Posts Tagged ‘Economic inequality’

Wealth, risk, and power

August 9, 2017

This is from a Twitter thread by Theresa Nielsen-Hayden.

1.  The rich don’t need federal health insurance. Their up-and-coming competitors, who aren’t rich yet, do: one major illness can wipe them out.

2.  The rich donor class hates social policies that make the non-rich braver and more enterprising. For example…

3.   Social Security, so a lifetime of hard work doesn’t end in misery.  Student financial aid, so that talent + hard work can = achievement.

4.  Bank regulation, so our careful savings and investments aren’t wrecked by irresponsible games the big-money guys play with each other.

5.  Health and safety regulations, because it shouldn’t be okay to maim or poison people who don’t have clout. And so forth.

6.  Us little guys shouldn’t have the nerve to start new businesses, develop new products, or go as far as our work and talent will take us.

7.  Poor whites are supposed to stay poor, and know in their bones that they’re born to sorrow, and their luck will never last.

8.  Blacks should keep quiet, and do first-rate work on jobs that are well below their ability, because things can always get worse, y’hear?

9.  There’s no point in women having ambitions, because one little mishap can wreck everything you’ve worked for.

10.  Keeping the rest of us in a constant state of low-level fear is the one consistent goal of the policies the donor class supports.

11.  Why? Because we have to tolerate some risk in order to successfully compete with them and their less-than-talented offspring.

12.  I’m not talking about rational, calculable risks.  I mean the unforeseeable: illness, accidents, market crashes, natural disasters.

13.  They want us to know in our bones that we have no defense against risk. If *anything* happens, we’ll be stuck paying for it forever.

14.  We’re not allowed to build a more level playing field that we all share.  They want us out of the game entirely, so they can always win.

15.  Meanwhile, they’re always angling to get their own risk reduced.  Always.  Because winning.

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How much inequality is too much?

January 7, 2017
incomedistribuiton2014-5-0

This chart from Vox shows how each $100 in Americans’ income was divided among the five main income groups in 2014, and how their shares have changed since 1989

It’s a bad thing when the rich get richer and the poor get poorer.

But suppose the rich got richer, but the poor didn’t get poorer. What would be wrong with that?

Is the problem with economic inequality in and of itself?   Or would extreme differences between rich and poor be bad even if they poor did have enough—whatever your definition of “enough” happens to be.

New Dealers in the 1930s thought that increased incomes for the poor would be good for everybody, including the rich.  If poor people had more money to spend, that would increase demand for goods and services, and get the economic going.

The “supply-siders” in the 1980s thought that increased incomes for the rich would be good for everybody because that would make more capital available for investment.  That turned out not to be true, for reasons I came to understand later, but suppose it had.  Would that be bad?

I think it would be.  I didn’t always think so, but I think so now.

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A venture capitalist’s argument for inequality

January 20, 2016

Paul Graham, a venture capitalist and essayist, thinks economic equality can be a good thing, not a bad thing.

Since the 1970s, economic inequality in the US has increased dramatically.  And in particular, the rich have gotten a lot richer.  Some worry this is a sign the country is broken.

Graham-cover3I’m interested in the topic because I am a manufacturer of economic inequality.  I was one of the founders of a company called Y Combinator that helps people start startups.

Almost by definition, if a startup succeeds its founders become rich.  And while getting rich is not the only goal of most startup founders, few would do it if one couldn’t.

I’ve become an expert on how to increase economic inequality, and I’ve spent the past decade working hard to do it.

Source: Economic Inequality

He goes on to write about how rich rewards are necessary to motivate people to found start-up companies, and how successful start-ups are good for everybody.  I think that is true as far as it goes, but I don’t think it addresses the real driving forces behind today’s increasing inequality.

I’ve written a good bit on this web log about economic inequality, but my concerns have been less about successful business founders and more about the following:

  • Wall Street speculators who get rich at the expense of the public, sometimes by breaking the law, and not only go unpunished, but shift the burden of their losses onto the general public.
  • Executives of business corporations, government agencies and so-called non-profits who milk the system to increase their own incomes and the incomes of their cronies, while imposing austerity on those who do the actual work.
  • Crony capitalists whose wealth is based on personal connections, especially with politicians and government officials, rather than creating value.
  • Rich people whose share of national wealth, as documented by Thomas Piketty in Capital in the Twenty-First Century, tends to grow automatically, all other things being equal.

All this is made worse by rich people who turn their wealth into political power, which they use to destroy the social safety net, starve public services, weaken labor unions and subsidize corporations..

That said, Paul Graham raised a fair point, which I want to discuss.  He pointed out that there is a difference between those who get rich by playing zero-sum games at other people’s expense and whose who get rich by creating value.

I agree.  I think there also is a difference between those who participate in zero-sum games with each other, such as those who participate in high-stakes poker games, and those who participate in zero-sum games with the general public, such as the sub-prime mortgage speculators.

People who create value deserve to be rewarded.  People who make a maximum effort and an important contribution to society deserve more than people who make a minimum effort and a routine contribution.  But I don’t think the rewards system should be structured so that the former get virtually everything and the latter virtually nothing

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American labor unions and the middle class

November 16, 2015

UnionsMiddleClassMay2015Source: Center for American Progress.

Thomas Piketty on democracy and capitalism

May 16, 2014


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Tom Ferguson on Piketty and the Democrats

May 15, 2014

Piketty on the power of inherited wealth

May 1, 2014

inheritanceflowpiketty_u

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In Balzac’s story Pere Goriot, set in the early 1800s, the struggling law student Rastignac lives in the same boarding house as the master criminal Vautrin and the impoverished former millionaire Goriot.   Vautrin explains to Rastignac the odds against his ever achieving success sufficient to earn a life with dignity, and advises him to woo and wed a rich heiress instead.

In the charts above and below, Thomas Piketty, in his book Capital in the Twenty-First Century, showed the gap in those days between inherited wealth and wealth achieved through one’s own efforts.   He didn’t have comparable data for the United States, and doesn’t think the flow of inherited wealth was as great in the USA.

That gap has narrowed, Piketty warned that there is nothing to prevent those days from returning.  A Sam Walton may build a retail empire through his own efforts, but all his children and grand-children have to do in order to be rich is simply to mess up.  His research indicates that great wealth compounds faster than moderate wealth, because the ultra-rich can diversify their investments and call upon the best expert advice.

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Defenders of wealth push back against Piketty

April 29, 2014
piketty12growthrate

Source: Thomas Piketty, Capital in the 21st Century

If things go on as they are now, there’s nothing to prevent wealth from becoming more and more concentrated and economic inequality returning to the levels of England and France 200 years ago, according to French economist Thomas Piketty in his new book, Capital in the Twenty-First Century.

But many economists say this is not a problem.  They say concentration of wealth is a good thing, not a bad thing, and benefits us all in the long run, not just a tiny elite.   In this post, I will consider this argument, and state it as fairly as I can, then explain what I think the argument leaves out.

Concentrations of wealth are necessary to a capitalist free-enterprise economy.  They provide the means to invest in machinery, technology, education and the other things that increase society’s total wealth.   Capitalism has generated more economic growth than any alternative system and, without capital, there is no capitalism.

The chart above is illlustrates Piketty’s conclusion, based on his research,  that, most of the time, r > g – that is, the rate of return on investment exceeds the rate of growth of the economy, which, as a matter of logic, means that the income of investors grows faster than the income of wage-earners.

Now the chart should be read with discretion.  The parts prior to 1820 are no more than an educated guess; the parts from 1820 to the present are blends of different national economies; the future projection is possibility, not a prediction.  That’s no criticism of Piketty.  He did the best he could with the data available, and what he shows is reasonable.

According to the chart, r > g by a great deal on average prior to 1913.   Nevertheless there was an increasing rate of economic growth.  Inequality was just as extreme in 1913 in France and Britain and more extreme in the USA compared to 1820 or 1700, but that doesn’t mean the average person got no benefit from that growth.  It just meant there was just as much of a gap between rich people and the rest of us.

Not all rich people did things that promote economic growth, but the famous economist Friedrich Hayek argued that an idle rich class is of benefit to society.  They are pioneers in consumption, he said.   Once automobiles were a luxury for the upper class, for example, but now almost every family in North America owns one.  If rich people hadn’t provided an initial market, automobiles would never have developed.   Medical treatments which once were affordable only to rich people are now available to the general public.

Rich philanthropists finance good works, including, as economist Tyler Cowen pointed out, Belknap Press of Harvard University, publisher of the English translation of Piketty’s book.

A final argument is that the problem of excessive returns on capital is self-correcting.  When you have too much capital, the rate of return on capital falls.  If too many houses are built, rent falls.  If capitalists invest too much in building railroads or making personal computers, railroad tickets or computers become a glut on the market, and profits fall.  The economist Joseph Schumpeter called this “creative destruction,” and he said this is how the capitalist system renews itself.

I don’t think these arguments are completely wrong, but they leave a lot out.   Let me explain.

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Piketty’s Capital21: why is inequality rising?

April 28, 2014

Thomas Piketty’s Capital in the Twenty-First Century is a great book.  It consists of the working out of the implications of a simple principle, namely, that if the return on investment is a higher percentage rate than economic growth, wealth and income will become more and more concentrated in the hands of a tiny minority.

He said there is nothing to prevent wealth from becoming as concentrated in the hands of a tiny elite as it was in France and England in the 18th and 19th centuries — which is not the same thing as saying this is certain to occur.   I’m now re-reading Piketty’s book, from which I’m learning a lot, but l think it is important to be clear on what he’s saying and not saying,

He says that historically return on investment has exceeded the rate of economic growth, or, as he puts it, r > g,ut, like most economists, he writes of this as if it were the impersonal workings of the economy.  He lumps all income-producing forms of property together, which is legitimate for his purposes, but I make a distinction between (1) innovators who create value, (2) inheritors and passive investors and (3) usurers and manipulators.  The first deserve rich rewards, the second deserve average rewards, the third deserve to be unemployed or maybe in prison.   I think the rise of people in the third category is a big reason for the upward distribution of income in the USA.

Extreme inequality of income is a bad thing because it gives a small group of people too much power over the rest of us.  But curbing the excessive power of the top 0.1 percent or top 0.01 percent of income earners will not, in and of itself, create economic growth or end poverty.   These are not Piketty’s topics.

His preferred solution to excessive concentration of wealth is a progressive tax on capital along with progressive taxes on incomes and inheritances.  I’m not opposed to this, but I think there are other, better ways to change the r > g equation.  Promoting economic growth is one way.  Empowering wage-earners, such as by stronger labor unions or higher minimum wage laws, is another.

Below are links for those who want to know more, but don’t have time to read the 585 pages of his book and 78 pages of end notes.

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Rewards and punishments

February 3, 2014

steve+sack+cartoon.ja.

I think that the main reason that the distribution of wealth is growing so much more unequal as that the distribution of incentives, opportunities and bargaining power is growing more unequal.

LINKS

Majority of Americans favor raising taxes on the rich to aid the poor by Pew Research.

Most Americans, including 54% of Republicans, Say We’ve Got Too Much Inequality by Washington’s Blog.

The Invisible Finger of the Market by John Perr for DailyKos.

California’s New Feudalism Benefits the Few at the Expense of the Multitude by Joel Kotkin.for NewGeography.

Hat tip for the cartoon to jobsanger.

Why gross inequality is harmful in itself

December 26, 2013

I am not bothered by the fact that there are people in the world who have a lot more riches than I do.  I’m amused, not resentful, that John McCain couldn’t remember how many houses he owns or that Mitt Romney had an elevator for his car.   So long as I have a house that satisfies me, what difference does it make if someone else owns a mansion, or many mansions?

What does bother me is the means by which the upper 1 percent have gotten rich.  We have a financial elite that, with some exceptions, have gotten rich not by creating value, but by milking the system and by transferring wealth upward—CEOs who get huge compensation packages while laying off workers and managing decline, Wall Street financiers who profit from manipulation of the system and outright financial fraud.

But in the TED talk shown in the video, Richard Wilkinson presents facts and figures that gross inequality is an evil in itself, regardless of the cause.  The facts and figures in his slides the more unequal a society is, the worse off the people tend to be in many measurable ways.  Once a society reaches a certain level, once it is possible for everybody to have a minimum amount of food, clothing, shelter, medical care, education and leisure, then alleviating inequality becomes the most important factor in promoting human well-being.

I’m not sure exactly why that should be, but this seems to be the fact.

Of course growth and equality are not always contradictory, and certainly it would be easier to lessen inequality in a growing economy than otherwise.   And I know of no society that strives for complete equality of income and wealth.  What’s in question is the degree of inequality and the processes that create it.

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Upward mobility in red vs. blue America

July 30, 2013

In what part of the United States do people have the best chance to get ahead—the conservative Republican areas or the liberal Democratic areas?  David Leonhardt of the New York Times, author of a much-read article about the geography of upward mobility, reported in a follow-up article that there’s little overall difference between Red and Blue America.

Double click to enlarge.

Click to enlarge.

The study found that among the 50 largest metropolitan areas, the ones that offer the best opportunities for poor people to get ahead are (1) the best,  Salt Lake City, (2) San Jose, CA, (3) San Francisco, (4) Seattle, (5) San Diego, (6) Pittsburgh, (7) Sacramento, (8) Manchester, NH, (9) Boston and (10) New York City.

The ones that offer the worst opportunities are (41) Milwaukee, (42) Cincinnati, (43) Jacksonville, FL, (44) Raleigh, NC, (45) Cleveland, (46) Columbus, (47) Detroit, (48) Indianapolis, (49) Charlotte, NC and (50) the worst, Atlanta.

Leonhardt commented:

The patterns make sense in light of the four factors the study cited as being strongly correlated with upward mobility rates: school quality; family structure; civic engagement, including membership in religious groups; and the size and geographic dispersion of the middle class. These factors do not strongly favor either conservative America or liberal America.

On the one hand, divorce tends to be less common in high-mobility areas, and Democratic states generally have lower divorce rates. But religious participation, another feature of high-mobility regions, is typically higher in Republican states.  Standardized test scores are generally higher in Democratic states than Republican ones, but several conservative states, like Kansas, Montana and the Dakotas, have high scores, according to the National Assessment of Educational Progress.

The study also found that some of the metropolitan regions with a notably small number of middle-class households (based on the national income distribution) and a high concentration of poverty are in blue-leaning states. Milwaukee, Chicago, Detroit and Baltimore all make that list.

[snip]

It’s true that upward mobility is less common in Deep South. (In the 11 states that made up the Confederacy, the odds of jumping from the bottom fifth of the income distribution in childhood to the top fifth in adulthood were only 6.6 percent, compared with 8.9 percent in the rest of the country.)

But mobility was also notably low in Democratic-leaning Michigan and in the swing state of Ohio.  As Paul Krugman noted in his column today, Atlanta and Detroit, which otherwise have little in common, both suffer from low mobility.  And while the Northeast and West Coast, Democratic strongholds, have high rates of mobility, some of the highest rates are in Utah, Wyoming and the Dakotas, none of which have voted for a Democratic presidential candidate in almost 50 years.

via NYTimes.com.

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Where you live and how far you can rise

July 29, 2013
inequality map 630

Click to enlarge.

The New York Times published a much-discussed article showing that the odds of American children rising to a higher income bracket than their parents vary widely depending on where they’re born.  There’s enough food for thought in the article and the accompanying map to keep social science researchers busy for a generation.

Click on In Climbing Income Ladder, Location Matters to read the full article.  The map with the original article is interactive, so if you’re an American, you can see how much income mobility there is in the metro area closest to you.

It isn’t hard to understand why there is little opportunity in some of the former one-industry towns of the Midwest Rustbelt, where the one industry has closed.  The Deep South has long been a region where hereditary wealth is respected and leaders try to attract new industry with promises of low wages and no labor unions.  But that is just as true of Texas as it is of Georgia, and Texas doesn’t seem to follow the Deep South pattern.

It’s more interesting to speculate as to why some communities offer so much more opportunity than others.  Is there a common factor that links San Francisco and Salt Lake City?  What do you think?

[Update]  I forgot to mention that the researchers concluded that poor people have a greater chance of moving up when they are intermingled with middle-class people rather than living in concentrations of poverty.  Other things that are correlated with upward mobility are predominance of two-parent families, good elementary and high schools and high membership in church and civic organizations.

High taxes on rich people and tax credits for poor people don’t seem to have much effect, they found; the presence of ultra-rich people and institutions of higher learning doesn’t seem to matter much.  Researchers said counties with high concentrations of African-Americans appear to have less upward mobility for both black and white residents.  This is from the New York Times article.  Click on the link to read it.

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As inequality rises, opportunity declines

June 13, 2013

o-GREAT-GATSBY-CURVE-570

Some Americans like to say that while we are less equal in income and wealth than some of the western European countries, we have greater opportunity to rise on the economic scale.   If everybody has a reasonably fair chance to acquire wealth, based on talent and hard work, then we should not complain about inequality of wealth, or so the argument goes.

The chart above shows the problem with that argument.   Among 10 industrial nations, the United States had the greatest concentration of income at the top, measured by the Gini coefficient, and the second least equality of opportunity, based on correlation of your income with your parents’ income.

This stands to reason.   The steeper and higher the slope, the hardest it would be to climb up.

The chart is based on figures for 1985, which was nearly 30 years ago.   Income inequality has grown since then, and there is a dot on the chart extrapolating the decline in economic mobility for 2010 based on the Gini coefficient of wealth concentration for that year.

Click on The Great Gatsby Curve for an animated GIF of the chart, which makes it easier to understand.

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Social liberalism and economic inequality

May 25, 2013

Is there a connection between social liberalism and economic inequality?

As I see it, one link is a widespread meme that sees society as an arena of competition and social justice as a guarantee of fair rules and a level playing field.

inequalityIf you see society in this way, rather than as a means for people to co-operate for mutual benefit, then justice demands that you do your best to assure equal opportunity for everyone, regardless of race, ethnicity, gender, sexual orientation, immigration status, physical handicap or anything else that isn’t under control of the individual.   But these meme does not give the wealthy any obligation toward the non-wealthy.  It would be like demanding that the winner of a high-stakes poker game return some of his winnings to the loser.

Of source there is no logical connection between social liberalism and economic inequality.   In fact, it would be much easier to assure equal opportunity in a full-employment, high-wage economy.

Click on More diversity, less equality: why the tradeoff? for my earlier post on this topic.

Click on Hard equality for comments about that post on the Unqualified Offerings web log.  It’s humbling to realize that a link to my post on somebody else’s web log gets comments and the original post did not.

To be clear, I think a market economy is great if it is understood as a way for people to cooperate and exchange goods and services for their mutual benefit without getting permission from Big Brother.  And I think meritocracy is great if merit is understood as how much you contribute to the common good.

One in four US workers are “guard labor”

April 24, 2013

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One fourth of the American work force is employed in “guard labor”, not producing anything themselves, but keeping the actual workers in line, according to a studies by economists Samuel Bowles of the Santa Fe Institute and Arjun Jayadev of the University of Massachusetts.

Comparing nations, they reported that the greater the amount of inequality in a society, the higher the percentage employed in guard labor.

The following is from an interview with Samuel Bowles in the Santa Fe Reporter.

Inequality leads to an excess of what Bowles calls “guard labor.”  In a 2007 paper on the subject, he and co-author Arjun Jayadev, an assistant professor at the University of Massachusetts, make an astonishing claim: Roughly 1 in 4 Americans is employed to keep fellow citizens in line and protect private wealth from would-be Robin Hoods.

securityguardThe job descriptions of guard labor range from “imposing work discipline”—think of the corporate IT spies who keep desk jockeys from slacking off online—to enforcing laws, like the officers in the Santa Fe Police Department paddy wagon parked outside of Walmart.

The greater the inequalities in a society, the more guard labor it requires, Bowles finds. This holds true among US states, with relatively unequal states like New Mexico employing a greater share of guard labor than relatively egalitarian states like Wisconsin.

The problem, Bowles argues, is that too much guard labor sustains “illegitimate inequalities,” creating a drag on the economy.  All of the people in guard labor jobs could be doing something more productive with their time—perhaps starting their own businesses or helping to reduce the US trade deficit with China.

via Santa Fe Reporter.

The category of “guard labor” includes police, prison guards, court workers, military and civilian employees of the Department of Defense and private guards, as well as monitors and supervisors with the power to reward and punish.   They do not count employees of companies that make burglar alarms, video surveillance cameras and other security equipment.

They do count the unemployed and prisoners, which may seem like a stretch.  Bowles and Jayadev argue that if nobody was out of work and nobody was in jail, there wouldn’t be any way to keep the rest of the population in line.  This is in line with Karl Marx’s idea that employers need a “reserve army” of the unemployed to keep wages low.

But even excluding the unemployed, Bowles and Jayadev said that “guard labor” is about a fifth of the American work force.

The chart below shows the growth of guard labor in the United States.   By their count, the percentage of U.S. workers in guard labor nearly quadrupled in the 20th century, and increased more than 10 times if you don’t count the unemployed.

guardlabor

This is old information, but I don’t think the trend has reversed.  I see armed security guards and video monitors everywhere I go and, while I’m retired, my friends tell me that work conditions are getting more and more restrictive.

In the best of societies, there will be a need for a certain number of supervisors, monitors, police, courts, prison guards and military forces, and there will be a certain number of prison inmates and job-seekers.   But Bowles and Jayadev found that the percentage is much greater in nations with a high degree of economic inequality, such as the USA, which has more than double the percentage of guard labor of Sweden or Denmark.   Where there are no extremes of rich and poor, it is not necessary to devote so much effort to keeping people in line.

Click on Guard Labor PDF to read the 2006 paper by Samuel Bowels and Arjun Jayadev.

Click on Garrison America PDF to read the 2007 paper by Samuel Bowles and Arjun Jayadev.

Click on Crime and Punishment: Some Costs of Inequality for a report by Nancy Folbre in the New York Times.

Click on Born Poor?  Santa Fe Economist Samuel Bowles Says You’d Better Get Used to It for the full interview in the Santa Fe Reporter.

Click on Vested interests in mass incarceration for an earlier post of mine on a related subject.

Hat tip to Nina Paley for the Mimi and Eunice cartoon.

[Update 2/25/14]

Samuel Bowles and Arjun Jayadev wrote about this more recently in the New York Times.

http://opinionator.blogs.nytimes.com/2014/02/15/one-nation-under-guard/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1

The rising tide lifts some of the boats

February 21, 2013

average-incomes
Hat tip to occasional links and commentary.

CEO pay vs. minimum wage pay

February 20, 2013

minimumwageIt’s a funny thing.  I never hear anybody argue that increasing CEO pay will lead to fewer jobs for CEOs, or that increases in CEO pay will cut unacceptably into profits, or that the cost of CEO pay will be passed on to consumers.

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An obituary for the age of mass affluence

June 29, 2011

Advertising Age reported that the only American income group that increased its spending last year were those earning more than $100,000 a year.  Everybody else is economizing and cutting back.  Consumer demand, according to Advertising Age, is being driven by “a small plutocracy of wealthy elites.”

A recent research report by a firm called Digitas, self-described as “the leading global integrated brand agency,” writes off two-thirds of the people even within the $100,000-plus category.  Unless you are taking in $200,000 or more by age 35, you’re not worth bothering about, Digitas says.  And if you aren’t taking in $100,000 or more a year in your 20s, you have little chance of reaching the $200,000 level.

Digitas recommends that business should concentrate on selling only to the Affluent, Wealthy and Rich, and to the Emerging Affluent, since they have a chance of becoming Affluent, Wealthy or Rich.  The rest don’t count.

During most of the 20th century, it was a proud boast of the United States that the vast majority of the population had access to the same kinds of goods and services as the very rich.  They all could afford similar, though not identical, goods and services – automobiles, refrigerators, TVs, annual vacations at the seashore or in the mountains.  You could not tell the difference between a wealthy person and a middle-class or working-class person by looking at them.

This is still true to an extent.  But unless something changes, we’re moving toward an economy more like that of France in the age of Louis the Fourteenth, in which the vast majority of the population labored at low wages to serve the desires of a wealthy minority.

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