantasy looks a lot closer to reality in 2007 than it did in 1957, when the movie was made.

In the United States, one would expect political activity to begin showing Latin American characteristics, including a breakdown in social cohesion, as Gini rises towards Latin American levels. This appears to be happening. One example is the doubling since 2000 of the number of Washington lobbyists, whose objective is primarily to divert public resources to private uses. A second is the growth of earmarking in legislation, up 10-fold in the decade to 2005; earmarks are generally inserted in order to benefit some private interest at the expense of the general good. U.S. politics has always been corrupt, and was especially so during the 1870-96 Gilded Age, the previous high point for inequality, but the increase in the proportion of Gross Domestic Product spent on lobbyists, the proportion of GDP spent on corrupt government spending and indeed the proportion of GDP spent on elections themselves suggests that systemic corruption is rapidly increasing.

The new immigration bill is above all an example of class legislation. The choice between a low or a moderate level of immigration depends primarily on non-economic factors — a voter’s interest or otherwise in increasing the diversity of the society, and the recognition that the global economy may work better and produce more wealth for all if there is a certain amount of migratory lubrication between different societies. However, the effect of more than modest immigration on inequality and therefore on class structure is highly significant. The Immigration Act of 1924, which largely restricted immigration to the richer countries of northwest Europe, produced the greatest social leveling the United States has ever seen, with the Gini coefficient declining by around 10 points between 1920 and 1965, the years of its salience (the 1924 Act replaced previous restrictions introduced during World War I.)

After 1965, immigration policy was reversed, to encourage a larger flow of immigrants, primarily from developing countries. Initially, this had only a modest economic effect. Then the 1986 amnesty encouraged low skill immigrants, allegedly now numbering 12 million, to try their luck with the overstretched immigration bureaucracy. Even large companies, knowing that immigration laws would not be enforced, seized the chance for some cheap labor.

Whatever the economic effect of moderate amounts of skilled immigrant labor, almost certainly positive, the economic effect of large amounts of unskilled immigrant labor is very clear: it drives wage rates down to rock bottom levels, particularly in personal service sectors where training is minimal and employment informal. That’s why a haircut costs less in real terms now than it did 30 years ago, it’s why even modest middle class households now have a cleaner and a gardener, which they usually didn’t 30 years ago and it’s why enormous numbers of dubiously constructed houses appeared when finance became available in 2002-06.

For the elite, the eloi of the HG Wells future we appear to be entering, this is all very attractive. The servant problem, butt of jokes ever since equality began to increase after World War I, has suddenly gone away – the rich can and do have as many servants as they want, provided they speak Spanish. Chicken processors, construction firms, retailers, hotels and meat packers who employ low skill labor no longer need make any pretence of paying union wage rates; they can simply hire illegal immigrants to fill any gaps that may appear. Corporate profits are at record high levels and service sector inflation, a bane in the 1970s and 1980s, has more or less disappeared.

The claim by eloi pro-immigration forces that the US economy has a massive new “need” for unskilled labor is of course pure bunkum. If there are 12 million illegal immigrant workers in the economy, about 8% of the working population, then since we know the value of output, productivity is in reality about 8% lower than we thought it was. That means that productivity growth, far from accelerating in the mid 1990s as Wall Street fatuously claimed, in fact slowed, as more and more bodies were required to achieve the same output. GDP may have continued to increase, but GDP per capita is also 8% less than we thought, and hence has shown little growth. It is this that has caused the curious phenomenon of an apparent rapid increase in GDP that in practice makes nobody any better off.

However attractive illegal immigration is to the eloi, it is hell for the morlocks. Instead of the well paid factory jobs their fathers had, making physical products in which they could take pride, they are now reduced to competing with infinite numbers of illegal immigrants for personal service, retail and construction jobs that have not been mechanized or outsourced. Theoretically, they could get more education and turn themselves into brain surgeons or computer-aided designers; in practice, these possibilities merely make them mourn that they hadn’t paid more attention in math class. Thus the social gulf grows ever wider.

The inability of the morlock element to achieve the modest comfort of their fathers brings other social pathologies. Since the morlocks are unable to “settle down” to marital bliss and a decent standard of living, illegitimacy and crime increase – only partly from the immigrants, legal or illegal, but also from the impoverished population as a whole. Political activity no longer offers hope of assistance, so they cease to vote or participate in politics, either directly or indirectly through unions and fraternal organizations. There is little point in saving, so they run up gigantic credit card debts, choosing to gamble away any windfalls they may receive. The eloi in turn withdraw themselves to gated communities, and Wells’s dystopia grows ever closer.

The new immigration bill, with its ineffectual enforcement provisions and its enthusiastically inserted loopholes through which even more immigrants can arrive, is perhaps the most socially divisive policy since the taille of the French ancien regime, a tax that was exacted from the poor and the middle class but not from the nobility. It stems from the same cause as the taille, a desire by the political class and its financial backers to entrench their superiority over the common herd.

Our choice of future is thus clear: it’s Wellsian dystopia or the Terror.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)