Economics

The WAY We Grow in the US Brings More Inequality. Distribution of Income During Expansions

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There are two very large factors driving inequality of income which are the equivalent of deep tidal forces, almost impossible to turn back, and a third bonus force.

First, technology itself is both deflationary and winner-take-all in its general impacts. Think about what happens when a technology company makes a large breakthrough in terms of providing greater value for lower cost. Value is increased for consumers through a mechanism of comparable or superior quality at a lower price point, even as thousands of jobs are eliminated and profits are centralized in the hands of the innovator.

Uber and Lyft are great examples of this. Revolutionizing the transportation industry means putting thousands of inefficient taxi drivers out of business, at great benefit to consumers, while lowering costs. This is a boon to consumers, but it is also a creative destruction process that eliminates jobs and concentrates profits in the hands of the innovators.

Meanwhile, the investors in Uber and Lyft (or their tech comparables) make a lot of money along with the founders. So technology is “winner take all” along with being deflationary, because profits are concentrated in the hands of those who successfully leveraged greater productivity across the system.

You can’t fight this force even if you wanted to, unless you want to fight consumer innovation. Lowering costs and taking waste out of the system means an inequal distribution of profits to the innovators, even while destroying jobs that were inefficient or non-modernized. Technology is thus inherently deflationary from a mean wage perspective.

The second impossible-to-fight force is the nature of government policy response to financial crisis. Modern economies are based on leverage and credit, which in turn rests on a foundation of bank lending. You can’t just outlaw leverage and credit, because doing so would cause economies to painfully shrink in size, even implode. We need leverage and credit to operate our economies at the size and scale we are accustomed to. Indeed, leverage and credit on the part of businesses are what allow new job creation in the first place.

But when the system blows up — when there is a financial crisis — government policy response is to try and save the banks first, because their ability to facilitate leverage and credit is the beating heart of the system. Saving the banks first, however, means juicing paper assets, which in turn means generating asset inflation that benefits the top tier of the population (less than 10% of families have the vast lion’s share of paper asset wealth).

This system can’t effectively be changed without completely changing the capitalist structure of the system with banks at the center of it. You can’t just get rid of the leverage without risking economic contraction and mass unemployment, and when the system breaks you have to support it somehow (or again mass contraction and unemployment).

Globalization is another bonus force that is deflationary and inequality-driving, though also providing equality below the surface. When America middle worker wages are compressed, to some degree that may come because offshore wages are lifted up. Think of the offshore individual who will do the same job an American used to do at 40% lower cost, and be happy with the work, because their comparable cost of living is also 40% lower. This is deflationary from the eyes of American workers, but again lowers consumer costs and is seen as a bonus to the new worker who gets to participate in economic growth.

On the whole I don’t think the reddit hive mind has a helpful grasp on the economics. There is too much idealist sentiment driven by individuals who are frustrated with low wages and assuming socialist type sentiments or solutions are the key. They aren’t, not really. If you misdiagnose the problem you won’t really understand the solutions.

The forces driving inequality are actually getting stronger, not weaker, and it isn’t really a matter of will power or morality to change that. Nor can you really say that a technology entrepreneur, who creates value even while eliminating inefficient jobs, is a force for evil just because his impact on the system is concentrating value for himself (making him rich) while delivering lower consumer costs and better consumer experiences across the spectrum.

It may be that, ultimately, the deflationary and income-concentrating forces of technology and globalization become so strong that the structure of society has to be rethought. But that is a different question than tinkering at the margins with the current structure of society as it exists. One thing’s for sure, hopes for moving toward a Marxist utopia in which “the workers” have more power aren’t going to come to any kind of meaningful fruition any time soon. If ever. [kuleshov](http://www.reddit.com/user/kuleshov)

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“The WAY We Grow in the US Brings More Inequality. Distribution of Income During Expansions”