Affluent, and unequal

Print edition : September 15, 2001

How in the land of plenty, private affluence and public squalor co-exist. And why this is not a peculiarly American phenomenon.

AS we do in India, the Americans make use of their decennial census not only to count heads but also to elicit a wide range of information relating to the characteristics of the population and its living conditions. Data gathered during the United States Census of 2000 have been processed and the findings are becoming available. In an article published in The New York Times of August 6, 2001, the author Eric Schmitt stated that according to comprehensive new census data, "American standards of living increased markedly throughout most of the country in the 1990s bringing gains in education, housing and mobility along with higher incomes ..." Specific details are also given.

Making ends meet in Manhattan. The number of impoverished working Americans has been rising sharply.-GIFFORD/GAMMA/LIAISON

* In 2000, 82 per cent of people 25 and older graduated from high school and 25 per cent had at least a bachelor's degree. In 1990, the figures were 75 per cent and 20 per cent, respectively.

* More than 90 per cent of households owned a car, van or truck in 2000, the highest share ever, and 18 per cent owned three or more vehicles; 76 per cent of workers drove to work alone up three per cent from 1990. People are spending more time driving to work, often from rural settings, where better-paying jobs are scarce.

* The incomes of families grew and so did the size of their homes, as more than one in four homes has seven rooms or more, up slightly from 10 years ago. This confirms data showing that nearly one out of five new houses exceed 3,000 sq ft.

More people from the rest of the world are flocking to this paradise on earth. "About 44 per cent of America's 30.5 million foreign born residents, about 13.3 million people, arrived in the country in the 1990s. Of a total population of 281.4 million, immigrants make up 11 per cent, the largest share since the 1930s... Forty per cent of Californians spoke a language other than English at home."

The report recognises some imbalances too. Much of the nation's wealth is still concentrated in the northeast, but that region lost some of its edge in the decade as jobs and people migrated to fast-growing economically vibrant areas like southeast and west. There is also mention of "the pockets of impoverishment" where governments are struggling to provide services for the needy. But overall, the census data provide the image of a nation growing richer and becoming more affluent. "It is the American dream updated," the newspaper report quotes one urban analyst as saying.

For a more balanced picture, it may be useful to take a look at the decade of the 1990s as a whole. In many ways it was a remarkable decade for American society, for American economy in particular. Although the early years of the decade saw a recession - claimed by some to be the worst since the Great Depression of the 1930s - things began to change fairly soon. One of the major achievements of the Clinton administration was that the deficits of the Federal budgets, which had become a contentious issue for many years, were contained and some surpluses were generated. More important still, the second half of the decade witnessed unprecedented growth in the income and wealth of the American people with a growth rate of GDP of over 4 per cent per annum, the like of which America had not witnessed since the 1950s and part of the 1960s. And, of course, the 1990s marked the emergence of the information-communication technology (ICT)-driven new economy that had a perceptible impact on practically all aspects of American society. A more detailed analysis of the decade may, therefore, provide a better understanding of the nature of social transformation going on in affluent America.

The 1980s was also a decade of some innovations and achievements. It was, as many will recall, the period of Ronald Reagan as President and of Reaganomics that brought in major changes in economic philosophy with the Reagan administration favouring market orientation in place of state domination of the economy. A perceptive observer summed up the decade thus: "The 1980s were the triumph of upper America - an ostentatious celebration of wealth, the political ascendancy of the richest third of the population and the glorification of capitalism, free markets and finance" (Kevin Philip, The Politics of Rich and Poor: Wealth and the Electorate in the Reagan Aftermath; Random House, New York, 1990). Official figures for the period 1977-1988 showed that the real incomes of 80 per cent of the households declined, the top 10 per cent barely managed to hold the level, while the top 5 per cent gained 23.4 per cent and the top 1 per cent close to 50 per cent. BusinessWeek magazine stated: "That the great divide between rich and poor in America has widened is perhaps the most troubling legacy of the 1980s."

A more descriptive account of that period and a social profile of America in the early years of the 1990s were provided by Robert B. Reich in his influential book The Work of Nations (Alfred A.Knopf, New York, 1991). Reich was then on the faculty of Harvard University's John F.Kennedy School of Government, but was later drafted by Bill Clinton as his Secretary of Labour. According to Reich, "Between 1977 and 1990 the average income of the poorest fifth of Americans declined by 5 per cent, while the richest fifth became about 9 per cent wealthier... That left the poorest fifth of Americans by 1990 with 3.7 per cent of the nation's total income, down from 5.5 per cent twenty years before - the lowest portion they have received since 1954. And it left the richest fifth with a bit over half of the national income - the highest position ever recorded by the top 20 per cent. The top 5 per cent commanded 26 per cent of the nation's total income, another record."

These statements may appear to be far too abstract. In terms of real-life situation, Reich offered the following comparison. In 1960, the typical executive officer of the core American corporation earned about $190,000, approximately 40 times the wages of the company's average factory worker. By 1988, the chief executive officer (CEO) of one of America's 100 largest corporations received on average $2,025,000, which amounted to 93 times the wages paid to the average production worker of the same corporations. Even after tax the CEO's earnings were 70 times those of the average worker.

Not only that the gap was widening, but, pointed out Reich, "by the 1990s, many jobs failed to provide a living wage... The number of impoverished working Americans climbed by nearly 2 million, or 23 per cent, between 1978 and 1987... Among full-time, year-round workers, the number who were poor climbed even more sharply - by 43 per cent."

By the beginning of the 1990s another major change was becoming palpable in America, the emergence of a group of professionals whom Reich designated as symbolic-analytic services personnel and symbolic analysts for short, engaged in problem-identifying, problem-solving, strategy-brokering activities. Included in this category were those involved with global finance and ICT, both of which attained a prominent position in the American economy and society in the 1980s and into the 1990s. Typically these were top-level bankers, lawyers, accountants, software engineers, researchers, public relations executives, writers, journalists, television and film producers, and a host of rapidly increasing new jobs, together constituting about 20 per cent of the U.S. workers. This technology-savvy, globally-mobile, high-proficiency segment of the population symbolised New America at the beginning of the 1990s, and the creamy layer in terms of affluence.

What is really significant is that this segment of affluent Americans began to contract out of society at large. "America's symbolic analysts have been seceding from the rest of the nation," pointed out Reich. "The secession has taken many forms, but it is grounded in the same emerging economic reality. This group of Americans no longer depends, as it once did, on the economic performance of other Americans. Symbolic analysts are linked instead to global webs of enterprise, to which they add value directly."

Reich identified different forms of this secession. There was a perceptible physical secession. The symbolic analysts started pulling out of crowded cities to set up exclusive residential communities of their own, far from the madding crowd. These new affluent residential communities came to have distinct characteristics of their own. They set up their own schools, recreation centres and other forms of community institutions for the exclusive use of the residents. The attempt has been to evolve homogeneous enclaves within which their earnings need not be redistributed to people less fortunate than themselves. The basis of that homogeneity, of course, was the level of income. "There is only one thing Americans increasingly have in common with their neighbours," wrote Reich, "it is their income levels." Such homogeneous affluent communities naturally protected themselves against external intrusions. By 1990, private security guards comprised fully 2.6 per cent of America's workforce, double their percentage in 1970, and outnumbering public police officers in the entire country.

Privatisation of this kind was facilitated by public policy, to be sure. The Reagan administration brought about a sharp reduction in top income tax rates from 50 per cent to 33 per cent. While some increases were made in the rate of capital gains taxes, the net effect was to shift the tax burden from wealthier to poorer Americans and to a reduction of public spending. For instance, physical capital investment dropped from over 24 per cent of total federal outlays in 1960 to less than 11 per cent in 1991, and public funding to train and retrain workers dropped by more than 50 per cent in the 1980s.

In sum, in the land of plenty private affluence and public squalor go together - a fact powerfully brought out by John Kenneth Galbraith in his book The Affluent Society many decades ago.

IN the 1990s, America became decisively more affluent and so the claim based on the census data that "American standards of living increased markedly" during that decade need not be contested. But it should be probed whether that marked increase was of the kind that took place in the 1980s.

Although the 1990s started on a depressed note for the American economy, by 1992 the upturn had started. And the period from 1993 till the end of the decade, especially the second half of the decade, was one of remarkable achievements and prosperity. (The following discussion on the economic performance of the decade draws on an article by Robert Pollin, "Anatomy of Clintonomics", New Left Review, May-June 2000 and another by Robert Brenner, "The Boom and the Bubble", New Left Review, November-December 2000). Some analysts claim that this period saw the best performance of the American economy since the "Golden Era" of the 1950s and 1960s. The achievements were quite impressive. The GDP growth rate of 4.15 per cent for the years from 1995 to mid 2000 came very close to the average rate of 4.2 per cent of the 1950s and 1960s. Labour productivity, particularly in the manufacturing sector, which was sagging for a long time increased at a rate of 2.7 per cent, about the same as in the immediate post-War decades. Real wages moved up at the rate of 1.8 per cent, unemployment was low and inflation was kept under control. Thus, by standard indicators the second half of the 1990s was one of unprecedented achievements since the long-term downswing of the American economy from the early 1970s.

It was also a period of high levels of profits both in manufactures and in finance. In the former, the way to high profits was via a brutal process of rationalisation and downsizing that increased labour productivity. Financial institutions, banks particularly, achieved their highest rates of return on equity in the post-War era, and finance sector profits came to constitute a greater percentage of total corporate profits than at any time in post-War history.

Such good performance and the eagerness of the rest of the world to share in the American prosperity led to the spectacular performance of the stock market. Equity prices began to soar as never before. The East Asian currency crisis of 1997, the Russian crisis of 1998 and, above all the sudden collapse of the privately sponsored, but high-profile Long Term Capital Management (LTCM) hedge fund in September 1998 caused some hiccups, but from 1995 till late 2000, the stock market was in a bullish mood, thanks, in no small measure, to the performance of the new economy, and equity prices kept surging. Brenner notes that by the first quarter of 2000, the value of corporate equities, their market capitalisation, had soared to $19.6 trillion, up from $6.3 trillion in 1994, and market capitalisation as a percentage of GDP tripled from 50 per cent to 150 per cent during roughly the same period. Stock prices rose some 14 per cent a year above the growth of the real economy, a rate much higher than in previous periods.

American stock holders suddenly found themselves exceptionally wealthy. This wealth effect, or asset inflation, had its impact on consumer spending and borrowing. Both increased substantially and kept up the demand for goods and services, internally as well as from other parts of the world. Large-scale borrowing also led to the demand for houses going up. And, for a while the good performance of the economy and a robust stock market reinforced each other. So rosy and reassuring was the mood that Alan Greenspan (the man who then shaped America's monetary and interest rate policy as the head of the Federal Reserve System, and who still continues in that job under a new President) remarked in 1999: "We are witnessing, this decade in the U.S., history's most compelling demonstration of the productive capacity of free peoples operating in free markets." That the boom would bust in less than two years just could not be imagined at that time! But that is a different story.

Meanwhile, the affluence of the 1990s could not escape one of the characteristics that accompanied the affluence of the preceding decade - growing inequality. In fact, an affluence generated by a stock market boom naturally favoured the economically better placed. Brenner points out, "... between 1989 and 1998, the top 1 per cent increased its net worth by 11.3 per cent, the top 5 per cent by 10 per cent, the top 10 per cent by 4.1 per cent, and the bottom 90 per cent by minus 4.4 per cent."

In order to gain a feel for these aggregate statistics, let us clothe them in some real life situations. These are provided by another commentator of the contemporary American social scene, Thomas L. Friedman, the Pulitzer Prize-winning foreign affairs columnist of The New York Times. In his book The Lexus and the Olive Tree, first published in 1999 with an updated edition in 2000 (Anchor Books, New York), Friedman locates the American economy and society in the context of rapid globalisation and admits that "during the 1980s and 1990s, as globalisation replaced the cold war system, income gaps between the haves and the have-nots within industrialised countries widened noticeably". He then uses his skill as a journalist to tell a real life story about it woven around the National Basketball Association (NBA), its players, owners and spectators. The star player of the NBA, of course, is Michael Jordan whose total earnings in 1997 were estimated to be around $80 million (equal to the annual salary of some 2,700 teachers at $30,000 a year). Playing with Jordan on the 12-member team was Joe Kleine "someone whose shooting skills were only marginally less effective than his (Jordan's), someone whose jump shot was only slightly less accurate, someone whose free throw shooting was only slightly less consistent, someone whose defensive skills were only slightly less intense," but whose annual earnings were only the NBA minimum of $272,250. A difference of almost 300 times in earnings between two members of the same team with about the same professional skills. And why? Because Michael Jordan being Michael Jordan is able to supplement his professional earnings through commercial activities such as endorsements, sale of autographs and many other ways, and use this to get the NBA to pay him much more than the minimum that his less fortunate teammates receive, thus to become more of a celebrity, and so on. Friedman refers to this as the "winner takes all" phenomenon, which implies that those who are ahead in the line (any line) can move up much faster while the tail-enders have a hard time just to defend their level, thus leading to increases in inequalities over time, especially when the going is good.

Friedman brings out a couple of wider social consequences of the phenomenon. As the fortunes of the NBA go up, the sports association will be bought up by new owners, not necessarily sports lovers, but profit lovers. The NBA's owners used to be local businessmen from the community, says Friedman, who would invite players on private vacations with them. But increasingly sports associations are owned by huge, global corporations like Cablevision System Corporation and Time Warner, creating a gap between players and owners.

Nor is this all. The gap between the players and the gap between players and owners is getting reflected in a gap in the stands. To pay the huge salaries of players and to make reasonable profits beyond that, "ticket prices are being put out of reach of all but the rich, and the stadiums are being segmented by classes, with the poor slobs who can afford only $75 ticket sitting crammed into the bleachers eating peanuts, while the rich sit in skyboxes, with plenty of leg room, and dine on crab cakes brought by waitresses," writes Friedman. No longer are stadiums the kind of shared public space that brings together people from different walks of life, said a Harvard political theorist whom Friedman quotes.

This is not a peculiarly American phenomenon. It draws attention to what is happening all around, even in India. The "winner takes all" principle is an inherent feature of all capitalist economies where the power of resources is the basis for accumulation and affluence and where the market, driven by economic power, is the arbiter of all major decisions. A system like that tends to make the rich richer and widens the gap between the top and the bottom as growth takes place and the market spreads both territorially and in terms of activities. Hence all claims of improvements in standards of living of the people of a country as a whole must be evaluated in greater detail to get to know what the aggregates hide.

A final point. In capitalist societies the disparities resulting from affluence can be mitigated to some extent by redistributive measures and other forms of support to the indigent. Most states in capitalist societies do this, some more, some less. The welfare states of the Scandinavian countries have been the best examples of the positive possibilities in this sphere. America too started implementing welfare measures of various sorts starting with President Franklin D. Roosevelt's New Deal. But a conservative reaction set in whose great representative was President Reagan whose administration in the 1980s dismantled a wide range of welfare measures on the notion that the role of the state must be strictly limited in the economic sphere. The accent then was on reducing the tax rates. President Clinton in the 1990s promised more social welfare measures. But the commitment of the Clinton administration was primarily to wiping out the fiscal deficit. This was achieved partly by reducing federal outlay and partly by benefiting from the increased tax revenues resulting from soaring capital gains. With the more resolute commitment to the ideology of "free capitalism" both in the U.S. and throughout the world, the chances are that American society of the first decade of the new century will reap all the consequences of uncontrolled capitalism.

Dr. C.T. Kurien is Professor Emeritus, Madras Institute of Development Studies, Chennai.

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