About Inequality…

November 25, 2014

There are various complex models for this, but the general explanation is fairly intuitive: Modern economies are built on a mass market. But if the great majority of people don’t have much (or any) disposable income, then there is no mass market, and it’s harder to start a business relying on any kind of mass sales. And with weak consumer spending, existing businesses have little reason to invest in growth, and instead disgorge their profits to shareholders, exacerbating the trend. In the end, you get a hollowed-out, bifurcated economy, where low-grade goods are sold to the broke masses on razor-thin margins, while incomprehensible sums slosh around weird luxury markets.

SOURCE: What Democrats get wrong about inequality – The Week.

The words above do the best job I have seen lately explaining how prosperity happens.  It is no secret that when Henry Ford started paying a living wage to his employees the birth of the middle-class started in earnest. If he had paid the then current minimum wage his workers and others like them could never have afforded the cars they make. Mass markets depend on a large customer base to be successful. That is as the article says is fairly intuitive.

There is a reason the Walmarts of the world are displacing so many local vendors and that is because with their mass marketing potential they can get their products at a lower cost than local competitors.  Paying wages that are not livable wages is the logical result of Walmart’s success.

I am a “car” guy in that I enjoy watching all the car fix-it shows on satellite TV especially the Velocity channel.  There seem to be hundreds of companies that take 40 – 50 year old cars and renovate them for their nostalgic  customers. Most often the price of these cars are from $80,000 to as high as several million. Obviously the customer base for these companies are the upper 5% or so of the population.  It is great that companies can earn a good living from these business but there are only so many people who can afford the products they produce.  as the article says incomprehensible sums slosh around weird luxury markets.

It seems like our downfall as a middle-class nation is the result of not providing enough people an income that will allow any kind of discretionary spending. The national minimum wage has remained stagnate for more than a decade due to GOP resistance. In fact some in that quarter want to even abolish the minimum wage entirely and leave it up to individual companies to determine what they pay. There is said to even be some house bills to that effect.

They say statistics show that the income inequality is the worst it has been since the robber-baron years of more than 100 years ago. But we don’t, like we did a hundred years ago, seem to have a person with the character of Teddy Roosevelt to get us out of our most recent downward spiral. I don’t know what it will take to turn it around this time? But I do know that if it continues as is it currently going we will drive ourselves into an almost third-world status. I’m sure China will be more than happy to take over as the world economic leader if we falter.

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4 responses to About Inequality…

  1. 

    It is scary to propose this, but maybe America’s fall from world leader status would be the best thing that could happen to us at this juncture. Our money will not go a horribly bloated military establishment. Our citizens won’t die trying to fix another country’s internal problems. Our economy will not support multibillionaires who demand more and more for their god-like egos and bank accounts. Our “leaders” will have to cooperate and actually strive to solve our problems. And, we will be forced to admit we are not uniquely blessing by God – we are just a collection of flawed humans who have lost our way for a time.

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  2. 

    On another note, I might point out that the US is not alone in it’s economic decline. Europe, indeed all western countries are suffering , with more and more citizens living in poverty. One piece of the problem is the overwhelming demand of immigrants escaping to countries like ours, France, Great Britain, Sweden, Norway……. with greater security and economies. Europe and the U.S. cannot keep absorbing these large numbers without degrading our own resources and quality of life. If we want to reduce this pressure we may need to focus more attention on these countries to raise their economies and education levels to a point where they can sustain their own populations. I don’t know if that’s even possible and it would no doubly prompt endless political battles. And of course it would be a long and expensive process, but the alternative might be just as costly in terms of securing and defending borders and supporting countless immigrants. As I said, economies are complicated and this might just be one part of the solution….or not.

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    • 

      Thanks for the encouragement Bob over on your blog today. Yeah I will be hitting 2,000 posts before the end of this year. I might not have your readership but I do exceed you in posts. 🙂

      England did OK when we replaced them as a world power so maybe we just might be better off. As you say our military budget would decrease 95% to be in line with other countries. That new found money could then be used for the welfare of our citizens and that would definitely be a good thing.

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    • 

      Jane Thanks for your insight. Yes, immigration can be a drag on an economy but it doesn’t have to be so. In 1990 West Germany basically allowed 16 million immigrants (almost 25% of their population at the time) into their country via unification with East Germany. It was amazing how quickly they absorbed that population given the utter dismal economy of East Germany. And even today they take in more immigrants than any other EU country.

      It doesn’t have to be an either/or situation. You can accept immigrants even large numbers of them and still prosper if you do it right and allocate the resources for their integration.

      But you are right that there are too many countries in the world that suppress their citizens and have some pretty lousy economic situations.

      I remember more than twenty years ago when Friedmen (I think) made the statement that the US prosperity must decrease and the third world increase so that eventually everyone would be on an even keel. That is happening right now. It is not so great for those of us who are losing wealth but in the end it might result in a better world. I’m certainly not an economist but it makes sense to me.

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