Senate Income Inequality in the U.S.: Causes, Effects, Solutions

So you would have the state intervene in the mechanism of price discovery?

 

...? Are you implying that I believe the government should control the price of a big mac?

 

No, but in favouring a living wage over minimum wage you are suggesting that the government intervene in the pricing of labour.

There's a reason why McDonalds workers get paid little. Are you addressing this?

 

Yes...doesn't the government already have a say about the price of labor with minimum wage laws?

 

It does. And it's virtually a 50/50 split among economists whether minimum wage laws actually make the problem of unemployment -- youth unemployment in particular -- worse rather than better.

Put it this way, in Australia we've been trying the living wage experiment more or less since the Harvester decision back in the early 1900s if I remember right. The most recent view -- across both major political parties, which are Left of a US Democrat's wildest dreams -- is that centralised wage fixing is an impediment on business at the best of times. Bear in mind that's after a good century of trying. Awards are set across industries, certainly, but individual businesses can contract out of them (under FWC supervision) to a significant extent. Decentralisation of wage fixing began in a real way under the Hawke/Keating governments -- Labor, i.e. the Leftmost of major Australian parties, because even they had to give up and concede the experiment had largely failed.

There was also the comment earlier about Australia's maternity leave system -- yes, we do have it. But you're not seeing the full picture, and in particular that Australia to a large extent survives off as the US's parasite, in defence and larger economic terms. Because the US maintains the largest nuclear and non-nuclear arsenal left on the planet, Australia only has to spend a comparatively piddling fraction of its budget on defence. In substance we're utterly reliant on the ANZUS treaty if anyone really wanted to drop by and pick up a few million acres of equatorial territory. That is, the US in effect subsidises Australia's defence. In similar ways, it also subsidises our health industries and other facets of life where Australia can simply buy cheap stuff from the US and not have to manufacture goods itself. The world's medical manufacturers are to the largest extent in the US; that fact allows Australia to sit back and not develop or make its own medicines. It allows Australia to be, after 200 years or so, still a primary industry economy at its fundamentals. We make nothing on large scales; we don't refine our own minerals before sending them overseas; we engage in tourism and "education" (read: long tourism for the most part) as our most significant industries. In essence, Australia is able to offer generous entitlements because we sponge off other, richer nations in effect. That is not the US's position, and you might want to think carefully before you necessarily want to be in that position.

 

That's not the problem, Merk. The problem is that those other nations depend on the US to provide security. I 100% agree that they shouldn't and that we should not be in the business of providing for global security. But the reality is that we are. Who is going to accept the US not being able to respond to pirates of Somalia? Or the crisis in Syria? Or frankly any number of other scenarios that pop up around the world? Those other nations spend so much less on their militaries because they are absolutely convinced that, push come to shove, if they got invaded, the US would come to their aid. And needless to say, no one really considers invading because they know the US would intervene. But for that assurance to work, the US actually has to be a credible threat. We are today, but that is fast becoming a shrinking reality. Two decade-long wars and misplaced priorities have emboldened the few nations that don't count on US interventionism for their security.

Again, I'm not suggesting that we should intervene in so many of the events that occur. But imagine a world in which we can't. Are you ready for that? Is the rest of America? Is the rest of the world?

Continually picking away at defense spending (while ignoring the programs that are actually outpacing GDP growth) is not only rhetorical equivocation, but actually dangerous to the world economy.

 

You realize its a good thing for the economy if the gap exists. That way everyone understands their position and won't overspend like we had a problem with before. We may grow slowly but it will be sustainable economic growth.

 

Is that an honest question? From the tone of it, it seems to me that you've given it thought and decided that there really wouldn't be any significant consequences. But I may be reading you wrong.

 

I think it bears noting that the defence spending in the US also has significant flow on effects for the economy. Simply cutting spending would do almost of nothing of good unless you count increasing unemployment as a good thing. Defence is an industry in the US and that's actually a vital thing.

I'm going to see a talk from David "The Wire" Simon as part of a wider festival, where he will talk about the two societies in the US: http://fodi.sydneyoperahouse.com/some-people-are-more-equal-than-others

I'll let you know what he says.

 

Ok. I’ll do my best to respond in earnest. I'll say that my...reticence..comes from seeing how "discussion" has degraded here since I first joined the boards. Topics have mostly been used as a spring board to restate political ideology rather than actually discuss a given issue--about class or political (rhetorical) warfare. That said:

True. But we spend far less on defense than we need for what we actually ask the defense department to do.

I alluded to this in my post and you acknowledged it, but I think it’s worthwhile to look at what the actual expenses are*

DoD spending covers 7 categories—Personnel (27.4%); Operation & Maintenance (O&M) (39.2%); Procurement (18%); Research, Development Test & Evaluation (RDT&E) (13%), Construction (1.6%), Housing (0.4%), and Revolving Funds (0.4%). It’s important to note that this funding covers all branches of service.

As you can see, the big items are “sustaining-the-force” areas, which are people and equipment. Procurement and RDT&E (31% combined) which are the items most people think would be a good place to cut, ignores the reality that our ships, aircraft, and equipment, inevitably have to be replaced and those things cost a lot. The most complicated vehicle in the world is the space shuttle. A close second is a Virginia Class submarine.

The American people are pretty intolerant about us equipping our soldiers and sailors in substandard or unsafe equipment. We don’t want to hear about guns jamming on the line or submarines not returning home. As upset as everyone was that we lost a sailor when the San Francisco collided with an unground mountain, the fact that we only lost one Sailor and not the entire boat is a testament to the engineering marvel that was that ship. Here’s a pic to give you a sense of enormity of the collision:


That kind of engineering costs money. A lot of it. The military has to compete with Apple and Google and the like to recruit the kind of talent necessary to develop and maintain that kind of hardware. That costs money.

We also sure do love our tech! Gotta launch those drones and we like knowing that we have all the spy satellites we want. We love knowing that we have super-secret helicopters that can insert special operations teams into Pakistan to kill UBL. We demand that our forces can go anywhere at any time. We also expect commanders to have the best intel possible and have the most accurate weapons possible. Could you imagine the outcry if a Chinese submarine were to surface off the coast of California, unannounced?

Engineers are fond of saying: There’s cheap, fast, and high quality. You can only get two out of the three. Our country’s pattern has been to demand fast and high quality. So it costs a lot.

All of this is just to illustrate that just keeping the force where it is, maintaining the ability to respond today, is inordinately expensive. Bottom line: Cutting spending means cutting capability.

I’ve listed just a small few above, but there are many more. Like humanitarian response, for example. We would do well to remember that Carrier Strike groups don’t just show up to threaten. They often show up as first responders in major natural disasters when no one else can or will.

I’m fully supportive of cutting spending if people are willing to point to capabilities they currently enjoy that they’re perfectly willing to live without. When they’re willing to stop saying “We’re the most powerful nation on earth and we can’t find one guy?” or similar statements.

*It’s worth knowing that not all of “Defense” spending goes to DoD and not all of DoD spending goes to the armed forces. But that’s a whole other discussion about budget tomfoolery which would either bore you to tears or make you want to tear your hair out.

And as I just illustrated, that’s precisely where most of our spending is—pay and benefits and ensuring we have the resources to defeat any enemy that attacks us.

But I don’t want to be disingenuous. Your point is that we arguably could stay out of the Middle East and the South China Sea. Let other nations worry about China’s relationship with Taiwan and China’s stated determination to control the Pacific out to the second island chain from its coast. And certainly we don’t need to maintain personnel in South Korea. So let me address that.

Let me start about by pointing out the strawman you’ve presented. No one has presented a choice where we spend money on the military or spend money on our poor. If that were really a discussion being had, it’d be a worthwhile one. But the truth is that we’re spending money on both and $0.40 of every dollar we’re spending is an IOU. I won’t debate the validity of the false choice you’ve presented because no one is talking about that. There is no diversion of resources from one scarce amount to another. What we’re talking about is scaling back military spending and its impact on the economy. If we want to borrow more money to spend on the poor, nothing is stopping that except an electorate that feels that we already spend way too much (over 80% of the budget) on domestic (non-defense) programs:


(2010 Data)

The short version is that it’s hard to say for sure exactly what would happen. But it’s important to remember that global trade relies on stable and secure trade routes. Currently that stability and security is achieved by having the US “on watch” all the time. Our presence serves as a check against aggression. If we withdraw, the nations best poised to replace us are the ones who do not share the interests of neither the rest of the western world nor the developing world.

The US could easily cut defense spending in half if we change our mandate to simple protecting our EEZ and our northern and southern borders. We would also have to cut about 700,000 or so people from the forces. But it could be done.

But the world would become a very, very different place if we did.

I think you understate the magnitude of the potential consequences and way overstate the extent of the path we’re on right now. Your comparison to the French Revolution is beyond hyperbolic. The only thing we have in common with that time is the magnitude of the wealth disparity. But what’s very different here is that our poor are far and away richer than the poor pretty much anywhere else in the world.


(Source for some of my data comes from the 2013 Comptroller Report on DoD Budget appropriations. The rest comes from personal experience and education in defense acquisition)

 

Well you can't just compare the pure metrics because you have to consider a) prospects of upwards mobility, and b) infrastructure in place to support the poor. Large parts of Western Europe are social democracies (as opposed to liberal democracies like the US) so the safety net is pretty comprehensive and wide.

I would also note that the most objective metric we have for measuring inequality is moving away from inequality. Not the other way around.

 

No problem. I'm glad I was somewhat helpful.

Oh, I agree with you. But I utilized that particular turn of phrase only because it was so ubiquitous. That said, similar phrases are abound all the time. For example, could you imagine the reaction if our SEALS hadn't stopped the Somali pirates that captured Captain Phillips? But think about how ridiculously difficult that mission was and how much it cost to position them to accomplish that mission. If our forces weren't forward deployed and had to leave US shores to get there, we'd be talking about how "the richest country on Earth" was brought low by a bunch of (near-starving) thugs with AK-47s.

Well, we're mixing apples and oranges here. Other countries citizens have, on average, better pay and benefits but they have that through government interventionism in the market. The result is that everything costs more. A lot more. Now that's a price most Europeans have accepted in order to live the way they do. They also accept that upward mobility is not all that likely for someone born at the bottom of the economic ladder. Now some would argue that America is just as immobile, but they would be wrong. But regardless, these wages and benefits are not economic choices that the government is making with respect to its budget. The government simply says "women will have 1 yr paid vacation" as a mandate and the business is required to figure out how to make that an economically viable option. Most pass on that additional cost to consumers. Some don't expand or restrict production. Others absorb the cost entirely. But just about any economist will tell you that such legislation serves to restrict economic growth. That doesn't mean it's necessarily a bad choice to make. But we shouldn't pretend it doesn't happen.

Kidding! Sorry. I couldn't resist.

But seriously, I agree with you completely. I cannot for the life of me understand why genuinely valuable civic services like libraries, museums, national parks, zoos (and yes, even public radio, though I have mixed views on that particular service), etc are often on the chopping block when the represent such an infinitesimal part of the budget. Actually, I take that back. I do know. Because it's easier to "furlough*" a few public employees than to tell the American people that we don't have enough money to fund Medicare, Medicaid, Social Security, and Health and Human Services (which now includes the Affordable Care Act). So we talk about roads and bridges and infrastructure. Or we talk about cutting defense spending. Or we talk about no longer funding Big Bird. Because we can't have the grown up discussion we need to. You cannot tax your way into paying for these programs. We have to restructure them. And the people who vote just aren't interested in dealing with that.

Well, there's that "wealthiest nation in the world" thing again. What living conditions do our poor endure that make them unacceptable? What metric would we use to achieve an "acceptable" level? Certainly, there are poor people in deplorable conditions. But most have roofs over their heads, clothes, food, access to emergency health care, education, electricity, air conditioning, a phone (or more), microwave, stove, etc. Does that mean that we shouldn't want to make their lives better? Of course not. But what standard of living are we hoping to achieve? The standard of living for our poor is extraordinarily high compared to any country in the developing world. So are we going to work towards achieving the same standard of living for say the other nations in the western world? If so, it's worth realizing the scale of that demand given that we have 5-15 times the population of most of the nations in the western world.

Surprisingly well, actually. It's worth pointing out that Europe isn't one state, but a series of independent nations with their own budgets to deal with their relatively smaller problems--a reality that has frustrated the Eurozone as Greece hadn't handled their budget particularly well.

@Ender_Sai addressed this point particularly well, so I won't belabor the point.

 

Gini Coefficient is your friend.

 

In case you're wondering what Ender's talking about, contrary to the talking points often espoused on the subject, the US is actually comparable to many European nations. And although this inequality index is rising, it's rising less and less quickly, indicating a possible burgeoning peak. Most importantly, we are hardly on the brink of economic Armageddon.

Now, that being said, there are lies, damned lies, and statistics. Depending on how you want to look at (read: cherry pick) the data, you could easily see an alarming trend wherever you want to.

Let’s be clear, though: There is a disturbing stagnation of inflation-adjusted wages and it’s worth discussing it. But this is not a crisis. Moreover, the ones pointing to it and declaring it a crisis and are providing “solutions” are part of the very political class that helped create the problem in the first place.

 

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Cutting military spending and replacing it with spending elsewhere in infrastructure, education, healthcare, or even temporary aid to the poor would do almost nothing but good, however. The GDP multipliers for defense spending in the short term and long term are less than 1. Every dollar spent on defense is only yielding, in the near term, about a 60 or 70 cent return to GDP. The commonly-cited estimates from Mark Zandi suggest that (while the economy is weak) infrastructure spending or temporary increases in food stamps would yield about $1.60-$1.70 in GDP for every $1 spent. Even lump-sum tax rebates or temporary across the board tax cuts provide a better return to GDP than defense spending.

 

As I said, there are lies, damn lies, and statistics. There is also equivocation and obfuscation.

In point of fact, at best, I implied it precisely once and intentionally used a different term--the same one Ender used when he simply said you need to consider "prospects for upward mobility". I was alluding to the "American Dream" which is dead only in the minds of some. But regardless, you presented no evidence to counter this point--merely a conclusion drawn by the Brookings Institute. As I said in the very sentence you quoted, some would argue that America is just as immobile (for someone born at the bottom of the economic ladder) as other western nations, but they would be wrong. Perhaps I should have qualified that to say, "in my opinion", but I'm sure that's implied. I haven't looked at the data in some time, but I am convinced by my personal experience that my prospects of reaching my level of success from my meager beginnings would have been much smaller in just about any other nation in the world.

Still, I withdraw the point because I don't want to argue statistics.

Ender's point (at least what I took from it) was that you can't look at one or two statistics that support your chosen ideology and ignore other important considerations. He also pointed out that our income inquality problem seems to be turning in a better direction.

Blithe: The discussion here started with the argument that we should cut Defense spending and use that money to help the poor. In the context of that discussion, it's important to consider what impact cutting defense spending would have (economic being but one consideration).

Truth can often be obfuscated by selective statistical analysis. Defense spending brought much of the technological developments that we enjoy today to the world. What's the multiplier associated with GPS or the internet? However, that the article about the GDP mulitplier for defense spending is fascinating--especially considering that massive increases in WWII defense spending is a famous crutch Paul Kruegman is fond of leaning on to support more stimulus spending. I can't argue with the analysis in the study. From what I reviewed, I'm sure it's sound analysis. I would argue that it doesn't (can't, really) capture effects like transferrable technologies that serve to revolutionize society (like GPS), but I'll move on.

One thing that struck me is actually your first statement:

I'm sure you realize that this is just not true, right? Or at best, it is a gross overstatement. Cutting military spending has all kinds of harmful effects. They may be effects that you don't care about, but they absolutey exist.

 

Souderwan, Of course I realize that there are harmful effects to cutting military spending. Those who lose work while the transition away from excessive military spending takes place will go through some tough times. Provisions should be made to help them through such a transition. The benefits of shifting our resources away from excessive military spending to other needs outweighs the detriments. Based on the evidence that I see, the trade-off is in favor of cutting defense. Just because some people will suffer doesn't mean we should keep throwing money down a rat hole.

I don't take exceptions to your points about revolutionary technology that is derived from defense spending. I would note that we shouldn't blindly cut defense. There are hundreds of billions of dollars in our defense budget that aren't contributing to that kind of growth and development, or are only barely contributing to it. It's not as if the entire defense budget is comprised of R&D.

As for the Paul Krugman argument about World War II defense spending being what brought us out of the Great Depression, I will point out a couple of things:

1) Krugman has never insisted that it had to be defense spending to bring us out of the depression, only that it was an example of what a massive government spending program could do if necessary. There were more ideal options available, but the military spending was necessary due to the war, so it happened to be the only thing that the government became willing to embark on in the kind of scale that Krugman has argued was required to close the output gap.

2) The deeper the economic contraction, the greater the impact government spending of any kind can have on Real and Nominal GDP. Unemployment was far higher leading up to the US's entry into WWII than it is today. Krugman would argue that amount of slack in the labor force and that level of output gap would have made defense spending more potent than it is today.

 

Again, you're thinking only of econimic impacts. If you look at my post #513 above, you'll see that I'm not just talking about the economic effects. Your characterization of "excessive defense spending" prompts me to ask you the same questions I proposed to Anakinsfan. What would you cut from DoD expenditures? What capabilities are you willing to give up? What risks are you willing to accept to global maritime security? Who do you propose will fill the gap that we would create? Do you really believe there would be no negative effects to the economy if the Taiwan Strait, for example, were to become the accepted (and defended) territorial waters of China? Or if the Strait of Hormuz were to be shut down by the Iranian military?

You characterize defense spending as "throwing money down a rat hole" but I'm not at all sure what makes you say that. Simply saying "the US spends more than the next 10 countries combined" only tells a part of the story. The US also does more than the next 10 countries combined. We live in a global economy. If we decide that the US will withdraw and reduce its military presence in the interest of cost savings, how much will be sufficient and who will replace us?

It's worth pointing out that in the 1980s, defense spending was over a third of the budget. We're down to around 19-21% these days.



We spend about 4% of our GDP on Defense, which is higher than some nations, but it's over 30% lower than our peak expenditures in WWII when we spent nearly 40%.

Anyway, as for Krugman, I am well aware of his arguments and I find most of them laughable. He's unquestionably smarter than me, but he is so ideologically wedded to government spending as a solution to economic downturns that I can't take him seriously.

 

As I said before, we shouldn't blindly cut defense. If anything, we should also consider a re-arrangement of spending. Instead of maintaining numerous military bases in allied countries that often have income per-capita levels that rival our own we could divert some of that money into aircraft carriers. Carriers have been shown to often be a much more efficient and cheaper way of providing for maritime and commercial security as well the national defense of the US and our allies. You also get the added bonus of more technological development involved in the design, maintenance, and upgrade of ships in the fleet. Our latest model of Carrier (I believe it's called the Gerald Ford-class. . . ?) will cost nearly 9 billion to make and about 2.5 billion per year to keep it running. Small cuts to our roughly 100 billion dollar expenditure on overseas bases could build and maintain several new carriers over the next decade, giving a better bang for your buck in terms of security, innovation, and impact on GDP and job creation.

 

Well you'll get no argument from me that we should cut back or completely eliminate our overseas bases and we are in danger of losing at least one (perhaps 3) of our planned Gerald Ford class carriers. I agree with you that we (DoD and Congress) seem to be making some strange choices with respect to how we prioritize the funding that we have given the cuts that are in place.

But what we've been talking about to date has been further cutting defense spending, ostensibly to shift resources to someplace else (like more social programs). The reality is that we're at a point where we are already likely sacrificing capability to meet the required cuts to planned spending over the FYDP (five -year defense plan). Further cuts are just not feasible without appreciating that there are commensurate reductions in our capabilities.