Why the Super-Rich Get Richer

A story at WaPo called This chart explains everything you need to know about inequality gives the following very interesting graphic:

It plots the average income for the top 1% horizontally against the average income for the bottom 90% (vertically) in year-by-year dots, showing that from the 1930s to the mid-1970s, only the bottom 90% saw incomes rise meaningfully. Since the mid-1970s, only the top 1% have seen incomes rise meaningfully.

The author of the WaPo piece tries to paint an explanatory narrative around fiscal policy, blaming Reagan's tax reforms (which favored the rich) for the sudden shift in incomes, which is silly, because taxation is taxation and income is income. You have to make an income for it to be taxed. The Reagan tax reforms have little to do with what's going on in this graph.

If you want to understand income inequality, you have to be willing to look at the bigger picture of what happened to wages after the introduction of mass-produced computer technology in the mid-1970s.

Various versions of this graph can be found all over the Internet and economists agree on the fundamental soundness of the underlying data. The graph basically shows that wages parted company from productivity in the 1970s. The epochal event that transformed economic reality in the mid-1970s was the introduction of mass-produced microprocessor technology, first in pocket calculators, then in affordable computers.

Not coincidentally, the mid-1970s was (were?) also when the 1% started to see their incomes explode.

It's not hard to understand what happened, although economists, as a group, seem to be incredibly dense on this point. Computer technology allowed radical increases in productivity. But when you hand a business owner a radical increase in efficiency, the business owner doesn't react by paying people more, or hiring more people, etc. He or she simply pockets the efficiency gain, whenever possible. ("Margin expansion" is one name for this.)

The fantastic efficiency gains made possible by computers (and Internet and mobile) have mostly not been passed through to consumers. They've been pocketed by the winners. That's what's going on here. It's not rocket surgery.

The other aspect to computer technology (computers, Internet, mobile) that's wrecking the Old Economic Order is the ability of computation to put people out of work. Some extreme examples:

  • At its peak in 1988, Kodak, the iconic American photography company, had 145,000 employees. By 2010, digital cameras were in cell phones. In 2012, Kodak filed for bankruptcy.
  • When Facebook purchased WhatsApp for $19 billion, WhatsApp had 55 employees serving 450 million customers.
  • Uber, an app created by two guys, is putting around 100,000 cab drivers out of work. In 2000, there were 233,000 cab drivers in the U.S. We don't know how many there are today, but in San Francisco, average monthly trips by cab have fallen 65% since Uber came along .
  • According to Uber, the median wage for an UberX driver working at least 40 hours a week in New York City is $90,766 a year. In San Francisco, the median wage for an UberX driver working at least 40 hours a week is $74,191 . Does that sound like a plan for reducing income inequality? Or increasing it?

    The standard dogma preached by economists is that people displaced by technology will find more meaningful knowledge-based work elsewhere. This was true, for a while. If you lost your job in the shoe factory, you could go back to school and become a programmer.

    But now we outsource a lot of programming jobs to eastern Europe, India, etc. So that strategy doesn't work very well.

    So go back to school and become a doctor or a teacher. Right?

    That doesn't work either now.

    From a story at alternet.org :

    In coming years, software apps will be doing many of the things physicians, nurses, and technicians now do (think ultrasound, CT scans, and electrocardiograms).

    Actually, think surgery . Many procedures (try 400,000 a year ) are robotic now.

    Meanwhile, the jobs of many teachers and university professors will disappear, replaced by online courses and interactive online textbooks.

    You can pooh-pooh these trends all you want, but the fact is, the economy is being transformed and millions of people are either being put out of work or having their jobs crapified into part-time/on-call work with few or no benefits; "efficiencies" are accruing to the few at the expense of the many. And technology is the key.

    Bottom line, the era of "technological unemployment" (a term coined by Keynes in 1930) is at hand, and in the new economic version of musical chairs, the winners only get richer, not more numerous .