Situation Analysis: Economic Inequality

Economic inequality was once a thing of the past in the United States. However, with the aid of globalization and financial deregulation, the issue has again resurfaced and went straight into the political limelight, triggering powerful, but unsuccessful movements such as Occupy Wall Street. The problem is growing, and not even an economic crisis slowed the disparaging gap between the rich and the poor.


Economic inequality has become one of the most talked about issue in today’s politics, especially following the routine economic collapse of various countries across the Western world since 2008. The United States of America has seen much social unrest as more and more citizens become frustrated at their seemingly static socioeconomic status while watching the rich get richer. Currently, the USA is ranked third among all the advanced economies in the amount of income inequality, per the Stanford Center for the Study of Poverty and Inequality. It seems to be getting worse, from the collapse of the middle class to rising costs of living and lowering of wages. Issues like healthcare and government aid – referred to by the more elite as “handouts” – have become issues of the poor, issues that are talked about but never really resolved. Nowadays it seems like the public is at war with the government: spurts of rebellion can be observed throughout the past few years, such as the Occupy Movement, and the average citizen’s disgruntled opinion on the state of the nation is resonated throughout America. Congress’s approval rating has pummeled into an all-time low starting in 2013. Gallup, the organization who has been monitoring a variety of political data since 1935, has attributed this rating due to the Congressional stalemate: a Republican majority in the House and a Democratic majority in the Senate. However, it goes deeper.

Economic inequality is not an issue to be taken lightly; enraging the masses has not tided over well for many governments in the past. But understanding why economic inequality has taken on an integral role in the political atmosphere and what implications it has – both if the government were to step it and offer a solution as well as if nothing is done about the expanding problem – on the USA’s sociopolitical structure.


A. Background
Economic inequality is a broad term that has been misused plenty in the media today. Economic inequality is the contrast between the economic conditions of different socioeconomic groups, usually measured by contrasting income. Income is an umbrella term for earnings, interest, dividends, and property royalties. The issue with economic inequality is that it begets economic injustice, when the wealthy oppress the poor and limit the poor’s quality of life and social mobility. Income inequality was observed at its worst in the Gilded Age, right before the Great Depression took over the country. In an attempt to stabilize the economy, FDR passed the New Deal, a series of programs which increased jobs, improved the country’s infrastructure and, ultimately, gave the “nobodies” the means to move up the socioeconomic ladder. The decades following the New Deal era – the 50s and 60s – were a time when many people were able to live comfortably. Economic inequality was at its lowest in the late 60s and early 70s, but spiked up in the 80s, during which the top 1% income share rose due to Regan’s trickle down policies. Since then, economic inequality has kept rising; in 2011, it finally reached the same level as it was in the Gilded Age. The major culprits behind the rise are globalization and financial deregulation.


B. Globalization
Globalization has been both a gift and a curse to the American people. On one hand, foreign companies now sell their stock to Americans, usually the wealthy who have enough money to participate in the gambling of the stock exchange. Many prosperous Americans have increased their capital through wise or lucky investments in the stock market. However, on the other hand, middle and lower classes have had to compete with cheaper labor forces of India and China, which led to the demise of manufacturing in the United States. As the rich became richer, the poorer Americans had to struggle with unemployment as factories all over the US were shutting down. The lower classes do not usually have to capital to become stockholders, so many people feel like their voice cannot be heard in their corporation, so the corporation continues to cut costs and workers without much care. To boot, mainstream media has gone after unions and have, on the whole, given unions a bad name by focusing on the corrupt parts and not bothering to regard the good aspects of such institutions. The lack of capital for stockholding and the lack of motivation to participate actively in a union makes middle and lower class Americans feel overlooked in corporate businesses. Of course, the people making virtually all the decisions are only higher ups, and they are not making decisions in favor of the common people.

C. Financial Deregulation
Financial deregulation began rearing its head in the late 1970s, when the Supreme Court ruled in favor of the banks in Marquette vs. First of Omaha and eliminated loan rate ceilings in a number of states. As banks began to grow in power, more and more legislation began to be passed in order to give them even more power; clearly, this was a result of a very large and very effective Congressional lobby. Deregulation continued steadily, from the Depository Institutions Deregulation and Monetary Control Act of 1980, which increased deposit insurance, to 2009’s Public-Private Investment Program for Legacy Assets to make toxic assets, or assets that have significantly decreased in value and are no longer an option in the market, more liquid to financial institutions. The Glass-Steagall Act of 1933 had made sure that banks could only exist for one purpose (such as being a bank that gave out loans, or a bank that only engaged in investments), but was repealed in the 1950s, shifting power to the banks and allowing them to grow into bigger businesses with multiple branches. The more banks began to resemble businesses, the more they resembled a “too big to fail” schema. In 2005, banks began to lower their standards for mortgages and credit. Merrill Lynch, Morgan Stanley, Lehman Brothers, Goldman Sachs & Co., and J.P. Morgan & Co., all began to leniently rate investments. The economy was clearly on the verge of collapse as more and more banks approved risky mortgages to people who were less than creditworthy. The bubble burst and millions of Americans were left with loans they could not pay, leading to mass foreclosures and loan defaulting. The financial crisis of 2008 begot the global economic crisis of 2008-2009, and many global economies are still suffering with the consequences to this day. Many people were left wondering how Wall Street and politicians did not predict the on setting crisis. The problem is that Wall Street did foresee the crisis, and were all well prepared: almost everyone walked away pocketing large sums of money. Bankers had established a system in which they “bet” against risky loans, ones that were likely to be defaulted on, and thus gained profit from other people’s misfortune. While the average American watched their house get foreclosed, the rich bankers on Wall Street walked away from the ruins with millions. And as the poor got poorer, the rich got richer.


A. Collapse of the Middle Class
Of course, economic inequality has become a controversial subject, portrayed by the mass media as propaganda for the lazy and the people cheating the system and abusing entitlement programs. Yet the ever-increasing gap between the poor and the wealthy is hard to ignore. 10% of the richest Americans (roughly 31 million people) take up 50% of the countries earnings. The remaining 280 million of the population, 46.3 million of which live below the poverty line, have to divvy up the rest of the earnings. In November 2012 the US Census Bureau said more than 16% of the population lived in poverty, including almost 20% of American children – up from 14.3% in 2009. Inflation accounted for, the richest today make four times more than the richest people made in the 70s, while middle and lower Americans have stayed the same. As Middle America’s spending power decreases, more and more businesses are targeting rich people – those earning over $200,000 annually – exclusively.



Elizabeth Warren, a US Senator and consumer protection advocate and researcher, has attributed much of the economic inequality to the collapse of the middle class. Warren researched consumer purchasing data from the 1940s to the 2010s, and, after adjusting for inflation, made a startling discovery. The middle class was shrinking fast; people no longer had as much of a financial safety net as they did mid-20th century. The median number of incomes per household has risen from 1 person to 2 people. Men also make $800 less than they did midcentury. Thus, the rise in income per household over time has been because of women entering the workforce. But despite the increase in income per household, savings have gone down drastically from 11% in the 1960s to 0% in 2010 (still up from -2% during the financial crisis). Overall, over the past 70 years, households have been pending 32% less on clothing, 18% less on food and 52% less on appliances, while housing and mortgage payments have gone up by 76%, employer sponsored health care went up by 74%, child care went up 100% and progressive taxes went up by 25%. So, conclusively, throughout her studies, Warren found that Americans were actually spending more and more of their paychecks on necessities like housing, insurance and gas, which made them more likely to try to save on clothing, food and appliances. Because so much of every household’s paycheck goes to merely surviving, there’s less and less of a safety net for families, especially if something happens to one of the people bringing in the income. With savings at 0%, American families nowadays cannot afford to lose their jobs, get sick, or take time off. The middle class is collapsing on itself from the weight of inflating prices to survive with a minimal standard of living. While a lot of people are outraged, their frustrations are reflected on the mass movement against tax raises and entitlement programs, the last of the available social netting for people who had fallen in the cracks. Big government support the bailout of failing companies and nobody notices as legislation slides by, but aiding social constructs that prevent the average American from going destitute and provide him or her with a second chance is met with clamor and malice. The movements set up to protest big government and its love affair with Wall Street, such as Occupy Wall Street, have been, on the whole, unsuccessful. Middle Americans demand to be heard by the politicians and bankers, but in the long run, money speaks louder than an active majority.



B. Income Explained
In the past 50 years, mean income has risen, writes Benjamin Page in his book Class War: What Americans Really Think about Economic Inequality, but not for the reasons many people would expect. While wages have risen slightly, standard of living has risen even more, debilitating lower socioeconomic classes and making it harder for upward mobility. But the biggest player in the shift in mean is the rapid income increase in the higher class. While it seems like the standard deviation curve (with x-axis being income in dollars and y-axis being the population) is equally spaced, with µ=­x̄ (aka mean equal to x bar, or, in layman’s terms, there is an equal number of people below and above average – half the population in each hemisphere). In reality, the curve is skewed to the left, which means that most of the income is located in the right of the curve. CEOs now make 185 times more than the average worker. This explains why there’s a famous saying in business nowadays, referred to as the 20-80 rule: “20% of people make 80% of the decisions.” Politically and economically, this translates to the following: the top 10% of the economic population holds at least 80% of the nation’s wealth and financial resources.”

C. The Cost of Egalitarianism
Every country in the developed world has at least incrementally more social mobility than the US does. But because America has always been a nation based on a multitude of “rags to riches” stories, Americans tend to block out any information contradicting this myth. Nobody wants to believe that the American Dream is reserved for the wealthy or the lucky. It is true that most of today’s top 10% have made fortunes for themselves. This tidbit has been turned into a sound bite to make it seem like wealth and success is accessible to everyone. “But it’s important to note that for the rich, most of that income does not come from “working”: in 2008, only 19% of the income reported by the 13,480 individuals or families making over $10 million came from wages and salaries.” The gap between the rich and the poor keep increasing with each generation entering the job market. The widening gap is very visible, and causes quite a distress among society, but the repercussions of severe economic inequality sometimes goes undetected. Countries with higher levels of economic inequality end up with higher rates of crime, mental disorders, obesity, trust issues, drug and alcohol abuse, homicides, teenage births, infant mortality, and imprisonment. Conversely, high levels of economic inequality also lead to low levels of social mobility, math and literacy scores and life expectancy. Clearly, economic equality plays a pivotal role in supporting the fragile foundation to the success and longevity of a country and its people. By allowing the economic gap grow and refusing to address the issue accordingly, lawmakers and people of power are damning the future of the nation, all for their own personal gain.


Economic inequality is a snowballing issue, growing and showing up in almost every political discussion and debate. The matter is becoming more sensitive and the common people grow restless for change. It is imperative now to be more cautious in flaunting successful business ventures or announcing big bonuses for top employees. If the majority can find steady footing within the next few years, perhaps there will be some change in the socioeconomic climate. Specifically what kind of change that will be is unclear; it certainly cannot be a complete overthrow of Wall Street, since so much of the global economy relies on it, but even incremental change is good. The more power and freedom people have, the more a nation can prosper. All that can be done so far is to sit and watch as the people find their voice.

Further Reading & References
The Asset Price Meltdown and the Wealth of the Middle Class, E. N. Wolff
The Spirit Level: Why Greater Equality Makes Societies Stronger, Richard Wilkinson & Katie Pickett
How Economic Equality Harms Societies, RIchard Wilkinson TED talk
Fault Lines: The Top 1%, Al Jazeera special feature
The Coming Collapse of the Middle Class, Elizabeth Warren lecture
Inside Job, documentary about the financial crisis by Charles Ferguson


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