Capitalism fails American middle class

0 Comment(s)Print E-mail Shanghai Daily, September 26, 2011
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We know one thing for sure: the gap between rich and poor in the US has widened in the past 30 years.

In 2007 the top 1 percent of earners took home 18.3 percent of national income - that is more than two and a half times their level in 1973, when their share was 7.7 percent.

For a long time, the US was in denial about its growing income gulf. The middle class clung to the old promise of mass affluence - and used home equity loans and credit card debt to make that dream real.

The elite, particularly the conservative intellectuals who have dominated the national economic debate since the Reagan era, insisted that growing income inequality was propaganda invented by the class warriors on the left, and cited robust consumer spending as evidence.

In a 1998 speech at Jackson Hole at the annual gathering of American economists and economic policy makers, Alan Greenspan, then chairman of the Federal Reserve, argued that what mattered was what people could buy, not what they earned.

"Inequality in consumption, when measured by current outlays, is less than inequality in income," he said. Greenspan illustrated his point with some unusual measures of inequality - ownership of consumer goods like dishwashers, microwaves and clothes-dryers. The comforting result? Even though inequality as measured in dollars was growing, when measured in dishwashers, microwaves and clothes dryers it was decreasing.

The 2008 financial crisis and the prolonged economic downturn has eviscerated the consumption defense as ruthlessly as it has burst the credit bubble that allowed the middle class to feel richer than it was.

Fact of life

Income inequality is today a fact of life, as essential to doing business as the rate of inflation: Proctor & Gamble executives study the Gini co-efficient, a technical measure of income inequality, to divine what is happening to their erstwhile middle-class consumer base, and have decided the best strategy is to give up on the center and to market instead to the top and the bottom.

Citigroup advises investors to design their portfolios around income inequality. It calls this strategy the "Consumer Hourglass Portfolio" and has created an index of companies that serve the rich and the poor while avoiding the vanishing middle.

Once income inequality has become a tool for marketing executives and stock pickers it becomes pretty hard to deny. But we can still argue over what is causing it.

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