The Peripatetic Philosopher continues his musing:

Poverty

Part Two 

James R. Fisher, Jr., Ph.D.

© June 14, 2015

In America today we are nearer the final triumph over poverty than in any land.  The poorhouse has vanished amongst us.

President Herbert Hoover (1874-1964), 31^st President of the United States, and president during the onset of The Great Depression

TRICHIN ON ECONOMIC EVOLUTION AND THE GREAT COMPRESSION

The Great Compression, meanwhile, unfolded under a low-immigration regime. This tallies with work by the Harvard economist George Borjas, who argues that immigration plays an important role in depressing wages, especially for those unskilled workers who compete most directly with new arrivals.

Immigration is only one part of a complex story.

Another reason why the labor supply in the US went up in the 19th century is sex. The native-born population was growing at what were, at the time, unprecedented rates: a 2.9 per cent growth per year in the 1800s, only gradually declining after that.

By 1850, there was no available farmland in Eastern Seaboard states. Many from that population surplus moved west, but others ended up in eastern cities where, of course, they competed for jobs with new immigrants.

This connection between the oversupply of labor and plummeting living standards for the poor is one of the more robust generalizations in history.

Consider the case of medieval England. The population of England doubled between 1150 and 1300. There was little possibility of overseas emigration, so the ‘surplus’ peasants flocked to the cities, causing the population of London to balloon from 20,000 to 80,000. Too many hungry mouths and too many idle hands resulted in a fourfold increase in food prices and a halving of real wages.

Then, when a series of horrible epidemics, starting with the Black Death or Bubonic Plague of 1348, this pandemic carried away more than half of the population, the same dynamic ran in reverse.

The catastrophe, paradoxically, introduced a Golden Age for common people. Real wages tripled and living standards went up, both quantitatively and qualitatively. Common people relied less on bread, gorging themselves instead on meat, fish, and dairy products.

The tug of war between the top and typical incomes doesn’t have to be a zero-sum game, but in practice it often is. 

Much the same pattern can be seen during the secular cycle of the Roman Principate, that is, the boom period of the Roman Empire between 27 B.C.E. – 284 C.E.

The population of the Roman Empire grew rapidly during the first two centuries up to 165 C.E. Then came the Antonine Plague or Plague of Galen, who described it.  This pandemic was brought back to the Roman Empire by troops returning from campaigns in the Near East and to have been caused by either smallpox or measles.

In Rome’s Egypt, real wages first fell (when the population increased) and then regained ground (when the population collapsed). We also know that many grain fields were converted to orchards and vineyards following the plagues. The implication is that the standard of life for common people improved, they ate less bread, more fruit, and drank wine. The gap between common people and the elites shrank.

Naturally, the conditions affecting the labor supply were different in the second half of the 20th century in the US. An important new element was globalization, which allows corporations to move jobs to poorer countries (with that “giant sucking sound,” as Ross Perot put it during his 1992 presidential campaign).

But none of this alters the fact that an oversupply of labor tends to depress wages for the poorer section of the population. And just as in Rome’s Egypt, the poor in the US today eat more energy-dense foods such as provided by the “fast food” nation, while the wealthy eat more fruit and drink wine.

Obesity, as a result, has become a palpable index of poverty, not only in the United States but in all wealthy societies across the globe, clearly unable to effectively cope with penury. 

Falling wages isn’t the only reason why labor oversupply leads to inequality. As the slice of the economic pie going to employees diminishes, the share going to employers goes up. 

Again, this is no surprise.  Periods of rapid growth for top fortunes are commonly associated with stagnating incomes for the majority. Equally, when worker incomes grew in the Great Compression, top fortunes actually declined in real terms.

The tug of war between the top and typical incomes doesn’t have to be a zero-sum game, but again in practice it often is.

And so in 13th-century England, as the overall population doubled, landowners charged peasants higher rents and paid them less in wages because they could.  This economic impoverishment of the general populace translated into a Golden Age for the aristocracy.

As the historian Christopher Dyer writes:

“Life was good for the upper-crust English around 1300. They drank more wine and spent their spare cash building or refurbishing castles, cathedrals, and monasteries. They didn’t just enjoy a better living standard; they also grew in number.  The number of knights and esquires tripled between 1200 and 1300.

“But disaster struck in 1348, when the Black Death removed the population surplus (and then some). By the 15th century, while the common people were enjoying their own Golden Age, the aristocracy had fallen on hard times.  In the mid-15th century, there were simply fewer aristocrats and they were much poorer.”

In the US between around 1870 and 1900, there was another Golden Age for the elites called the Gilded Age. While living standards for the majority declined (seen vividly in dwindling average heights and life expectancy), the moneyed classes were enjoying ever more luxurious lifestyles.

Just like in 13th-century England, the total number of the wealthy was shooting up. Between 1825 and 1900, the number of millionaires (in constant 1900 dollars) went from 2.5 per million of the population to 19 per million. In our current cycle, the proportion of those whose net worth exceeds 10 million in 1995 dollars grew tenfold between 1992 and 2007 — from 0.04 to 0.4 per cent of the US population.

This cycle fosters a peculiar development.  Cheap labor allows many enterprising, or simply lucky members of the poorer classes to climb into the ranks of the wealthy.

In the 19th century, a skilled artisan in the US could expand his workshop by hiring other workers, eventually becoming the owner of a large business. In America today, enterprising individuals start dot.com companies or claw their way into jobs as CEOs of large corporations.

On the face of it, this is a wonderful testament to merit-based upward mobility. But there are side effects. Don’t forget that today most people are stuck with stagnant or falling real wages. Upward mobility for a few hollows out the middle class and causes the social pyramid to become top-heavy. Too many elites relative to the general population leads to ever-stiffer rivalry in the upper echelons. This however is an invitation for trouble.

In the US, there is a close connection between wealth and power. Many well-off individuals, typically not the founders of great fortunes but their children and grandchildren, choose to enter politics (Mitt Romney and the Kennedy clan come to mind).

Yet the number of political offices in the US government is fixed: 100 senators and 435 representatives, and only one US president.

As the ranks of the wealthy swell, so too do the numbers of wealthy aspirants for public office.  It is no accident that a score of Republicans are vying for their party’s 2016 presidential nomination.

When watching political battles in today’s Senate, it is hard not to think about their parallels in Republican Rome. The population of Italy roughly doubled during the second century B.C.E., while the number of aristocrats increased even more. Again, the supply of political offices was fixed.  There were 300 places in the senate and membership was for life.

By the end of the century, competition for influence had turned ugly. During the Gracchan period (139 – 10 B.C.E.), political feuding led to the slaughter of the tribunes Tiberius and Gaius on the streets of Rome.  The reason is apropos to this discussion.

The Gracchus brothers, Tiberius and Gaius, attempted to pass land reform legislation that would redistribute the major aristocratic landholdings among the urban poor and military veterans. After achieving some early success, both were assassinated by enemies of these reforms.

During the next century, intra-elite conflict spilled out of Rome into Italy and then into the broader Mediterranean. The civil wars of the first century C.E. fueled by a surplus of politically ambitious aristocrats, ultimately caused the fall of the Republic and the establishment of the Empire of Constantine in 306 C.E.  Less than 200 years later, the Roman Empire of the West was no more.

Beside sheer numbers, there is a further, subtler factor that aggravates internal class rivalry.  Elites are not a monolithic group.  As absurd as it might sound, the differences within the wealthiest one per cent are almost as stark as the difference between the top one per cent and the remaining 99.

The millionaires want to be worth $10 million, then $100 million, then worth one $ billion or more.  There is never enough wealth, never enough security.

Nor is this simply greed.  The wealthy compare and compete like children for the power and prestige and a quest to become untouchable, which, of course, is impossible.  The result of this very intense status rivalry mirrors the conspicuous consumption of the other 99 percent.

Towards the end of the Roman Republic, aristocrats competed by exhibiting works of art and massive silver decorations in their homes. They threw extravagant banquets with peacocks from Samos, oysters from Lake Lucrino and snails from Africa, all imported at great expense. Archaeological digs confirm a genuine and dramatic shift towards luxury.

The US political system is much more attuned to the wishes of the rich than to the aspirations of the poor.  This might explain something of the American character, that is, the preference to throw money at the problem of poverty rather than get involved to understand what it means to be poor.

Intra-elite competition also seems to affect the social mood. Norms of competition and extreme individualism become prevalent as the norms of cooperation and collective action recede.

Social Darwinism took off during the original Gilded Age.  Ayn Rand argues in her Objectivist Philosophy that altruism is evil (see Atlas Shrugged, 1957).  Her philosophy has grown astonishingly popular during what we might call our Second Gilded Age.

The glorification of competition and individual success in itself becomes a driver of economic inequality.  The one percent families send their children to the best and most expensive prep high schools, then off to Ivy League universities to acquire careers of power and privilege.  Then this elite write books and seek public office to explain to the other 99 percent why they are poor and what should be done about it. 

As Christopher Hayes writes in “Twilight of the Elites” (2012):

“Defenders of the status quo invoke a kind of neo-Calvinist logic by saying that those at the top, by virtue of their placement there, must be the most deserving.” 

By the same reassuring reasoning, those at the bottom are not as deserving for a host of cliché reasons.  As such social norms spread, it becomes increasingly easy for CEOs to justify giving themselves huge bonuses while cutting the wages of workers. 

MEN WITH AN ECONOMIC PLAN

It would appear that economists see their discipline as first and foremost a social and moral science.  Given this discussion, it is also apparent that they rely largely on metrics and mathematical models. 

Economist Anthony Atkinson in “Inequality: What Can Be Done?” (2015) proposes universal family benefits financed by a return to progressive taxation in Great Britain.  Together, they are intended to reduce British inequality and poverty from American levels to European levels.

He also argues for guaranteed public sector jobs at a minimum wage for the unemployed and democratization of access to property ownership via an innovative national savings system with guaranteed returns for the depositors. 

He further envisions this will be inheritance for all, and will be achieved by a capital endowment at age eighteen financed by a more robust estate tax, and a flat-rate tax for local government and the effective abandonment of Thatcherism. 

Like the boom years in the United States and Great Britain in the 1980s in which President Ronald Reagan and Prime Minister Margaret Thatcher were successful in sharply reducing tax rates on the wealthy along with deregulation, that success is now blamed for poverty today in both countries.     

Nobel Laureate for Economics (2001) Joseph Stiglitz argues similarly in “The Price of Inequality” (2010).

While pondering why America’s “1 percent” equals the wealth of the entire bottom 30 percent, he offers his own progressive solution.  He is more emphatic in “The Great Divide: Unequal Societies and What We Can Do About Them” (2015).

Alas, macroeconomics seldom translates smoothly to "boots on the ground" microeconomics.  Stiglitz sees America currently with the most inequality and the least equality of opportunity among advanced countries. While market forces play a role in this stark picture, he admits politics have shaped those market forces. 

Stiglitz exposes what he sees as the core issue: the efforts of well-heeled interests to compound their wealth in ways that have stifled true, dynamic capitalism.  

Like Atkinson in Great Britain, he examines the effect of inequality on our economy, our democracy, and our system of justice, while explaining how inequality affects and is affected by every aspect of national policy.

He then offers his vision for a more just and prosperous future, supported by what he calls as a concrete program to achieve that vision. 

He reminds the reader that while Congress reduced the taxes on the super-rich and deregulated corporate operations in the 1980s to enlarge the economic pie, hoping that the middle class and those at the bottom would benefit, what has happened is that now the top 1 percent actually controls 40 percent of the nation's wealth.

Both men are progressives, both have faith in their mathematical models and the reliability of their data.  

If only people behaved so orderly, perhaps wealth and poverty would not be so time and energy consuming.

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