The Bear’s Lair’s examination last week of Latin American economies, which concluded that excessive inequality has combined with democracy to leave them trapped in a morass of poor economic policy and minimal growth no doubt left domestically-oriented U.S. readers unmoved. They should start worrying – there’s considerable evidence the United States is heading in the same direction.
The United States’ Gini index of household income inequality in 2004 was 46.6, according to the Census Bureau, having increased from the 38-40 range in the 1960s and 42.8 in 1992. Straight line extrapolation of the recent trend would suggest a reading at or above 47 for 2005. This is not as high as the pathological levels seen in Latin America, where Ginis of 50 or more predominate, but it’s heading in that direction, and is now well above the optimum Gini level of about 40 at which economic growth is maximized. Should current trends continue, it’s likely that Latin American political pathologies, of poor political choices by the hopeless poor and corruption and self-serving by the selfish rich, will rapidly assert themselves.
One cause of increasing income inequality, the boom in capital markets and asset prices in the last decade, is politically neutral and can be expected eventually to reverse itself, although its continuance over so long a period has had unpleasant social and political effects. Wealth in housing or in stocks is concentrated at the upper end of the income scale, to a greater extent than income itself. According to a 2001 Federal Reserve study, the ratio of household net worth to household income increased from 1992 to 2000 by 229.7 points for the top household income quintile compared to only 38.2 points for the middle household income quintile.
In other words, the top income quintile from 1992-2000 increased its wealth by more than 2 full years income, or 28.7 percent of income in each year, whereas the middle income quintile increased its wealth by only 38.2 percent of income over the 8 year period, or 4.8 per cent of income in each year. Part of this was counterbalanced by the savings rate, which for the top quintile dropped in 1992-2000 from 8.5 percent to minus 2.1 percent (a drop of 10.6 percent) whereas the middle income quintile remained sober throughout the period, its savings ratio rising from 2.7 percent to 2.9 percent. For the United States to have a lower savings rate among the rich than among the middle class is strange to say the least.
If the top income quintile is scoring an additional 28.7 percent of income from capital gains each year while the middle income quintile is receiving only 4.8 percent of income from capital gains and that continues for an 8 year period, inequality will inevitably increase. While the stock market decline of 2000-02 will have reversed this somewhat, the housing bubble of 2000-05 will have intensified it, so that the position at the end of 2005, with household net worth at record levels in terms of income, is also one of record inequality, probably greater than that in 1929. One can realistically hope that the orgy of conspicuous and vulgar consumption among the top income quintile will deplete its wealth and keep the Gini coefficient within bounds, but this is no way to run an economy.
A second factor contributing to the United States’ increasing inequality and the Latinization of its politics is the heavy immigration of the last decades, particularly the estimated 11 million illegal immigrants that are now estimated to be in the country. Culturally, heavy immigration from Latin America evidently poses the risk that the immigrants will be inculcated with counterproductive Latin American political attitudes, so tending to tolerate high levels of corruption and vote (when they legally can) for economically illiterate extremists.
However, the main Latinizing effect of heavy low-skill immigration may be economic. Even if the immigrants were all from say Singapore (to pick a country with an excellent political/economic culture) but of a low skill level, their influx would pose a threat to working class U.S. living standards and to the inequality of the U.S. income distribution. Earnings levels for Americans with high school diplomas or less have dropped by 20 percent since 1973, and the latest evidence is that they continue to decline, with wage levels in the U.S. economy as a whole still below those of 2001. With overall incomes having hugely increased since 1973, it is thus clear that heavy immigration has put harsh pressure on working class income potential and thereby has sharply increased inequality.
While outsourcing is both a threat and a benefit to U.S. living standards, heavy low skill immigration is pure threat, as in sector after sector low skill immigrants, particularly illegals, hold down wage levels below those at which normal working class lifestyles can be established or maintained. Furthermore most of the sectors in which illegal immigrant employment is highest, and their effect greatest are those – for example retailing, personal services, construction and hospitality — in which outsourcing to a third country is generally impossible, because the service by its nature must be provided in situ.
Reasonable immigration enforcement is prevented by an elite that likes the easy availability of cheap domestic help, and by employers who want cheap labor and give large campaign contributions to pro-immigration politicians. It is buttressed by rhetoric that disgracefully denounces immigration opponents as racist, and extols without any evidence the benefits of a multicultural community. In practice the costs of multiculturalism, in poor communication between neighbors and high crime rates from deracinated native youth, are far more immediately evident than its benefits, which again accrue largely to the elite in the form of greater restaurant choice.
The world’s great civilizations, including the United States in its rise to supremacy after 1924, have all been built with an underlying belief that high fences make good neighbors. Conservative organs such as the Wall Street Journal that attempt to deny this and make us all part of a borderless world community should be labeled as what they are, world communitists — or Commies for short. THAT should galvanize the atavistic reactions of the older WSJ staff!
Finally, at the top end of the income distribution, we have the behavior patterns of the high earners themselves, fueled by the enormous and ongoing increases since 1980 in the pay of Chief Executive Officers and other members of top corporate management. Increasingly in the last 25 years, it has become the pattern for high income couples to devote themselves entirely to their careers, working hours much longer than are common in Europe or were expected 30 years ago, then retiring little after they reach 50, or even before, having accumulated enough money in bonuses etc. to finance their lavish lifestyle in middle and old age.
This pattern is hailed in the U.S. media as solid evidence of the United States’ superiority to “Old Europe” yet it is in reality very inefficient, in both the short and long term, as well as increasing inequality. The best and brightest provide their companies with more hours of work, but for fewer years; they also demand a pace of work from their colleagues that is dangerous to the health of older executives, thus forcing them prematurely out of the workforce. As life expectancies increase, this pattern will become increasingly dysfunctional.
Second, since it remains almost impossible to prolong women’s reproductive years beyond the age of 45 or at most 50 high powered career women have two choices. Either they can remain childless, thus causing their presumably superior genetic material to die out and condemning them to a lonely old age or they can have children during their careers, but subcontract the upbringing of those children to maids, child minders and other domestic staff, generally in big cities of very inferior quality indeed.
If both their parents are working 80 hour weeks and only the domestics are available to interact with them, it is little wonder if yuppie children grow into teenage werewolves and waste their high genetic potential. The study featured in the Washington Post Sunday showing that depression in the United States is much higher among couples with children than among the childless is an appalling commentary on the unnatural stresses caused by modern economic patterns on the fabric of family life.
Third, the very high incomes and immersion in their careers of the high achievers separates them from the remainder of the community, and causes an impoverishment of cultural and community organizations – churches, school boards, operas – on which a vibrant, successful society is built. Particularly if the high achievers then retire to an expensive and isolated “senior community” or waste their early retirement years in pointless luxury travel their intellectual and emotional growth is stunted, and the interaction with the high achievers that in former ages gave encouragement to the young and the less successful is blocked.
A society in which the very rich are overworked and isolated from the remainder of the community, the working classes are threatened by an infinite supply of cheap immigrant labor and cheap money fuels capital gains that accrue almost entirely to those already possessing large amounts of capital is a society that increasingly resembles Mexico, Brazil or Argentina. One would thus have to believe very strongly in the innate superiority of Anglo-Saxon culture to believe that the pathologies of Latin America may not also appear in the United States.
Skeptics of the view that the United States is becoming Latinized should look at U.S. politics over the last few years, since Newt Gingrich was removed from the House of Representatives Speakership in 1998 – and see the emergence of typical Latin American patterns. In Latin America, politics is responsive to entrenched interest groups, rather than to the needs of the common man. Check! In Latin America, politics is generally dominated by a well-born elite, with few non-elite mainstream politicians. Check! In Latin America, corruption in politics is endemic. Check! In Latin America, public spending is generally a huge opportunity for graft, waste and political payoffs. Check! In Latin America, the electorate is cynical about politicians, believing that little will change no matter who gets elected. Check! In Latin America, property rights are not solid, but property is held at the whim of politicians. Does the Kelo v. New London Supreme Court decision of June 2005, which allowed local governments to destroy people’s houses to build a shopping center, ring a bell?
Only the Latin American populist has yet to appear, seducing the electorate with wild promises and destroying the economy with economically destructive seizures of private property.
Given the above analysis, does anyone suppose that his advent will be long delayed?
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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.)
This article originally appeared on United Press International.