After the Second World War, a ravaged world began to reconstruct itself. The devastation left behind convinced all nations that in the future they should strive to avoid a conflict of such massive scale, and although during the Cold War there have been situations close to escalating into a full-scale nuclear war, the planet has remained mostly at peace. As a result, throughout the second half of the 20th century and the beginning of the 21th century, the global economy experienced a growth never had seen before. The gross domestic product and income per capita of most countries skyrocketed, economies began to transition from industrial to service based ones; the middle class became the driving force of societies, as more and more people escaped poverty. But, even so, income inequality continues to grow around the world, the rich distancing themselves even further from low earning individuals, at such a level that, a large part of the global wealth is concentrated into the hands of only around 1% of the population. This has led to an ever growing influence of rich individuals on the world stage and social unrest of the masses that feel neglected in favor of their richer counterparts. Governments should start taking action against this issue, which if left unchecked, might undermine their authority. This essay will present two of the causes of income inequality and will analyse solutions designed to tackle them.
One cause that has led to rising income disparity is political polarization (Bonica, McCarty, Poole and Rosenthal, 2013). In the United States, the two political parties in the two-party system, the Republicans and the Democrats, have experienced since the 1980s a widening ideological gap (McCarty, Poole and Rosenthal, 2006), moderate politicians almost completely disappearing from the Congress. This, combined with lobbying by big companies and donations from top 1% earners, results in a legislative gridlock and filibusters that block legislation that addresses the poor in an effort to fight income inequality and are overcome only with key actors known as ‘pivots’. A solution would be the change of the political system to a more representative one. As stated in the 2013 article, “the United States is more majoritarian in its political institutions than many nations” (p. 118). Each state has allocated two senator seats that are won by the party with the majority, not taking into account the voters choice. The same can be said for the electoral process that chooses the president which, in the last elections, lost the popular vote. As such, The Senate and The Presidency should be elected representatively to the citizen’s vote. This change would lead to a greater implication of the society in politics and would allow more parties to join The Congress and depolarise the government, overcoming the political gridlock and steering the politicians towards more compromises on legislation; maybe even coalition governments. But rising income inequality, as a result of political polarisation, appears mostly in the United States (Fenzl, 2018) or countries that have similar political systems. Elsewhere, the increasing disparity leads political parties towards having the same stance on economic policy, therefore mitigating the cause. Also, even though the society is in favour of political change, politicians might refuse it, leading to protests and insurrection of the masses, which would have disastrous effects on the economy and the credibility of the executive.
Kochan and Riordan (2016) state that another factor that influences income inequality is skilled-biased technological change (SBTC). The demand for highly-skilled workers increases as technology evolves, creating a shortage in the availability of those individuals, while later intensifying the competition for lower-earning jobs of lower- and middle-skilled workers by requiring them to increase their mobility. Others argue for the emergence of “job polarisation”, a reduction in middle-skill workplaces in favor of more low- and high-skill jobs which result in employees either having a low or high income. Thus, education reforms and better collaboration between companies and teaching institutions are needed for reducing SBTC, hence income disparity. Although change in educational policy requires money and time to perfect, education being a long-term investment, it is undoubtedly needed for “a highly educated, skilled and innovative workforce”, which could support high-wage economies, in a globalised world where human capital can be outsourced. Reforms could, over time, increase the availability of a better trained workforce and reduce the differences in income, while also diminishing the need for outsourcing.
In conclusion, rising income inequality can be tackled through different methods that address certain causes. Political reform is one of them and is needed for a government to remain credible and fight this issue, but as stated above, political polarisation on economic issues is not present in most democratic countries and can only be applied in a few to resolve the problem. Educational reforms are a better solution, as they can be applied on a larger scale, although they imply large capital and time consumption, they have always led to the advancement of societies, from agrarian to industrial to service based, and lower differences between classes, overall increasing the standards of living across the world.
Business Side Of Income Inequality
I will preface my remarks with a caution about being too focused on inequality. I care much more about poverty. For example, income distribution is far less equal in my own country of the United States than in a country such as Cambodia. Yet the poor in America have much higher incomes than the average Cambodian. Business practices affect inequality in three different ways, through corruption, scalability, and the search for undervalued resources. I close with a story about a for-profit business helping people who have lost their jobs.
I first studied income distribution when I was in my early twenties. As you can see from my hair color, that was a few years ago. Professor Martin Bronfenbrenner, an expert on the subject, told us that Haiti had the most unequal income distribution. This was during rule by the Duvaliers, Papa Doc and his son Baby Doc. The inequality arose from government favors to key business leaders, such as granting monopolies and government contracts. The rich got richer, and the poor people got less for the money they spent and had fewer opportunities to earn money. The problem was not business, but the collusion between corrupt government officials and dishonest business people.
This pattern plays out over and over again. The extreme examples include the Philippines under Marcos, Indonesia under Sukarno, and today Cameroon under Biya. And other cases are abundant. Business will be corrupt where government officials are corrupt. But where government is generally honest, business will be generally honest. Business leaders will reflect the morals of the government and the society under which they operate.
Reducing corruption produces two good results: it increases total economic activity, while also increasing the welfare of poor and middle class citizens. The sad part of this issue is that I cannot tell you how to get from here to there. Take Sicily. The island has a history of corruption dating back hundreds of years. How can Sicily become more like Sweden? I don’t know, but I am certain that Sicilians would be much better off with less corruption.
Now I turn to the greatest force generating economic inequality today: scalability, in technology and in business. Venture capitalists considering an investment in a start-up will typically ask, “Will it scale?” A simpler question would be, “If we want twice as much revenue, do we have to work twice as hard? Consider Google. Once it built its search engine so that one person could use it, providing the service to additional users was very easy. We say that it scaled. My maternal grandfather was a farmer, who had about 40 hectares of scrubby land. If he had been a great farmer, he might have been able to buy more land, increasing the scale of his farming. The benefits of his great ability might be spread over 100 hectares. That would not have made him rich, but he would not have been so poor.
Now think of a scientist developing better seeds or fertilizer or pesticide. If this scientist is great, benefits could be spread over millions of hectares. The gains would mostly go to the consumers of agricultural products, with some also going to farmers using the scientific advances, but a small share of the gains would go to the scientist or the company employing him or her. That small share, multiplied by huge, global value, produces a large fortune. The scalability of the achievement increases inequality, at the same time that it makes everyone better off: scientists, farmers, and consumers of agricultural products. My other grandfather was a clerk. He made a living doing arithmetic. If he had been a really great clerk, he might have been promoted to a manager of other clerks, helping six or seven other clerks do better work. But today a computer programmer can help millions of clerks do better work. The programmer, or his company, will gain a portion of the benefit, increasing economic inequality while the overall economy grows larger.
This concept extends to managers of organizations. A person who improves the overall performance of a large corporation, helping thousands of workers be more useful, has added billions of rubles of value to the world. The ability of corporations to benefit from the work of their scientists, engineers and managers increases the compensation of these workers. Today in my country, very few of the wealthy people inherited their fortunes. Most of them earned their fortunes by providing great value. An alternative view of inequality derived from older experience. In this view, we all produce goods and services, but people in power extract a larger share. That certainly appeared to be the case in feudal societies. And corrupt countries validate this view: that some of the rich stole their fortunes. But great wealth can also come by providing value that scales across the economy. Public policy makers should understand that this source of inequality is actually good.
So far I have talked about business increasing inequality through corruption and scalability of innovation. Now let’s turn to how businesses reduce inequality, and this is a wonderful story. Businesses use resources, including land, raw materials and labor. Businesses are always alert for undervalued resources, which means resources that can be bought cheaply. When businesses can find people willing to work at low wages, they will hire them. As businesses compete for these low-wage workers, the wages and working conditions improve. After 1945, Japanese labor was cheap. American companies imported many products from Japan, and this use of undervalued labor led to higher wages for the Japanese. The same process pushed wages up in Hong Kong, Korea, Singapore and Taiwan, the “Four Tigers” of Asia. Poverty was greatly reduced in these countries.
The greatest example of improved conditions for poor people is China. Hundreds of millions of people lived on dreadfully low incomes under communism. After the country opened up for business, production increased and poor people did better. When international trade increased, the poor did much better. China’s neighbors learned the process, and growth has helped poor people across Asia, especially in the poorest countries of southeast Asia. We define extreme poverty as living on less than $1.90 per person per day. That’s about person per day. The number living in extreme poverty has dropped by over one billion people in a 30-year period. This is the greatest reduction of poverty in the history of the world. Let me repeat that: The greatest reduction of poverty in the history of the world.
This wonderful achievement was not the result of a government initiative. Government provided roads, a justice system, and other necessary processes, but it was private efforts that made the difference. Adam Smith had the great insight that widespread benefits come from people in business pursuing their own self-interest. And this alleviation of poverty is a tribute to the power of self-interest, pursued honestly.
Profit-seeking businesses are a part of the evolutionary process of the economy. At their best, they find ways to improve the world, by innovation in technology and business processes, through using undervalued resources, and offering products to underserved markets. In an honest society, profit-making businesses help the poor as well as the rich.
Economic Inequality And Education In Present-Day America
As an individual who is part of an American working-class family who came to the United States seeking a better future, I have been raised to believe education was the direction to a better future and economic stability, which to this day many Americans still believe. Economic inequality was seen throughout my childhood up to the present-day and although it might not have been clear back then, I started noticing little things throughout the years. Throughout my education, I had free-lunches at school while I noticed several of my classmates were given an amount due to the cafeteria every day. Little did I know the reason for owing to the cafeteria was because our parents had an income which was not low enough to be considered in the “lowincome” bracket and schools assumed families could pay for the students’ lunch. Another aspect of income inequality can be seen when students are trying to get into university/college and cannot afford to pay fees or tuition out of their pocket, so they apply for financial aid. Not all of the students are fortunate enough to be helped with financial aid because their parents’ income is not too low and the student is expected to apply for loans or scholarships.
All throughout my life, I was motivated to do well in school and go after my list of educational goals, which ended in pursuing a college degree no matter the challenges I faced. However, as I grew up and started noticing issues happening around me, I noticed pursuing a college degree does not secure a better, well-paid lifestyle. This is something Nick Hanauer points out in his article, “Better Public Schools Won’t Fix America”, as he says how education is not the main problem in America, rather economic inequality. No matter what educational level an individual pursues, there will still be income gaps that could affect individuals in all levels of education and life. Throughout his writing, Hanauer establishes his authority by stating his own perspective on the issues and realizing how after all the organizations he had taken a part of over the years and his ability to devote his time and money onto trying to improve education in America, he was ultimately fighting for the wrong thing. Hanauer states how he had “devoted countless hours and millions of dollars to the simple idea that if we improved our schools… American children…would start learning again” and points out he had taken part of an event next to Bill Gates, Alice Walton and Paul Allen in donating money for charter schools (2019).
Learning about everything that Hanauer has taken a part of and has devoted his time to, makes him a reliable individual in the topic of economic inequality and education because he is a wealthy individual himself who sees the mistake in the gaps of the economy. Stating that after all he did and who he worked beside, he was incorrect, Hanauer expresses he realized decades later how “educationism is tragically misguided” making economic inequality part of the real problem in America, not education as many believe (2019). The writer continues stating how he realized the problem to what he calls “educationism” is actually not trying to get the best education, because America does not lack a good education system, rather American workers being underpaid and no matter what educational level they have achieved, workers “have seen little if any [economic] growth since 2000” (Hanauer, 2019). Hanauer’s experience and perspective as a wealthy individual allows his readers to understand his point of view and see the real economic problem in America.
Furthermore, Hanauer appeals to the reader’s logic by using statistics and history in order to make his argument worthy towards his readers. Hanauer states a little after his introduction, how by the year 1970, America’s education system started to lose its way which caused the power of the middle-class people to decrease as well as political conflicts to arise (2019). The writer continues stating that the middle-class individuals are underpaid because of how “40 years of trickle-down policies have rigged the economy in favor of wealthy people like me,” and this allows Hanauer to be seen as a reliable individual by those individuals in the high-class because he knows about policies and includes himself, as a wealthy individual, in explaining what’s wrong with the economy, and having someone from the same status stating something, makes it more believable. He also uses statistics from the richest Americans and discusses how 40 out of 50 largest family foundations, “declare education as a key issue” (Hanauer, 2019). The writer continues stating that during the 1970’s not many people were obtaining high school diplomas, compared to the 90% today (Hanauer, 2019).
Furthermore, even though people believe that education is the cause of economic inequality, Hanauer states how the number of people who pursue a college degree has more than tripled since the year 1970, and this is what makes Hanauer’s argument believable because if education was main the problem in our economy, then not many people would pursue an education (2019). Moreover, part of the problem is that even if people obtain college degrees, it does not balance out the economic gaps that exist in our economy. The intended audience of Hanauer’s article are high-class individuals because he, as a wealthy individual himself, knows the wealthy class will always have the power to change things, and they must see the reality in economic inequality surrounding them. In his article, Hanauer assumes individuals in the high-class believe that poor education in America is what causes economic instability, and he tries to imply his realizations throughout his article by describing how he was incorrect in also believing that view. He seems to urge his audience to try and decrease the economic gaps between classes of individuals and balance out the wealth between high/middle/low class individuals because he realized the blame lands ultimately on the wealthy for not wanting to share the wealth and simply making individuals believe that education is the problem with the economy. Hanauer states how “educationism appeals to the wealthy and powerful because it tells us what we want to hear… can help restore shared prosperity without sharing our wealth or power,” and this allows Hanauer to demonstrate his knowledge about how the wealthy choose not to look at the issues around them that involve economic inequality because it does not benefit themselves (The Atlantic, 2019).
As a wealthy individual, he makes himself more credible towards his readers in the high-class because they will believe him as he is of their status and is giving them another perspective to look at economic inequality and telling them the truth that they are blinded to look at. Moreover, the use of statistics and history allows high-class individuals to view Hanauer as an educated individual because he did not rely his argument solely on his own perspective, rather incorporated statistical facts and historical events. Pursuing an education does not completely mean a better lifestyle with a higher income, neither does it mean going from a low-class to a high-class income bracket just because of a degree, as many believe. As Hanauer stated throughout his article using historical facts, statistics and his own perspective and knowledge, education is not the main problem in America, but the economic gaps that are widening as years go by. A solution for this economic inequality issue is to balance everyone’s wealth and be able to prosper with hard work and dedication, rather than stay in economic instability for the rest of person’s life. Without a doubt, education is much easier to achieve in this century than it was years ago, yet it has never been the main problem as Hanauer points out. It is up to the wealthy class to be able to take action and be willing to make a change that will benefit all American citizens instead of simply avoiding the issue and focusing on their own benefit instead of all.