The Significance of the Widening Socio-economic Gap

In the mature economies of the western world, the middle class, considered from Aristotle to de Tocqueville, the bulwark of democratic government has been losing out, capturing a declining share of total income growth. The opening of markets, since about 1990, has created and inspired a new, small but growing and forward-looking, middle class in the developing world, still relatively poor compared to the middle class in the West, but enjoying the kind of material security and sense of good prospects for their children associated with the idea of the postwar Western middle class. During the same period, the larger (and still far richer) middle class in the West has declined in size, and the prevailing mood among many of its members is one of anxiety and pessimism about their future prospects including those of their children. Simultaneously their social standing at home has also declined, with an increasing socio-economic gap.

It could be argued that it was an Englishman, John Wycliffe, who inspired a series of revolutions that began in the 14th century that have yet to conclude in the English-speaking world. On 26th July 1374, Wycliffe was appointed as one of five new envoys to continue negotiations in Bruges with papal officials over clerical taxes and provisions. The negotiations ended without conclusion, and the representatives of each side retired for further consultation. John Wycliffe tried to employ the Christian vision of justice to achieve social change. He argued, “It was through the teachings of Christ that men sought to change society, very often against the official priests and bishops in their wealth and pride, and the coercive powers of the Church itself.” In 14th century England the main grievance of the working class was the Statute of Labours (1351) which attempted to fix maximum wages during the labor shortage following the Black Death.

The Peasants’ Revolt was a major uprising across England in 1381 triggered by the Poll Tax under Richard II which was considered unfair and angered the people as the poor had to pay the same tax as the wealthy. For over 20 years prior to the uprising John Ball was preacher wandering the country-side denouncing the rich and their exploitation of the poor calling for freedom and equality: “For what reason have they, whom we call lords, got the best of us? How do they deserve it? Why do they keep us in bondage? … Except perhaps that they make us work and produce for them to spend!” The King’s army set about systematically identifying the ringleaders from each village that had participated in the uprising and executed them, including John Ball. Past promises made by the King were repudiated and the common people of England learnt how unwise it was to trust their rulers.

The middle classes in the developing world have been the big winners of open and globalized markets, growing in size (as in the China example above of a new 300+ million people) and enjoying (with many having moved out of poverty into the middle class) income gains, on average, between 20 and over 100 percent over the 20-year period. In contrast, their counterparts in the Western middle class had average real income gains over 20 years of less than 20 percent, or just 1 percent per year. Compounding resistance to globalization in the mature democracies, globalization has become associated with the increasing concentration of income and wealth at the top and the relative loss of stature and political influence of the old middle class to a new professional and business elite. The result: a huge, probably unprecedented gap (akin to the early 20th century Gilded Age) between the rich and the middle class.1

In 2015, the top 10 percent of households by income captured more than 50 percent of all income, and the top 1 percent captured almost half of that: 22 percent of all income. The bottom 90 percent of households enjoyed some income growth, but were still poorer in 2015 than they were when the 2008-2009 financial crisis hit. In the US, according to the recently released World Inequality Report 2018, the share of national income claimed by the top 1% of the population rose from 11% in 1980 to 20% in 2014, compared to just 13% for the entire bottom half of the population. The gap in wealth and income has hurt working and middle-class households in many ways, for example, pushing up house sizes and prices in good neighborhoods – making middle class residents “house-poor” as they spend larger shares of their income to live in neighborhoods with good public schools.

Meanwhile, in the aftermath of the financial crisis, the socio-economic gap increased. In the United States, steps taken by the federal government to rescue the economy from a financial panic and meltdown included “saving” the banks and, more problematically, saving the bankers, but did little to nothing for over-leveraged working and middle-class mortgage holders. For an example of how this system flows to the economic elite, just look at the Wall Street “bailout.” The real size of the bailout is estimated to be $14 trillion – and could end up costing trillions more than that. On top of the trillions given to the Wall Street elite, there is already a record $12.3 trillion in national debt on which $500 billion in interest on this debt paid out every year. Trump’s 2018 tax cuts will add another $100 billion a year to the deficit over the next decade.

Increased demand of globalization can lead to two types of inequality – benefitting select industries or, worse, only the highly skilled who can cross borders. Waves of trade and globalization can lift average incomes and reduce inequality, but that requires intervention to prevent rewards landing in only a few hands. What primarily hurts lower-skilled workers is rapidly advancing technology that replaces them with machines, computers, and voice mail, not free trade. One of the paradoxes of our age is that we are simultaneously living through a time of positive economic innovation and also a time of the painful erosion of the way of life of many middle-class families. More and more find themselves in an era of insecurity as the safe routines of their life have become undone. Excessive psychosocial stress is associated with the adoption of health threatening coping behaviors. Increased insecurity for low skilled workers is associated with rising mortality rates.

The economic elite gained control of both the Democratic and Republican political parties because they knew that hardworking Americans loyally followed these parties, while voters believed these parties were looking out for their best interests. In total, Americans have lost $5 trillion from their pensions and savings since the economic crisis began and $13 trillion in the value of their homes. During the first full year of the crisis, workers between the age of 55 – 60, who have worked for 20 – 29 years, have lost an average of 25% off their 401k. In 1970, CEOs made $25 for every $1 the average worker made. Due to technological advancements, production and profit levels exploded from 1970 – 2000. With the lion’s share of increased profits going to the CEOs, this pay ratio dramatically rose to $90 for CEOs to $1 for the average worker.2

What was great for the corporations and consumers has created stagnation of wages and underemployment for many. Automation, containerized imports, and a competitive global market have created rapid change in the world marketplace. This has occurred in parallel with key neoliberal policies of flexible labor markets and austerity. The promotion of flexible labor markets in the name of growth and competition may not make us better off if it leads to the proliferation of insecure work. The introduction of austerity continues to accelerate the roll back of post-war safety nets in order to help balance budgets. These austerity policies used to discipline the working class, are also designed to put money in the pockets of the economic elite in the near term, with promises of balancing the budget in the long-term. Middle class voters in the West are turning to populist politicians who promise better paying jobs that would shrink the economic gap.

Economic inequality (also known as the gap between rich and poor, income inequality, wealth disparity, or wealth and income differences) consists of disparities in the distribution of wealth (accumulated assets) and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of equity: equality of outcome and equality of opportunity. And if business and political leaders don’t focus on meeting the needs of the average voter, populists may take a wounded electorate – a middle class revolt – in unpredictable directions. History and post-election changes in the United States suggest it is unwise to trust the populist right for the answer; the answer is the set of economic and social policies that would rebuild the size and income shares of the traditional middle class.

1 Nancy Birdsall (3 Aug 2017) Middle Class: Winners or Losers in a Globalized World?

2 David Degraw (2 Feb 2010) The Economic Elite Vs. The People ~ Original 99% Movement Call to Action

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