Economic Insanity: Chapter 5 (part 1)

Of Course the Rich Are Getting Richer (Part 1)

Often there is one pay system for executives, the intent of which

is to pay them as much as possible. There are other pay systems

for managers and core workers. The intent of these is to keep

labor costs as low as possible. . . . It is this class distinction that

results in the incongruence of massive layoffs and record

profits and executive bonuses all in the same year.

—Peter Block, Stewardship

Though capitalists are also consumers, a distinct class difference divides the two groups. That distinction is revealed in the quotation from Peter Block above. A good definition of what it means to be a capitalist is simply that a capitalist is paid as much as possible. Why? Because capitalists control capital, and it is capital that produces income. These people pay themselves as much as possible so that they can accumulate more capital—not to spend on consumer items, but primarily to reinvest in productive capacity, so that they can become even more wealthy and control an even larger piece of the productive pie.

Noncapitalists, by contrast, do not control capital, even when they invest their modest savings in stocks or bonds. Noncapitalists, because they do not control capital, are paid as little as possible (so that the capitalists can minimize costs and maximize profits). What they take home in wages is called disposable income. Why? Because they are supposed to dispose of it through consuming the products they produce. They are not supposed to become more wealthy. As Galbraith points out, their role in the economy is to consume.

The end result of this class division is an ever-widening monetary gap between the capitalists and the consumers. This is not a political phenomenon, nor is it the result of an uncompetitive or misfiring economy. It is simply the logical consequence of the capitalist system. Quite frequently I read articles in the newspaper expressing dismay over the fact that the rich are still getting richer and the poor relatively poorer. The articles always cite the most recent statistics, and the writers are invariably aghast over this continuing trend.

This is an irrational reaction, however, for capitalism is designed at its most fundamental levels to create increasing inequality. Somewhere, I suppose, many of us got the idea that capitalism and equality are compatible. Our reasoning must go something like this: since egalitarianism is part of the American Dream, then American capitalism should produce greater equality. This reasoning may be comfortable, but it is also defective. Which mechanism in the capitalist machine, I would ask, is supposed to equalize wealth? There is none.

Capitalism is genetically predisposed to shift relative wealth from the poor to the rich, or, if you prefer, from the unpropertied to the propertied. It’s simply the nature of the beast. We can’t expect it to act other than it is designed to act. Let’s look at this idea more closely.

The “Leak-Through” Theory

I don’t pretend to know who first came up with the notorious “trickle-down” theory. The term itself can be traced to about 1954, although the concept is at least old enough that William Jennings Bryan railed against it a century ago. Said the Great Commoner: “There are those who believe that if you will legislate to make the well-to-do prosperous, their prosperity will leak through on those below.”¹ Bryan’s “leak-through” theory is basically the same as today’s trickle-down theory, which suggests that financial benefits given to the rich will filter on down to lower economic levels. This may be true, but there is nothing in the trickle-down theory to suggest that the lower levels of society will actually increase their relative wealth, and it is relative wealth that we’re talking about here.

When capitalism creates new wealth, greater economic equality can result only if the capitalist class passes on more wealth per capita than it retains. When has this ever happened? Even the most rabid, bleeding-heart, Robin Hood liberal would never dream of taking so much from the rich that the poor actually gain more wealth per capita than their elite counterparts.

If the poorest 20 percent of Americans get a trickle (or leak) of wealth, we can be sure that the rich are receiving a flood. We’ve been told that a rising tide lifts all boats, but today’s society can become more equal only if the rubber rafts and dinghies rise faster than the yachts and cruise ships. Unfortunately, though, the old “rising tide” maxim doesn’t hold water— because some of our individual boats don’t either. The system has punched holes in our hulls, and no matter how high the tide, we’re still going to sink.

There was a time when the poorest levels of society were indeed receiving that infamous trickle of real wealth. They may have been falling further behind the rich, but in real terms they were able to improve their living standard. In recent years, however, both the poor and those in the middle have not only fallen further behind the rich, they have actually moved backwards in terms of real wealth. According to Robert Reich, between 1977 and 1989 “the average after-tax incomes of American families in the bottom fifth of the income ladder fell some 9 percent, the next fifth grew 6.5 percent poorer, and the middle fifth about 4.5 percent poorer. Only the top fifth was spared. In fact, the higher reaches of the top fifth were not only spared, their incomes soared. The incomes of those in the top 1 percent actually doubled.”²

Reich attributes this growing gap, particularly the downward movement of the lower and middle levels, to the loss of manufacturing jobs. Between 1989 and November 1992, he says, 1.3 million manufacturing jobs were lost in the United States. Most of these workers were forced into service jobs that paid only one-half to two-thirds of typical manufacturing wages.

This is trickle-down economics of the 1990s. Economic gains are defying gravity and trickling up. The lower levels are losing ground, not just in a relative sense, but in a very real sense.

Three Types of Workers

The loss in manufacturing jobs is the direct result of new technology that displaces labor and cheap foreign competition that persuades executives to move manufacturing facilities abroad. The rise of the global economy has created, among other effects, a sharp division between various types of labor.

In his book The Work of Nations, Reich identifies three separate categories of American workers that are emerging with the global economy: routine producers, in-person servers, and symbolic analysts. “No longer are Americans rising or falling together, as if in one large national boat. We are, increasingly, in different, smaller boats.”³ Of the three types of boats listed above, only the third is rising with the economic tide. Let’s look briefly at these three groups and how they are faring.

Routine producers are those who perform repetitive tasks in the production of goods. This group includes not only blue-collar manufacturing workers, but also employees involved in white-collar or high-tech work. Data processors and programmers who devise routine coding for computer software come to mind. In-person servers may also perform routine work, but their services must be provided person-to-person. Retail sales workers, waiters and waitresses, custodians, cashiers, house cleaners, hospital attendants, taxi drivers, secretaries, auto mechanics, flight attendants, and security guards are typical of this category. Symbolic analysts, by contrast, engage in problem-identifying, problem-solving, decision-making, or strategy-brokering activities. These workers may be researchers, scientists, designers, engineers, public relations specialists, investment bankers, lawyers, consultants, systems analysts, advertising executives, film editors, art directors, architects, musicians, publishers, television producers, university professors, or seminar presenters, to list just a few.

As discussed in the previous chapter, routine production jobs are being lost continually to both foreign competition and technological advances. The thirty-five hours it took auto workers to assemble a car in 1977, for instance, has now been reduced to eight. Nippon Steel and Inland Steel built a cold-rolling mill near Gary, Indiana, in the late 1980s that cut the time to produce a coil of steel from twelve days to about one hour.⁴ The masses of workers displaced by technology and those entering the job market who are not qualified for symbolic-analytical work must increasingly compete for low-paying in-person service jobs. There are plenty of these, but intense competition keeps wages low.

The only jobs that show great promise for the future involve data analysis and the manipulation of symbols. Great demand exists in the global economy for scientific researchers, management consultants, advertisers, architects, property developers, public relations experts, civil engineers, political consultants, and even movie stars and other entertainers. “Among the wealthiest symbolic analysts,” says Reich, “are Steven Spielberg, Bill Cosby, Charles Schulz, Eddie Murphy, Sylvester Stallone, Madonna, and other star directors and performers. . . . [And] behind each of these familiar faces is a collection of American problem-solvers, -identifiers, and brokers who train, coach, advise, promote, amplify, direct, groom, represent, and otherwise add value to their talents.”⁵ These symbolic-analysts may be employees, but their expertise is in such high demand that they enjoy an independence and exert a level of control over their careers and incomes undreamed of by either in-person servers or routine production workers.

Perhaps the most important factor influencing the workforce equation, however, is that there is not unlimited demand for symbolic-analysts. One hundred percent of the employable population cannot find work in these jobs. Only a minority can fit into this one rising boat. The rest of us must compete for jobs in either a dwindling manufacturing sector or an immense, low-paying service sector. The result is an increasingly unequal society, one that can sustain neither economic nor social health. This whole unfolding scenario leads us inevitably to a particularly uncomfortable question: Is it perhaps time to rethink our centuries-old assumptions about the division of labor and come to terms with what those assumptions have done to our society?

Equality

The underlying issue here is equality, which is a concept that in both theory and practice seems to give nearly everyone dyspepsia. If we weren’t concerned about equality, we wouldn’t even have an American Dream or social ideals, and we wouldn’t be troubled by the increasing gap between rich and poor. We wouldn’t even bother trying to justify the natural effects of capitalism. But we are concerned about equality. It’s an integral part of the American psyche and the American Dream. According to Webster’s, the American Dream is a “social ideal that stresses egalitarianism and especially material prosperity.” If the two halves of this definition seem incompatible, well, they are—given our current economic assumptions. In our capitalist system, overall material prosperity comes only at the expense of equality. Can the two ideas be reconciled? We certainly must hope so, for equality is not merely an American ideal and a morally appealing principle; some approximation of it is also necessary for long-term economic health.

Thomas Jefferson declared in the Declaration of Independence that “all men are created equal,” thus planting the idea, as Frost put it, “where it will trouble us a thousand years.”⁶ Frost was right. Because Jefferson didn’t bother to explain exactly what he meant by “equal,” we have been arguing about it already for more than two hundred years.

For instance, do we mean equality of opportunity or equality of outcome? It’s hard to guarantee equality of outcome without removing people’s freedom entirely, for individuals possess varying levels of intelligence, talent, and motivation. Equality of opportunity is probably nearer the mark, but how do we guarantee everyone an equal opportunity? This is actually the central question of this book, and I shall attempt to answer it more fully in a later chapter, but for now let me merely suggest that neither the liberals nor the conservatives offer a viable solution.

It is also difficult to entirely separate these two types of equality. When we talk about equality of opportunity, we can’t just sweep equality of outcome under the rug, because it is impossible to offer equal opportunity without requiring to some degree an equality of outcome. As the natural mechanism of unbridled capitalism creates a two-tiered society of haves and have-nots, the opportunities of some expand, while the opportunities of the rest diminish. This creates a vicious circle. Diminished opportunities translate directly into diminished outcomes, and diminished outcomes, in turn, further curtail opportunities. We must, therefore, address the complex problem of equal outcomes—not by redistributing wealth, but by ensuring that opportunity is never hoarded by some and withheld from others.

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1. George F. Will, “Kerry Exemplifies Double Dilemma of Democrats in 1996,” Deseret News, December 4, 1994, sec. V, 6.

2. Robert B. Reich, “High-Wage Jobs Needed to Heal Sick Economy,” Deseret News, November 5–6, 1992, sec. A, 15, reprinted from New Perspectives Quarterly.

3. Robert B. Reich, The Work of Nations: Preparing Ourselves for 21st-Century Capitalism (New York: Knopf, 1991), 171.

4. Reich, Work of Nations, 214.

5. Reich, Work of Nations, 220–21.

6. Robert Frost, “The Black Cottage,” in The Poetry of  Robert Frost, ed. E. C. Lathem (New York: Holt, Rinehart & Winston, 1969), 57.