This is part of PandoDaily’s “Dispatches from the future” series where we share prognostications on what may lie ahead. We encourage you to share your predictions in the comments or email editor Adam Penenberg (firstname.lastname@example.org) with ideas for your own guest posts, which we might publish.
Entrepreneurs and digital marketers spend their days dreaming about the next hot thing that will drive the American consuming class into lucrative paroxysms of purchasing. The looming problem with this dream is that the consuming class appears to be on the endangered list.
A new non-partisan government study confirms that income inequality in America has been rising for four decades and projects it will continue getting worse for at least 22 more years. If this keeps up much longer, eventually the super rich will have all the money and the rest of us will be locked into poverty. Forever.
In terms ordinary people like me can grasp, here’s what this means: America can kiss both its ass and its consumer economy goodbye in roughly 60 years unless there are big changes in public policy, none of which seem particularly forthcoming in the deepening binary schism of our politics.
To understand the terminal collapse of American consumerism, you first need to know about the Gini index. It is the most broadly used measure of income inequality and runs, theoretically, from 0 to 100 (or 0 percent to 100 percent or 0.0 to 1.0). Zero on the Gini scale represents Lenin and Marx’s fantasy, where all family incomes are perfectly equal; every household earns exactly the same share of GDP. A score of 100 on the Gini index is the opposite. That’s what economists call “perfect inequality” or “total concentration.” Imagine a future America where we all huddle in tin and canvas shacks, earning nothing, while Sam Walton’s or Larry Page’s dozen surviving heirs enjoy annual earnings, including capital gains, of several trillion dollars, equal to the country’s total GDP. That’s Gini 100.
Low Gini scores are completely compatible with uniformly low or high incomes. Niger, with GDP per capita of $800 and a Gini score lower than the US’s is a good example of the former—equal but poor. It is impossible, on the other hand, to have a high Gini without deep, widespread poverty and a handful of rich people holding staggering percentages of a country’s total wealth and income.
The absolute extremes of the Gini scale cannot be reached or even approached very closely, as a practical matter. Current Gini scores worldwide range from the low-to-mid 20s (economically egalitarian places like Sweden, Denmark and Norway) to the low 60s (extremely unequal places like South Africa, Botswana and Sierra Leone).
Comparing income inequality in different countries is difficult because there is no data to use in comparing all countries at the same time. Existing ranking lists, like the one maintained by the CIA (which omits the US, interestingly enough) give a ranking and then qualify it with the year the data was collected.
In a new working paper published last month, the Congressional Budget Office (CBO) found that in 1984 the US Gini score was 34. (You can read summaries of the study in the Washington Post blog and this post from Demos.) That made America one of the more equal countries in the world in terms of income distribution, roughly equivalent to Ireland in 2010 (33.9), Niger in 2007 (34.0) or Taiwan in 2011.
By 2000, US income inequality had risen 18% to 40, putting us even with the UK’s 2009 score. Bear in mind when you think about this that the UK was in the depths of the global economic collapse. Also, the UK in the best of times is described by American politicians as a country of social and economic stagnation, where the class you are born into is your destiny.
Now the CBO working paper projects that the US’s Gini index will continue to rise through 2035, when it will hit 46. This score would place us squarely in the top three-dozen most unequal countries on the CIA’s current ranking of 136 nations (not including us, remember). In other words, a US score of 46 would today put us in the top 25% of the world’s most unequal nations, along with places like Peru in 2010 (46.0), Malaysia in 2009 (46.2) and Rwanda in 2000 (46.8).
A group of academics and government economists underscored the finality of growing income inequality a few months earlier when they delivered a report called “Rising Inequality: Transitory or Permanent?” at a Brookings Institute event. Based on newly available data from tax returns, the report finds unequivocally that the bulk of the growth in income inequality in the US is “permanent,” not temporary.
The CBO conservatively concludes that “earnings inequality generally ceases to rise” after 2035. It adds, “That result is consistent with the view that earnings inequality is unlikely to rise forever.” Nothing is forever, right? Lots of experts disagree.
While the CBO looks at market forces to moderate the rise of inequality, a group of prominent economists led by Columbia University’s Nobel economics laureate Joseph Stiglitz argue that this is caused by politics, not markets. Stiglitz makes his most powerful argument in the 2012 book “The Price of Inequality.” (Here’s the New York Times’ review.). Other researchers agree. Harvard’s Jonathan Schlefer, writing recently on the Harvard Business Review blog, concludes, “Markets do not determine income inequality. It is fundamentally a social decision.” Schlefer says inequality is a function of laws, politics and customs.
Some draw comfort from these viewpoints, believing that our politics and social policies are easier to reverse than our markets. But I’m quite certain both the left and right will concur that our gridlocked political system is completely incapable of agreeing on anything to alter the trends. And the trends, of course, are dire.
Given the real statistics of the last 20-plus years and the CBO’s predictions for the next 20-plus years, simple arithmetic tells us that our Gini score over this 50-year period gets more unequal by an average of just under 2/3rds of a percent every year, inexorably pushing America up the inequality ladder of nations by just over 1 rung annually.
If this trend were to continue without interruption, all things remaining equal, the US would exceed a Gini score of 63 before the end of this century. This score is impressive because it currently describes Lesotho, which has most unequal income distribution on Earth (according to the CIA). If the US achieves this pinnacle on the Gini index, it could very well be a shambling wreck where the gap between rich and poor will resemble a tiny African nation with virtually no economy at all that is described by the CIA this way: “Small, mountainous, and completely landlocked by South Africa, Lesotho is a least developed country in which about three-fourths of the people live in rural areas and engage in subsistence agriculture.”
I know there are those who will answer, joyfully: But the rich getting richer will result in a bigger pie and more wealth for all of us. Would that it were so.
Sadly, all evidence is to the contrary. The new preface to the 2013 paperback edition of Stiglitz’ The Price of Inequality displays a depressing litany of current income, wealth and other numbers that show the rich getting much richer while median household income, assets, opportunity and health outcomes for ordinary Americans continue to stagnate or fall. Stiglitz points out that life expectancy itself is falling for some groups whose incomes are falling. Inequality kills.
I’m not equipped to deal with all variables which will determine exactly how unequal income and life outcomes will get around here over the balance of this century. But if, even directionally, Lesotho is our future, then gadget makers, food sellers, auto makers, ad agencies, digital marketers and all but a very few of the rest of us are headed for misery.
If few can afford to buy what you’re selling, you’re not going to stay in business for very long.
If you see no trouble down this road, you might want to read or re-read Stiglitz’s book or the one by journalist Tim Noah, “The Great Divergence.” If you can’t spare the time (or, these days, money), try “Income Inequality,” which is chapter 5 of the World Bank’s free online book “Beyond Economic Growth.” Besides containing a fabulously simple explanation of how the Gini index is calculated, this concise chapter lists some of the problems with scoring too low or too high on the index.
I’ll let you look up the potential problems with too much equality. On the other end of the Gini, the World Bank says, “excessive inequality adversely affects people’s quality of life, leading to a higher incidence of poverty and so impeding progress in health and education and contributing to crime.”
The Bank goes on to list the commonly listed consequences, including political instability, reduced outside investment, an inability to raise prices on basic goods and services (because destitute people tend to riot when grain, cooking oil or electricity get more expensive) and the disintegration of trust in a society.
Sound familiar yet?
All this supports two staffers at the International Monetary Fund who described in a 2011 paper how income inequality kills economic growth. At the very start of their argument, they write, “But inequality can also be destructive to growth, for example, by amplifying the risk of crisis or making it difficult for the poor to invest in education.” Given the currently unbearable levels of student loan debt in the US, and the upward direction of the costs of both tuition and loans, this should sound even more familiar.
Welcome to your future. Assuming you aren’t a Walton or a Koch, as a member of the permanently impoverished underclass, living in interminable decay, you may be reminded from time to time of the darkly entertaining “Blade Runner”, our formerly favorite movie from dystopia.
How dismaying that this speculative science fiction has become current economics.
[Illustration by Hallie Bateman]