The American Dream is Dead

(Nov 27, 2017) San Diego. Pew found that Americans are at odds about the future. While Americans see that the job situation has improved Americans are not happy about their family finances. According to PEW

49% saying their family’s income is falling behind the cost of living, while 40% feel they’re staying about even and just 9% feel like they’re getting ahead. These views are little changed over the past two years, though the share saying they are falling behind financially is lower today than in 2014 or early 2015.

And while Americans have a more positive view f the economy, things are far from great. And economic optimism is down. There are reasons for that. A\the survey reveals partly why. People will feel stuck in place or lose ground. Well, Americans may not generally speak or know the intricate terms economists use, they know that they are not precisely doing well. One reason for Donald Trump. Is precisely that retreat from living wages and secure retirements that started in the 1970s.

How Unequal is the United States?

We can tell. Economists use one measure called the Gini Index. This is a statistical tool used to measure wealth distribution within a society. It is a measure of inequality. At zero there is absolute equality. At one there s absolute inequality. The world does not contain either extreme. However, the United States, by this measure, has very high inequality. To the point that this is starting to worry the investment class. How bad? Our inequality index, as of this year, stands at 0.45. This actually makes the United States more unequal than Iran, according to Richard Florida.

In the Americas, the United States, Mexico, and Chile have similar inequality rates. We know this will come as a surprise to many in the United States. We like to hide our heads from that reality. This is according to Bloomberg.

For comparison, Canada has a Gini index of 0.31 with a lower relative poverty as well. These measures also take into account distribution of goods and services after taxes. Neither Mexico or the US has a strong social safety net or strong taxation.

Is inequality necessarily bad?

The truth is, it depends. In low development countries, a cheap labor pool will encourage development. For example, see Bangladesh. This is a country with high inequality, and a plentiful, poorly educated workforce. One where the next generation is receiving some education, getting ready for an economic take-off.

In an advanced economy, such as the US, investment should switch from capital intensive, to human capital. This means infrastructure, schools and basic research. The United States used to invest a lot more in either of these areas.

U.S. spending on elementary and high school education declined 3 percent from 2010 to 2014 even as its economy prospered and its student population grew slightly by 1 percent, boiling down to a 4 percent decrease in spending per student. That’s according to the Organization for Economic Cooperation and Development’s annual report of education indicators, released last week.

Over this same 2010 to 2014 period, education spending, on average, rose 5 percent per student across the 35 countries in the OECD. In some countries it rose at a much higher rate. For example, between 2008 and 2014, education spending rose 76 percent in Turkey, 36 percent in Israel, 32 percent in the United Kingdom and 27 percent in Portugal. For some countries, it’s been a difficult financial sacrifice as their economies stalled after the 2008 financial crisis. To boost education budgets, other areas were slashed. Meanwhile, U.S. local, state and federal governments chose to cut funding for the schoolhouse.

This is not a minor issue. According to economists like Joseph Stiglitz this lack of investment in human capital, whether it is healthcare or schools, slows down economic growth. This is not a minor slowdown either. In the US it may be one reason for the slowdown, and malaise we currently live through. It is a choice by leaders in love with trickle down Economics. Whether that is Barack Obama with the bank bailout in 2008 (it came with no conditions) or the current Republican tax bill.

There is a price we are paying for this ideological choice. We have a less prosperous nation for it. Economists even know the sweet point for the Gini index, before it starts damaging an economy. It is in the mid 0.20s. We passed through it a while ago. This is a well-known phenomenon, “the effect of rising inequality on GDP per capita is negative in relatively rich countries but positive in poor countries.”

The United States is a rich country. Likely one of the richest. We used to be the richest, but China either overcame us or will soon.

The new tax proposal will further reduce the investment in human capital. What programs will be negatively impacted? They range from NASA to the National Institutes of Science, education, and healthcare, to mention a few. This year’s budget signals the intent clearly.

Many Americans believe they can make it. But truly, what we have is a tale of two countries

For the 117 million US adults in the bottom half of the income distribution, growth has been non-existent for a generation, while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population ageing. Quite the contrary: for the bottom half of the working-age population (adults below 65), income has actually fallen. In the bottom half of the distribution, only the income of the elderly is rising.5 From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50%, while 32% went to the middle class (defined as adults between the median and the 90th percentile), 68% to the top 10%, and 36% to the top 1%. An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.

This is why people voted the way they did in 2016. The current agenda in Washington is not changing any of these dynamics. It has already slowed potential growth because there is no way to get demand going. We have plenty of pent-up demand, however. This is with people have no resources to circulate because they are barely scraping by, and the very rich do not buy a pair of shoes for every day of the week.

What we know from available data is that in the previous generation we have seen a dangerous split. The most basic of questions is this: Can inequality lead to conflict? The answer is yes. It is not necessarily armed conflict, as the Occupy Wall Street movement showed. However, our political and economic elite continue to ignore that growing gap at their peril. We could be heading down a very dark path. One that may include violence. Our mass shootings might be a sign of that instability, in fact.

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