Why Are The Poor Getting Poorer And The Rich Getting Richer?

This year, Elon Musk has managed to add an extra $8 billion dollars to his personal net worth. That’s a lot of money by anyone’s standards, but it’s a heck of a lot for a man whose business ideas are verging on the insane.

However, people like Musk are doing very well for themselves in the economy of the 21st century. If you’ve got a great idea for a product and the ability to execute, you’re well on your way to staggering success.

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Of course, the modern economy creates losers too. Although the wages of the median household haven’t gone down, they also haven’t risen since the 1970s, which is quite shocking when you think about it, given the improvements we’ve seen in productivity over the last fifty years. It turns out that practically all of that increased purchasing power has gone to a select few, right at the top of the income pyramid.

The question of why this happened has been baffling economists for some time. Inequality has been rising, despite the fact that there has been robust economic growth over the last fifty years - with a slight exception for the era we’re living in now after the recession. Payday Loans Net point out that poverty is something that affects a vast swathe of the population. In the UK alone, there are more than 1.5 million people who don’t even have bank accounts, denying them access to traditional sources of credit which they desperately need. Many of these people are the poorest in society and are on the lowest incomes. Other people, perhaps up to 2 million, are living in squalid housing conditions with toilets that don’t flush and black mould all over the walls.

How could this happen in a world where productivity continues to rise, and western countries pump out more goods and services every year?

Better Technology Is Taking Jobs

Perhaps the most prominent argument is what might be loosely called the technology-education argument. Proponents of this argument believe that technology has taken over many previously middle-skilled jobs in the workforce, and this has led to a decline in the middle class in general, with some middle-class individuals entering high-paid jobs at the top of the income ladder, and the rest suffering falling incomes and pay packets. In other words, technology has led to a hollowing-out of the labor market, allocating people jobs at either one extreme or another.

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Economists have been aware of this trend for some time now. David Autor, an economist from MIT, constructed a plot where he lined up job creation rates across all skill levels for different decades. In the 1960s, the economies of the West were actually eliminating low-skilled jobs and creating large numbers of middle-income and high-income jobs requiring an enormous amount of competence and education. This was precisely the pattern that people wanted: work was getting better, less mundane and more highly paid.

But then in the 1970s, this happy pattern began to stall. Middle-class job creation slowed down, and there was a small, but significant uptick in the number of low-skill jobs demanded by the economy. Increasingly employers were looking for fewer accountants but more janitors. Fast-forward another three decades and job creation in middle-skilled occupations had gone negative, and the economy was either adding high-skill or low-skilled jobs to the mix, with little in between.

Economists, like Erik Brynjolfsson, were quick to blame technology. They pointed out that machines had effectively stripped many middle-class cognitive workers out of the economy altogether. Computer software had replaced office clerks, ATMs had replaced bank tellers and calendar software and replace secretaries. This isn’t something that is just happening in America either. It’s going on all over the countries in the western world. New jobs are being added, but they’re either right at the top, or right at the bottom of the income distribution. People are getting jobs as software engineers at Google - fun and interesting jobs by most accounts - but people are also getting jobs as fast-food workers, carers, and call centre operatives, which do not command high wages. Technology has increased output, but it has also led to a low wage economy where people struggle to afford the basics.

Many have proposed better education as the solution, but people have been arguing for better education for decades, and it never happens. The government controls education in most countries, and until that changes, we’re unlikely to see real innovation in the sector.

Globalisation Is Pushing Down Wages For The Many

The next great theory has to do with globalization. Proponents of this theory suggest that the reason incomes have stagnated, especially the incomes of middle- and low-wage workers, is because of the increasing integration of global labor markets.

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In the past, labour markets in different countries were effectively separate. The reason for this was the manufacturers needed to be close to target markets to be affordable. Henry Ford built his motor plants in Detroit because he knew that if he built them in Asia, the cost of getting cars to US shores would make his products uncompetitive.

That all changed, of course, with containerisation and massive international trade vessels which brought unit costs down. All of a sudden companies could afford to locate outside western markets where labour was cheaper. Soon, low and middle-income workers found themselves not only competing with other workers in their own country but workers abroad where living costs were much lower. Blue-collar workers, in particular, saw their jobs going overseas, and the days of highly-paid, middle-skill manufacturing jobs came to an end in the West.

What offshoring has effectively done is increase the supply of labour available to companies. The increase in the supply of labour has led to lower prices and a larger amount of labour employed but at the expense of some workers in the Western countries. Overall, global inequality is falling, but it’s rising in countries where the middle-class now has to compete with low-wage workers abroad.

One of the reasons people think that globalization, not technology, is the reason why inequality is rising, is because globalization kicked in before technological revolution really got going. After all, the process of rising inequality has been underway since the 1970s, but technology didn’t start to change rapidly until the era of the internet in the 1990s. Globalization first began when production shifted to Malaysia, South Korea, and Thailand in the 1970s and then to China from the 1990s, and this had a major impact on the people employed in those industries.

The Political Regime Is Stifling Innovation

The final school of thought is that it isn’t some background process, like globalization or technology that is driving greater income inequality, but the political regime itself. Governments have grown massively over the last fifty years, consuming an ever larger chunk of national income in the process. Despite the enormous increase in the size of governments, poverty is still an issue, even in developed countries. Simply throwing money at problems does not solve them.

But there’s been something even more sinister than this going on. Governments around the world have effectively allowed the game to be rigged against ordinary working people. One of these has to do with the fact that governments have regulated industries and financial institutions in such a way that benefits those institutions, but not the people. Take banks, for example. It’s almost impossible for somebody to set up their own bank, thanks to regulations, which means that the banks already in the system aren’t under as great a threat of competition. This allows them to charge higher prices which benefits their shareholders but harms the average customer.

It could be argued that similar processes are playing out all over the economy, increasing the returns to capital owners, while screwing over everybody else.

The key to income equality is the ability of people to compete for profits away. If people don’t have the skill to challenge those who are making significant returns, then they will continue to make large profits, unchallenged. A workforce that has been educated in terrible schools and has low self-esteem will never be able to step up to the mark and challenge incumbents. The result will be that those people already at the top of industry will make off like bandits, while poorly educated consumers pay higher prices.

Governments have also caused living costs to rise for the average person. Thanks to caps on housebuilding through regulation, costs for the average person have increased at a time when technology is making many other products a lot cheaper. TVs, for instance, have an average deflation rate of 15 percent per year. Restrictions on the number of new builds is pushing up housing costs, meaning that the amount of money getting paid to the owners of houses is also increasing.

In all likelihood, the problem of inequality is likely driven to some extent by all of these factors. But there’s no denying that it’s a problem that seems to be getting worse, not better. As technology become more sophisticated, it’ll get more difficult to understand, and greater numbers of poorly educated people will be left behind to pick up the scraps.

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