Tuesday, April 21, 2015

Why the Super-Rich Get Richer

See also: This Is What Plutocracy Looks Like.

A story at WaPo called This chart explains everything you need to know about inequality gives the following very interesting graphic:

It plots the average income for the top 1% horizontally against the average income for the bottom 90% (vertically) in year-by-year dots, showing that from the 1930s to the mid-1970s, only the bottom 90% saw incomes rise meaningfully. Since the mid-1970s, only the top 1% have seen incomes rise meaningfully.

The author of the WaPo piece tries to paint an explanatory narrative around fiscal policy, blaming Reagan's tax reforms (which favored the rich) for the sudden shift in incomes, which is silly, because taxation is taxation and income is income. You have to make an income for it to be taxed. The Reagan tax reforms have little to do with what's going on in this graph.

If you want to understand income inequality, you have to be willing to look at the bigger picture of what happened to wages after the introduction of mass-produced computer technology in the mid-1970s.

Various versions of this graph can be found all over the Internet and economists agree on the fundamental soundness of the underlying data. The graph basically shows that wages parted company from productivity in the 1970s. The epochal event that transformed economic reality in the mid-1970s was the introduction of mass-produced microprocessor technology, first in pocket calculators, then in affordable computers.

Not coincidentally, the mid-1970s was (were?) also when the 1% started to see their incomes explode.

It's not hard to understand what happened, although economists, as a group, seem to be incredibly dense on this point. Computer technology allowed radical increases in productivity. But when you hand a business owner a radical increase in efficiency, the business owner doesn't react by paying people more, or hiring more people, etc. He or she simply pockets the efficiency gain, whenever possible. ("Margin expansion" is one name for this.)

The fantastic efficiency gains made possible by computers (and Internet and mobile) have mostly not been passed through to consumers. They've been pocketed by the winners. That's what's going on here. It's not rocket surgery.

The other aspect to computer technology (computers, Internet, mobile) that's wrecking the Old Economic Order is the ability of computation to put people out of work. Some extreme examples:
  • At its peak in 1988, Kodak, the iconic American photography company, had 145,000 employees. By 2010, digital cameras were in cell phones. In 2012, Kodak filed for bankruptcy.
  • When Facebook purchased WhatsApp for $19 billion, WhatsApp had 55 employees serving 450 million customers.
  • Uber, an app created by two guys, is putting around 100,000 cab drivers out of work. In 2000, there were 233,000 cab drivers in the U.S. We don't know how many there are today, but in San Francisco, average monthly trips by cab have fallen 65% since Uber came along.
According to Uber, the median wage for an UberX driver working at least 40 hours a week in New York City is $90,766 a year. In San Francisco, the median wage for an UberX driver working at least 40 hours a week is $74,191. (The cab drivers who've been displaced were earning an average of around $30,000 a year.) Does that sound like a plan for reducing income inequality? Or increasing it?

The standard dogma preached by economists is that people displaced by technology will find more meaningful knowledge-based work elsewhere. This was true, for a while. If you lost your job in the shoe factory, you could go back to school and become a programmer.

But now we outsource a lot of programming jobs to eastern Europe, India, etc. So that strategy doesn't work very well.

So go back to school and become a doctor or a teacher. Right?

That doesn't work either now.

From a story at alternet.org:
In coming years, software apps will be doing many of the things physicians, nurses, and technicians now do (think ultrasound, CT scans, and electrocardiograms).
Actually, think surgery. Many procedures (try 400,000 a year) are robotic now.
Meanwhile, the jobs of many teachers and university professors will disappear, replaced by online courses and interactive online textbooks.
You can pooh-pooh these trends all you want, but the fact is, the economy is being transformed and millions of people are either being put out of work or having their jobs crapified into part-time/on-call work with few or no benefits; "efficiencies" are accruing to the few at the expense of the many. And technology is the key.

Bottom line, the era of "technological unemployment" (a term coined by Keynes in 1930) is at hand, and in the new economic version of musical chairs, the winners only get richer, not more numerous.

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  1. Also, the US via Nixon let go of the gold standard for the dollar in 1971. Could that be related? New money in the hands of politics flowing to those close to power: banks and industry.

  2. Actually there was a huge negative impact on the working lower and middle class caused by treaties, regulations, tax credits and incentives beginning in the 1970s. I'm speaking of NAFTA which at the same time as it "increased trade", also boosted corporate & upper class income. Imagine the windfalls created when suddenly America's largest manufacturers were encouraged to move their operations overseas to capitalize on slave labor wages in 2nd & 3rd world countries or to outsource to cheap suppliers already there. This followed an era when manufacturing was all about team work, quality reputation & products for the good old USA - company & workers joined to pursue those ends. But with NAFTA there was a mass exodus in the 70s and 80s: Ford, General Motors, Nike, Apple, etc. Outsourcing of production was so bad US railways cut back service severely as they were no longer carried raw materials to manufacturers. This was known as the railway crisis, one fallout from outsourcing.

    Not only was this huge savings of manufacturing costs happily embraced by nearly all the established bastions of US manufacturing (auto, steel, heavy eq) but also they would benefit by having to meet virtually no environmental standards abroad. No costly air scrubbers or safe disposal of hazardous liquids. These countries saw a big windfall for their own economies: their citizens now able to get these "high" paying jobs at $18/day instead of $5. It was a way for 3rd & 2nd worlds to move up a notch. Back here in America, no one talked about how for each new job overseas, at least one in the US would be lost, even more as management & operations personnel also were sourced overseas. This was the very high impact industrial forerunner to the wave of outsourcing of tech support to Malaysia, India and the Philippines.

    Meanwhile back in DC, more corporate tax loopholes were given (offshore operations & money sheltering is STILL not discouraged or banned), tax credits were added for the "jobs creators"- only the jobs creators had moved overseas & were no longer really making US jobs. At this time, Reagan also started busting the unions (Air Traffic Controllers) which were by then long established to bring stability for the masses. Unioins brought health, safety, fairness and sanity to the workplace that had been a place where brutish management could and did abuse, overwork and even kill workers (e.g. garment factory fires of NYC, mill disasters in New England, forced overtime & corporate-sponsored mob "enforcement" on workers in Detroit, PIttsburgh & other heavy industrial cities). Once union busting was seen as do-able, acceptable, (heck, Ronnie R sanctioned it!) companies began the all out assault on labor to remove even more costs from their bottom line.

    US workers who'd made those same parts & products for decades were now out of jobs, plants shuttered, communities sinking. Smaller companies supplying the big factories went under exacerbating the problems. (See Detroit) Some of the unemployed transitioned to new technologies. Others struggled a little or a lot. Many eventually had to transition to low paying unskilled service jobs because there simply were not any replacement industrial jobs left. This mass idling included highly skilled tradesmen as well as line workers.

    This very real economic trend, the rise of the 1% and the regression of the middle class and poor from 1970-2015, is most certainly NOT all tied to technology. It is much more than that with roots in government regulation allowing, encouraging even, US companies to go overseas where costs would be cheaper. Those cost savings never trickled down to enrich Americans as Reagan & those following him have continued to promise. Technology has no doubt had a part in this but it is much less prominent than this article would have one believe.

  3. Uber is boosting the incomes of the 99% at the moment. The top 1% starts at $350K-ish (see http://www.economist.com/node/21543178).

    HOWEVER, Uber is now investing in driverless cars: (see http://www.forbes.com/sites/benkepes/2015/02/02/the-battle-looms-uber-developing-driverless-cars-google-looking-at-ridesharing/). So Uber still fits the model.

    But technology is increasing quality of life in general. TVs and now smartphones with free apps are everywhere.

    So what do we do about it without killing the goose that's laying the golden eggs? What's the minimum possible change that will get that curve moving upward again?

    1. Thank you, Kevin, for the great input. Obviously, I don't have the ultimate answer (I don't know who does), but I do feel strongly that merely taxing the wealthy is not the answer. The best way to "tax the 1%" is to have them hire more people and pay better wages. If we can put more people to work, and pay them better, then more people will pay taxes and necessary social programs can be properly funded. It would help if the richest companies would simply hire more people who want to work. What those new hires should do, I don't know -- it doesn't matter. If the choice is between the government hiring people for make-work programs (WPA-style) or letting Apple, Google, etc. create their own WPA-style programs, I favor the latter. Certainly, Google already operates its own internal WPA make-work program, with people working on utterly ridiculous R&D projects that will never generate profit in our lifetimes. So Google is already setting a precedent here.

      I also think Jaron Lanier (author of Who Owns the Future?) is correct when he says that companies like Google, who enrich themselves by appropriating private data, need to compensate those of us from whom they steal data. My private habits (gleaned from Gmail and from my surfing behavior) are of huge value to Google; the fact that they offer me a "free search service" in return is like offering a child two pennies for a twenty-dollar box of Godiva chocolates. The exchange is not fair, in the slightest. Google, Facebook, Apple, etc. need to compensate people properly for the information about them that is quite frankly stolen from them. (Yes, we all agree to "Terms of Service," but such agreement is actually compulsory and not of anyone's true volition, hence is invalid.)

      It may be too early to know what the final changes need to look like, but it's not too early to begin a dialog.

  4. Your hypothesis of "margin expansion" sounds reasonable but needs to be validated. What graphs show those trends over time?

    That data would help separate that explanation from others, like equity compensation due to high tech mergers and acquisitions creating the super-rich.

    I'll probably make this the topic of my radio show this Thursday (see http://whosinchargehere.com), feel free to call in to discuss, great topic, and I think we need crowd thinking to start influencing good solutions.

  5. First of all, blogorrhea is a very witty blog name. Love it.

    Second, the premise of your article is flawed. While technology and increasing mechanization have played a minor role in job loss and wage degradation, the primary causal factor is class warfare by the rich and their conservative puppets against the poor and middle class. Massive tax cuts for the rich created huge deficits that became the pretext to kill or sabotage good social programs that helped the rest of society. It's a deliberate policy of impoverishment to concentrate power in the hands of the oligarchs.

    Evidence? Here you go: CEO to average worker pay in the US is about 300x. In other developed nations that have huge corporations that ratio is only about 20 or 30x (like Japan). They've had the exact same technological advances we've had, but their wealth inequality is far less.

    Conservatives are forcing people to work longer, harder, and faster for less so the rich can get richer.

    1. For anyone else reading this thread who wants the hard-core empirical "evidence" please see Thomas Piketty's book (Capital) and the data files referenced in it. This constitutes the best evidence to date (of wealth and income inequality).

      Ole, I think your premise of the Reagan tax cuts (and subsequent tax cuts) being causal is valid and MAY explain the whole thing but I think it is likely the rich have been greatly aided (to put it mildly) by what has to be considered the largest, most epochal change to the economy in recent centuries, certainly of the order of magnitude of the change brought about by mechanized agriculture, certainly as big as the cotton gin (etc.): the advent of computers. It is inconceivable to me that economists of Piketty's stature could overlook the impact of computers on the economy, since a hundred years from now it will be blatantly obvious that this was a historic sea-change. I concede that computers may (perhaps) only have accelerated what was already a structural trend, but my thesis is that the acceleration was nontrivial (indeed, critical) and ongoing. One can look at things like Facebook, Google, WhatsApp, Uber, etc. as multi-billion-dollar anomalies, but the "anomalies" are now of the size of Ford Motor Company, hence are not trivial anomalies and therefore are perhaps not deserving of being treated as anomalies per se. We are living in an era of multi-billion-dollar companies that employ small numbers of people; this is entirely new and transformative. Ebay with $69 billion market cap hires 34,000. Target with $50 billion market cap hires TEN TIMES as many people. Even the modern-day greatly-reduced-in-size Sears (NASDAQ:SHLD, which is now a very highly technologized company), with only $5 billion in market cap, employs almost 200,000. Facebook will probably never hire more than 20,000 (it currently employs 10,000 and is considered by some to have peaked).

      To discount the role of technology or give it anthing but a colossal role here is to misss a historic trend in action.


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