The Challenge of Inequality


Genuine WealthtroyMediaRobert McGarvey

December 6, 2013

President Barack Obama has identified inequality the “defining issue of our time”. He stated, quite passionately, that growing inequality in the United States was undermining the economy and social cohesion.

Although inequality is growing faster in the US than in Canada, the same dangerous trends are present in all developed economies.

The facts are hard to dispute. According to the Congressional Budget Office, since the late ‘70s, the top 1% of Americans has seen their incomes explode, up nearly 300 percent. In contrast to these dramatic increases, middle class wages over the same period have essentially stagnated.

Lloyd Blankfein, CEO of Goldman Sachs recently boiled it down into one simple line: “this country does a great job of creating wealth, but not a great job distributing it”

But honestly, is this news? Haven’t rich and poor always been at odds?

Not in my experience, and certainly not to this degree. As a Canadian lad growing up in the ‘50s and ‘60s I remember a much more egalitarian society. In our middle class neighborhood shoe salesmen, small business owners and middle ranking government employees could own their own homes, send their children to good schools and enjoy comfortable lives; shockingly they did all this on one family income.

Since then inequality has taken off. It is no coincidence that (simultaneously) two major changes have taken place in our society. First, a set of ideas best described as ‘market idolatry’ have come to dominate establishment thinking. Secondly, a ‘new’ knowledge-based economy has displaced the old industrial state as intangibles have risen to dominate our society.

To be fair, there are many advantages to this ‘new’ economy. Technology, for instance, has been largely responsible for a doubling in overall productivity (and GDP per capita) in developed nations in the past few decades.

And Moore’s Law means ever-improving consumer goods at ever-lower prices. Consider that the typical television in the ‘70s cost an inflation-adjusted $1800. Today you could buy two largish flat-screen TV’s, two tablets and two notebooks for that dollar value.

However, in the same way that the Industrial Revolution generated dangerous levels of inequality in its early stages, the knowledge revolution has also contributed to growing inequality.

Consider the research of Corrado, Hulten, and Sichel at the University of Maryland: “The $3 trillion increase in GDP arising from the addition of intangible investment to GDP results in an equal increase in Gross Domestic Income (GDI), all of which accrues to the owners of capital.”

It seems the rise of intangibles has contributed to inequality by channelling the accrued value of our new economy exclusively to asset owners not to labour. Ouch!

The question is why don’t we do something about it?

The answer is simple; ‘market idolatry’ has reduced our willingness and ability to tackle big problems like inequality. Market idolatry is predicated on the idea that – left to its own devices – ‘the market’ will solve all our problems. Market idealization has created a deep reluctance to intervene in the economy, a sense that the best thing politicians can do is let ‘the market’ sort it all out.

Regrettably, having trusted market forces to deliver the best possible outcomes for decades, politicians today are now searching for an alternative strategy.

The notion of “a rising tide that lifts all boats”, popularized by President John F. Kennedy, argues that economic growth – however accomplished – is by definition a social good, in that the benefits of economic growth eventually spread throughout all sectors and classes in society: this is the so-called trickle-down effect.

The uncomfortable reality is, the fruits of economic growth do not automatically trickle down, and regrettably are no longer ‘lifting the boats’ of middle and working class families.

The truth is, left to its own devices capital (like all power) concentrates. Unfortunately the ownership of assets is concentrating in our economy today. This fact combined with the power of leverage creates a trickle-up effect that is the opposite of what most people believe. The cold reality is this, in the absence of assets or asset-like qualities, a rising tide will not elevate – it drowns.

Inequality is not a small problem. Even Abraham Lincoln – who did more than most to fight injustice and inequality – was clear: “The perfection of our Union, especially our commitment to equality of opportunity, has been a story of constant striving to live up to our Founding principles.”

The difference between our time and Lincoln’s is that in those far off days abandoning the defense of liberty to ‘the market’ was not even considered.