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Economic Disparity

Earlier today, I mentioned economic disparity in passing. Here's a more in depth take on the subject:

Economic Policy Institute mentioned it on Wednesday. Morgan Stanley's Stephen Roach mentioned it on Friday. The Washington Post mentioned it on Sunday. All three have touched on the topic of economic disparity.

From EPI:

Living standards not keeping pace with productivity   
“The median household income rose just 1.6% between 2001 and 2004 … compared to an 11.7% rise in productivity. Workers aren’t reaping the rewards of their labor: real wages are trailing productivity gains because profits are taking the lion’s share of economic growth Growth in net worth has been equally lackluster, nudging up 1.5%

Even this slight gain has been unevenly distributed because it stems entirely from a run-up in housing prices. The central role played by residential property, which constituted 39% of total assets in 2004 (up from 32% in 2001), means that families are increasingly vulnerable to a downturn in housing prices.

If this downturn comes as a result of rising interest rates, households will be doubly impacted because the value of home-secured debt (for families that had any) rose by 27% over the three-year period.”

From the Washington Post:

“Our Financial Failings” by Neil Irwin
“It has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can't manage to pay off a $2,200 credit card balance. That is the portrait of the median American household as painted by the Federal Reserve Board's Survey of Consumer Finances. Blown away yet?

No? There’s more: “Only 49.7 percent of American families even had a retirement account in 2004.”

From Mr. Roach:

Globalization’s New Underclass:
“An increasingly integrated global economy is facing the strains of widening income disparities - within countries and across countries. This has given rise to a new and rapidly expanding underclass that is redefining the political landscape and stoking protectionist fears.” From his “conclusions”, (we edited to focus on the US; footnote is mine as well):

“The United States and China exemplify the full range of pressures bearing down on the global income distribution. (1) *Gini indexes show both nations with relatively high degrees of income inequality. (2) Courtesy of an IT-enabled arbitrage, real wage compression in the United States has moved rapidly up the value chain - sparing an increasingly small segment at the very top of the occupational hierarchy. (3) This sharpens the contrast between America's elite and the rest of the US workforce.”

Joanie notes what the bottomline is:

Don’t know about you, but I don’t have the stomach to stop and linger on any of this stuff for more than an instant. It’s that distressing. Worst of all, it’s been that obvious for some time. John Q is up the creek. If he has anything besides debt, for the most part, it’s his house. Oh, my. And not a sou in the bank for a rainy day or worse, for retirement. And as has been pointed out in this space on numerous occasions as just one example: the deal-makers make billions making the deals that makes John Q. unemployed or underemployed and thanking his lucky stars for a $15 buck an hour job installing sensor alarms on some M&A honcho’s 5,000 acre starter hacienda out in Bozeman.

This is what happens when the tail wags the dog, i.e., when the market drives the economy. Things’ll be different come the Revolution.

Next case.

Monday, March 13, 2006 | 11:00 AM | Permalink | Comments (64) | TrackBack (0)
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Comments

This goes back to that goofy businessweek article, "Unmasking the economy / why the economy is a lot stronger than you think," which in turn goes back to the "we think they sweat" iPod economy arguments. Competitive pain for non-IP-centric workers is the other side of the coin in an integrated IP-centric world.

Bullish pundits focus on the globalization benefits for knowledge based companies--which are real--and then try to pretend that the United States has a knowledge based economy, which it does not.

On the whole the world is becoming more meritocratic, as huge swathes of the global population (China, India, Eastern Europe) are getting their chance to fight for a piece of the pie.

But global meritocracy and entitlement-based notions of western democracy--especially fat, bloated, welfare-state democracy--are deeply and irrevocably at odds with each other.

So now we (in the west) get to choose between a return to rampant protectionism (which would be disastrous) or the slow but sure destruction of a long-held, entitlement-based societal model (the notion that one is entitled to success and prosperity simply because they are a citizen of X country). For the past few years we have attempted to sustain the illusion of continued prosperity-equality via deficit spending... which was never more than a temporary solution. Like the line worker who refuses to adjust his lifestyle to a sharply reduced income, making up the difference with a home equity loan / Visa / Mastercard, reality can be postponed but not denied.

Posted by: trader75 | Mar 11, 2006 12:45:38 PM