Economie Americana

8/13/2019 Economie Americana

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FACULTY OF EUROPEAN STUDIES AMERICAN STUDIES 3RD YEAR

American Inequality

Contemporary American Economics

Paper by student

andru Carmen Gabriela


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Thesis Statement

This research paper is going to deal with the following quote: The reality of rising American

inequality is stark. Since the late 1970s real wages for the bottom half of the work force havestagnatedor fallen,while the incomes of the top 1 percent havenearly quadrupled (and the incomes of the top 0.1

percent have risen even more). While we can and should have a serious debate about what to do about

this situation, the simple fact American capitalism as currently constituted is undermining the

foundations of middle-class societyshouldnt be upfor argument. Throughout this paper, I will bediscussing topics such as the American inequality, American wages or how Capitalism has interfered

with the wealth of society, based on Paul Krugmans words.

Introduction

The author of the previously mentioned quote is Paul Krugman, a famous American economist,teacher at Princeton University and writer for The New York Times. Krugman obtained the Nobel Prizefor Economy in year 2008. By the statement mentioned in the previous paragraph, the author tells usthat American inequality has considerably grown since couple of decades ago and that it is more visiblenow. For exemplifying this, Krugman refers to the fact that since the late 70s, wages have either stayedthe same or they fell. In the same time, the top 1% of society has almost quadrupled their income. Thetop of the top of society, which exists in proportion of 0.1% has a bigger income than that. Hence, it is alogical deduction that the American social classes have changed for most of the people. The majority ofthe Americans live worse nowadays than they did before the 70s.

It is a little surprising to know this nowadays, in the 21st century, as the world has suffereddifficulties throughout the two World Wars and in the Cold War Period. Alongside history we can alsotrace the existence of some serious financial crises that affected the world population. One may thinkthat governments have learned their lessons based on past events so that they take the necessarymeasures to prevent such situations as economic inequalities even more in the United States.However, according to Paul Krugman, American Capitalism did not manage in providing these muchneeded measures.

Worlds dominant market system is the industrial capitalism or, as it is called, the advancedmarket. The United States and Western Europe involve in their economic system levels of governmentregulation that are not described exactly as capitalist. The American system is considered to becapitalistbased on the principles of free market and lack of restrictions on economic activity1.

The term capitalist was coined by Karl Marx German economist and social theorist - in the19th century. He wanted to describe a system formed of a small group of people who have capital,money or the necessary means. These people should make the most important economic decisions2.Since then, the term has been altered and adapted according to current times.

The financial crisis from 2007 was an important moment that had its merits in achieving suchstatistics. But, is it enough a reason so that the foundations of the middle class be destroyed? How come

the economic difficulties havent reached up to the 1% of the rich population of the world? It iscommon knowledge that there are economic differences everywhere. People cannot be all poor or allrich or in the exact middle. The United States of America represent the true meaning of a democracy.This country is not based on Karl Marxs ideasof an imagined society with a world divided into twoclasses: the bourgeois and the proletarians.

1Robert L. Bradley Jr.;Roger Donway, Capitalism, Socialism, and the Middle Way. A Taxonomy, pp.71-72.2http://economics.about.com/od/howtheuseconomyworks/a/us_capitalism.htm, accessed on the 1stof February 2014.
http://www.epi.org/blog/real-hourly-wage-growth-last-generation/http://www.epi.org/blog/real-hourly-wage-growth-last-generation/http://www.cbo.gov/publication/42729http://www.cbo.gov/publication/42729http://www.epi.org/blog/real-hourly-wage-growth-last-generation/http://www.epi.org/blog/real-hourly-wage-growth-last-generation/


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Part I: American Capitalism

The economic system is an input in the economic process, as it has a considerable impact on theend economic results. People, nature, enterprises, social inputs, economic inputs, geographic inputs andpolitic inputs are the elements that form the economic system. All these have an impact on the finalresult. The product of the economic system is represented by wealth, pollution, social, economic andpolitical effects. An output of the economic system is alsopeoples happiness3. I may add that this is,probably, something more commonly met in the United States, for it is the country that has always beensearching the public good and peoples happiness.

Capitalism has its origins on liberty of property, liberty of labor and freedom of enterprise. Theideology the system of Capitalism is based upon is Liberalism. The essence of this ideology ischaracterized by free market, state non-interference in economy and private interest of the economicagent. The economic foundations of Capitalism are the market, the price, currency and the division oflabor. Modern society could be characterized through mentioning advanced technology, division oflabor and money use. In shorter terms, Capitalism is based on two essential principles, namely, privateproperty and freedom of exchange4.

American Capitalism means economic strength and power, wealth, productivity and profits.However, it also means income inequality. Therefore, Capitalism has been regarded as being differentfrom other economic systems. Capitalism allows the people who own or manage productive resourcesto make their own decisions; that is one reason why the productivity of the system works it is relatedto its economic organization based on independence. Competition is, also, a very important factor toconsider. American economy has changed in the last half of century. Labor unions and organizations ofworkers have grown to be more important5.

Could Capitalism lead to the disappearance of the middle class? Krugman tells us thatAmericancapitalism as currently constituted is undermining the foundations of middle-class society.However, Ibelieve that this system could be saved. In theory, Capitalism does not suggest the idea of underminingthe foundations of middle-class society. I agree that these present times are times of crises, but thesecould be overcome.

Economic inequality could be seen as a threat to the state security. Distribution of property andincomes is unequal in capitalism. This occurs because of differences between people, differences thatcould be corrected by the state6. However, this would mean an interference with the capitalistprinciples. Wrongly applied, these could do more damage than good.

Capitalism has grown to be so popular as a system that many of the theoreticians have failed inobserving the faults it has. For instance, modern Capitalism tends to let states interfere in order tosubsidize the issued areas and let them stay put. In the current economic crisis period, the U.S.government financed General Motors with billions of dollars, although the company was on its road tobankruptcy. Capitalism is not founded on integrity, justice or correctness; it is founded on greed7. If weadd the fact that human needs are unlimited, it is easy to think of the end results of the combinationwith greedthese would be disastrous.

Cooperation between states is something that the capitalist system agrees upon. Regarding the

international relations, for example, in 2010, French president Nicolas Sarkozy asked the United States

3Radu Barna; Drago Pun, Sisteme Economice i Financiare n Lumea Global, Editura Fundaiei pentru Studii Europene,Cluj-Napoca, 2009, p 19.4Radu Barna; Drago Pun,Ibidem, pp. 20-22.5Milton Firiedman; T. K. Galbraith; David McCord Wright, What is American Capitalism, University of Chicago RoundTable, 1953, pp. 1-5.6Radu Barna; Drago Pun, Op. Cit., p. 51.7http://www.business24.ro/macroeconomie/criza-financiara/marea-hiba-a-capitalismului-nu-se-imbogateste-cine-merita-1466114, accessed on the 1stof February 2014.


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to work with Europe for the economic protection and the change in the world government. Accordingto Sarkozy, the capitalist system is one that lacks rules and regulations. The French president alsomentioned the death of capitalism because of this lack on the economy market 8. If what is causing thedeath of this system is the lack of regulations, maybe governments should do something in this respectbut not by interfering too much.

Part II: Causes of Inequality

Apparently, based on household income, the U.S. has the highest income inequality among anyother country in the developed world, such as Sweden, Norway or Japan9. I believe that this issomething to worry about, but not in the sense of the poorness of people, which, based on some articlesI have read, is not that worrying, but based on the differences between the 1% Paul Krugman talksabout and the other 99% of the American population.

As previously mentioned, the American economist says in the discussed quote about the rich ofthe world. Who represents the top 1% that economist Krugman tells us about? It appears that themajority of the taxpayers are executives, managers or supervisors. The following occupations are in thenext areas: medical, financial, law, IT, sales, real estate, business operations, entrepreneurial field,government, social service or piloting10.

Krugman gives as reference point the late 1970s. In the period of the 70s, the Fed left theeconomic system in a monetary discount. This should have caused an unnoticeable rise inunemployment. Then, inflation should have stopped and the economy would have been back to thenatural. However, as Paul Krugman said according to the real business cycle theory, the Feds policiesshould not have had any effects11.

There were several problems that affected the world during the 70s. For example,the VietnamWar (lasting in the period 1954-1975) has ended. Another event happened in 1973. This year wasmarked by an oil crisis. Therefore, the U.S. economy was in a bad position, the country meeting arecession period. What followed were energy shortages, high inflation and unemployment. Highdemands and low supplies of jobs, rise of prices, lack of trust in the bank system were issues describingthe late 70s.

It appears that there were three main reasons for which the inflation period had begun. Firstly,until de 80s, no influential policy makers arrived at the Federal Reserve. Secondly, policies taken inthe 60s were bad for the economy of the 70s. The third cause was due to the fact that great depressionmade it hard to believe that the business cycle was fluctuating12. If these where the causes of the 70shardships, how come ever since the situation got worse for the majority of the Americans? I could nothelp, but wonder if, indeed, Capitalism has made things like this.

Apparently, poverty and inequality are strongly linked. Poverty is part of the income inequality..According to Krugman, the wage stagnation is one reason for the poverty people live nowadays.However, it seems that the antipoverty programs are working and have long term benefits13. Therefore,I must declare myself to be in favor of the existence of similar programs against income inequality.

Another famous American economist is Nouriel Roubini. He anticipated the collapse the United

States went through in 2007. He also predicted the worldwide economic recession that begun in the

8http://www.business24.ro/barack-obama/stiri-barack-obama/sarkozy-piata-fara-reguli-este-moartea-capitalismului-1473125, accessed on the 1stof February 2014.9http://www.businessinsider.com/new-charts-about-inequality-2011-11?op=1, accessed on the 1stof February 2014.10http://www.businessinsider.com/new-charts-about-inequality-2011-11?op=1, accessed on the 1stof February 2014.11http://krugman.blogs.nytimes.com/2009/07/30/the-lessons-of-1979-82/, accessed on the 1stof February 2014.12http://elcoushistory.tripod.com/economics1970.html, accessed on the 2ndof February 2014.13http://www.nationalreview.com/agenda/368136/paul-krugman-connection-between-poverty-and-inequality-reihan-salam,accessed on the 1stFebruary 2014.


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same period. Roubini recently said that capitalism goes through a self destruction period, agreeing, insuch way, with Karl Marxs statements that said that the capitalist system may fall apart. For the

German economist, there were only two major social classes: the bourgeois and the proletarians. Marxpredicted that the proletarians, the workers will fight against the superior class, because they will bedissatisfied for having to sell their work in order to live14. Therefore, many predictions have been madein order to find out what to expect.

According to other economists opinions, in the 1990s, some economic circles in the UnitedStates have formed the New Economy movement, leading to a rise in the GDP of the country.Productivity was raising and unemployment was close to nothing15. However, this lasted for a shortperiod of time, as the difficulties that the American nation faced were soon to follow with the 9/11events and the War on Terror that begun afterwards.

On the other hand, there are people who disagree with the existence of economic inequality.These argue that the current lifestyle is much more different than it has been 20-30 years ago16in thesense that todays lifestyle is wealthier and people have more needs nowadays thanseveral years ago. Ifwe base our analysis on this difference, it is clear that due to technological development and to otherfields expanding their domain of activity, the world has developed. In the same time, human needs havedeveloped. However, the existing inequality in the American society is measured according to todaysneeds.

There were, of course, several factors that contributed to the rise of inequality in the U.S. One ofthem is the decline of unionization. Another factor that has contributed to the rise in inequality is thedownward pressure on low skilled wages coming from a rising share of imports in GDP. The otherfactor that helped the inequality is the coming from an increased population share of low skilledimmigration17. This shows that the U.S. has not overcome its issues with immigrants.

Part III: Possible Solutions

I strongly believe that the issue of American inequality could be solved. As a democracy, theUnited States should do what is best for its citizens. Hence, I believe that by adopting the necessaryregulations to be imposed on businesses, investors or enterprises, this problem that the Americansociety is confronting at current time could be cleverly fought against.

The advantages that the United States have are represented by their resources, technology andscience, their currency and their culture18. Therefore, the Americans have something to base their hopeson. Americans are characterized by unity and prosperity. Hence, I think they have a chance inovercoming this current situation.

Another possible solution I may refer to is the one similar to the anti-poverty programs. If thesealready exist and function, then there could be implemented similar projects for the purpose ofanti-inequality.Hopefully, the present presidential administration could manage such situations. Also, I canthink of the securitization of jobs, better insurance programs in case of unemployment provided by thestate, programs for the elderly and for the youth who have difficulties in finding jobs.

14http://www.business24.ro/nouriel-roubini/stiri-nouriel-roubini/nouriel-roubini-capitalismul-se-autodistruge-1494423,accessed on the 1stof February 2014.15Radu Barna; Drago Pun,Ibidem, p.221.16http://cafehayek.com/2014/01/no-one-of-sense-would-pine-for-the-1970s.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+CafeHayek+%28Cafe+Hayek%29,accessed on the 1stof February 2014.17Robert J. Gordon; Ian Dew-Becker, Controversies about the Rise of American Inequality: a Survey, National Bureau ofEconomic Research, Cambridge, May 2008, p.10.18Radu Barna; Drago Pun, Op. Cit., p. 283.


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The consequences of the economic inequality and of poverty can be very serious. In this sense,a series of cultural movements may appear in the following period of time. These problems are beingfelt by the majority of people, fact that affects the American population as a whole and what itrepresents. If the mass-media gets involved in the issues affecting the American nation, then, we willprobably soon see exaggerations on this topic or TV shows that illustrate life as it is now from aneconomic point of view.

The more pessimistic of the predictors of the future of American capitalism said that it willfinally collapse. Economist Paul B. Farell mentioned that at first, American Capitalism will collapse.Then, the Capitalism worldwide will follow. As interesting as this perspective may be, I believe that itis unrealistic, because a system as great as Capitalism cannot collapse this soon. However, if it were tocollapse, probably, some of the people would be pleased to know what will follow. Maybe thefollowing economic system will bring better days and the end of this too obvious inequality. Accordingto the same source, Capitalism was worked by new challenges that constantly appeared in a too rapidway. Economist Farell acknowledges the need of newness in the economic system.

Wall Street had its contributions as well19 is what other sources believe. Of course, one maybelieve that it is all because of Wall Street. Given the historys course, many relate to the financial

issues by remembering the Great Depression from the 30s. Wall Street is a business and all businesseshave their risk. There are risks according to each businesss size. This is something to bear in mind.

Part IV: Taking Actions

Nowadays, the presidential administration of Barack Obama has admitted the problems theAmerican nation is facing regarding the economic situation. In the state of the Union address, U.S.President has promised to approach the issue of inequality and take action in this respect 20. PresidentObama drew attention on this particular issue by mentioning it in the state of the Union address. Thisshows that the president and the citizens of America are concerned with this fact and are willing to dosomething about it.

It appears that the percentage of the employees in the United States declined from 27% in 1979to 19% in 1986 and to 14% in 2005. At the same time, the real minimum wage was declining21. InObamas state of the Union speech previously mentioned, the president says that he appealed toCongress to approve a rise in the national minimum wage. At present moment, this wage is $7.25 perhour. Obama intends to raise the rate of federal contract workers to $10.10 per hour. If so, I cannot helpbut wonder if this is a clever measure in the times of financial crisis we are living now.

According to 2010 data, half of the United States population had 1.1% from the national wealth.At the beginning of the 21st century, in 2001, the American population had 2.8% from the nationalwealth, while in 2007, they had a percentage of 2.5%. The same document issued by the AmericanCongress Research Center shows that the wealthy have become wealthier. In 2010, the top 1% - thatKrugman mentions in the quote proposed for discussion - had 34.5% of the national wealth. The 10%of the wealthier Americans had, in 2010, 74.5% of the national wealth. The economic crisis separatedeven clearer the difference between the wealthiest and the poorest of American people. It appears that

Democrat president Barack Obama is trying to fight against these issues, mainly caused, supposedly, byRepublican president George W. Bush and his state legislatures22.

19http://jovonk.info/2009/11/20/analisti-capitalismul-american-se-va-prabusi, accessed on the 1stof February 2014.20http://www.bbc.co.uk/news/world-us-canada-25917009, accessed on the 2ndof February 2014.21Robert J. Gordon; Ian Dew-Becker, Op. Cit., National Bureau of Economic Research, Cambridge, May 2008, p.9.22http://dreptitate.net/2012/07/20/populatia-americana-fata-in-fata-cu-inegalitatea-sociala/, accessed on the 1stof February2014.


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At an event hosted by the Center for American Progress, Obama admitted that the economicinequality in the United States is what drives all his actions in the Office. The U.S. President believesthat the large gap between the very few rich and the very many poor can be covered by increasing theminimum wage and by increasing the level of education. The strengthening of unions, reduction ofpayments gap between men and women and making college more affordable are the priorities onObamas list.

Another plan the President has regards the creation of Promise Zones in struggling areasthroughout the country. A spokesman for House Speaker John Boehner, Brendan Buck said thatObamas economic policies promote government reliance and not economic mobility fact that mayinconveniently interfere in private business. According to the president, African-Americans andHispanics are more affected by the income inequality from a social and economic perspective.However, the reducing of this inequality should help all Americans, not particular races or particularsocial classes23.

Clearly, the Obama administration is concerned with the issue of inequality. Efficiently, he hasalready been thinking about required needs in order to save the American dream. This has been madeone of presidents top priorities for his second term in Office. If Obama manages in implementing theprograms that he has presumably thought about, then the United States of America have a good chancein surviving and overcoming the times of crisis they are facing. If this happens, we will get to see oneof the most efficient Presidents of the American nation.

Conclusion

The topic of American inequality has drawn increased attention in the last period. Whatever isthat brought this economic inequality in the United States - and in many more other countries - cannotbe the result of one single factor. There are clearly a number of reasons that brought about poverty.Some may think that one of the factors was state interference and some may believe that statenoninterference led to this issues happening.

However, I believe that by adopting necessary state regulations, these social inequalities couldbe weakened. I am not in favor of state interference in private economic business. Still, if the measuresto be taken are reasonable, I believe that there could be a lot of benefits.

Capitalism has always been criticized. I think that this happens due to the fact that people feelthe need to blame someone for the economic difficulties they find themselves in. As in any other areaof study, there are two sides to any storythe ones who agree or the ones who criticize.

The ones who search for the problems will find them. If economists say that the capitalistsystem is undermining the foundations of middle class society, we may choose to believe them or not. Iconsider that a middle class will always exist. We cannot and may not compare ourselves to the top 1%or the top of the top 0.1% regarding our wealth. If we do so, we may find out that we are all sadly verypoor.

To conclude my presentation, I may say that inequality is, indeed, the defining challenge of ourtime

24, as American economist Krugman put it. Obama also mentioned this in his latest state of the

Union address. The American leaders need to find something to fight against this challenge. TheAmerican nation has to become again the democratic successful nation it is thought to. Even more, theAmerican dream has to be preserved and well maintained fact that, I believe, will be accomplished

23http://www.usatoday.com/story/news/politics/2013/12/04/obama-income-inequality-speech-center-for-american-progress/3867747/, accessed on the 2ndof February 2014.24http://economistsview.typepad.com/economistsview/2013/12/paul-krugman-why-inequality-matters.html, accessed on the1stof February 2014.


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soon enough so that we do not remain in this vicious circle of income inequality and economic issuesthat lead to a variety of social problems.


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Bibliography list

Books

1. Barna, Radu; Pun, Drago, Sisteme Economice i Financiare n Lumea Global, Editura Fundaiei

pentru Studii Europene, Cluj-Napoca, 2009.2. Bradley, Robert L. Jr.; Donway, Roger; Capitalism, Socialism, and the Middle Way. A Taxonomy,Reader American Institutional Management.3. Friedman, Milton; Galbraith, T. K.; McCord Wright, David; What is American Capitalism?, A RadioDiscussion, University of Chicago Round Table, Number 794, 28 June 1953, pp. 1-12, The Universityof Chicago.4. Gordon, Robert J; Dew-Becker, Ian, Controversies about the Rise of American Inequality: a Survey,National Bureau of Economic Research, Cambridge, May 2008.

Internet Sources

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10. Web Site U.S. History, available at link: http://elcoushistory.tripod.com/economics1970.html,accessed on the 2ndof February 2014.11. Web SiteBBC News, available at link: http://www.bbc.co.uk/news/world-us-canada-25917009,accessed on the 2ndof February 2014.12. Web Site USA Today, available at link:http://www.usatoday.com/story/news/politics/2013/12/04/obama-income-inequality-speech-center-for-american-progress/3867747/, accessed on the 2ndof February 2014.

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Economie Americana