What Does Income Inequality Really Portend for the Future?

Income inequality has become a hot issue in the current political debate, but what does income inequality really portend for the future?

MarketWatch's Darrell Delamaide had an article Wednesday arguing that the issue of income inequality in the American political debate is not going away anytime soon. Delamaide: "[T]he debate about [income inequality] is not likely to be in a quiet room but in very public places throughout the presidential campaign." Delamaide cited Republican presidential candidate Mitt Romney's support of American capitalism as an example of how perhaps a rising tide does not lift all boats.

Delamaide also cited a recent survey from the Pew Research Center that "found that two-thirds of Americans now believe that there are 'very strong' or 'strong' conflicts between the rich and the poor, up from slightly less than one-half in 2009." Even further, according to a recent Washington Post-ABC poll, 55 percent of Americans "think that unfairness in the economic system favoring the wealthy...is a more important problem than over-regulation interfering with the free market...which 35% see as the bigger problem."

Thus, Delamaide views income inequality as a "big-picture issue" that transcends economic statistics and everyday political rhetoric. Delamaide went so far as to suggest that our current predicament portends a future "dystopia", or "a place where life is full of hardship and devoid of hope." With respect to this future dystopia, Delamaide cited the World Economic Forum's "Global Risk 2012" in that dangers could arise "if declining economic conditions jeopardize the social contracts between states and citizens. In the absence of viable alternatives, this could precipitate a downward spiral of the global economy fuelled by protectionism, nationalism and populism."

Delamaide concluded his analysis in that the situation is quite pessimistic, and "there's plenty of gloom out there -- maybe too much." Even so, he conceded that "this is the world, the real world, that our government and economy has to deal with." And even in light of political zings and policy debates, "the attention of the public has largely shifted to this bigger, fundamental issue confronting the nation -- nothing less than the loss of the American dream of a successful country with prosperity for all."

On Thursday, the Freakonomics blog featured an interesting post from economist Justin Wolfers on income inequality. Wolfers: "A lot of our political debate boils down to questions about equality of outcomes versus equality of opportunity. But it turns out that they're pretty closely related." Wolfers' analysis suggests that income inequality and intergenerational mobility are closely related. According to Wolfers, this idea is "political dynamite" because "[i]f income inequalilty in one generation can be linked to unequal opportunity in the next, then income inequality can't be dismissed as the politics of envy."

Wolfers' discussion plays well into the issue of the wealth gap between older Americans and younger Americans. According to an article from Hope Yen in November 2011, "The wealth gap between younger and older Americans has stretched to the widest on record, worsened by a prolonged economic downturn that has wiped out job opportunities for young adults and saddled them with housing and college debt." This old-young wealth gap has definitely taken on a political tone. As Republican presidential candidate Newt Gingrich said on Thursday night during the GOP debate: "I have an offer to the parents of America: Elect us, and your kids will be able to move out, because they'll have work."

Gingrich's comment was bold, but at this point, how realistic is it to hope that the government (via deliberate action or inaction) can resolve unemployment? Has the situation become too hopeless? Speaking with Marketplace's Kai Ryssdal, a guest on the Jan. 13, 2012 episode of the radio program summed up the situation well: "I don't see anything [pertaining to a full economic recovery] in the horizon. Maybe it's just because the recession's lasted so long, but people don't really have an outlook for the future very well... It's wearing on me. The mood, it's getting long."

Of course, problems with income inequality in capitalist systems are far from new, but as the wealth gap is widening to such a degree, one has to wonder if the problems are systemic, structural. As I discussed previously, in the 1800's the philosopher and economist Karl Marx discussed problems in the inherent structure of the capitalist system -- in particular, the falling rate of profit and concentration of capital. Marx saw these inherent structural issues in capitalism as building up to a major capitalist crisis wherein the economic "superstructure" would give way and another theoretical superstructure would take the place of capitalism. Some commentators including Richard Wolff and Charles Hugh Smith view our current global financial crisis as being a macroeconomic symptom leading up to a future collapse of the capitalist superstructure.

Interestingly enough, two recent stories from Zero Hedge reinforce the idea that capitalism is headed for a superstructural crossroads. The first Zero Hedge story from Jan. 19, 2012 discussed how KAM LP's Michael Krieger believes that "we are in a period of building tension". Krieger referenced the Occupy movement as being crucial to reacting to the status quo. Krieger: "The emergence of [Occupy Wall Street] was a huge deal." Krieger also referenced the futility of the political process and suggested that the "cultural divide" in the US is fabricated for the sake of distraction. Krieger wrote, "The reason I don't write about markets so much anymore is because I don't believe there are markets any longer" and went so far as to say that the current marketplace is like a hologram, a casino to take advantage of the "uninformed masses".

Interestingly enough, Krieger noted, "The longer the period of tension building the more explosive the release will be when it ultimately happens." He later continued, "[h]umanity is waking up and beginning to rise to the occasion. These moves by [political leaders] are last ditch attempts to preserve their system of control and their positions in society. Unfortunately for them, we are in the midst of a mega cycle of structural change and everything they are fighting to save will end regardless of what they do."

The second story from Zero Hedge from Jan. 20, 2012 on this line of thought discussed some of Marc Faber's comments on the economy. Faber: "If you think it through and you are as bearish as I am, and you think the whole financial system will one day collapse, we don't know if in 3 years, or 5 years, or 10 years, but one day there will be a reset, and everything will be essentially started anew, then you are better off in equities than in government bonds, because a lot of government bonds will either default or they will have to print so much money that the purchasing power of money will depreciate very rapidly."

While it may not be obvious at first, both Krieger's and Faber's sentiments seem to resound Marx's historical forecasts regarding the frailties of the capitalist system. Krieger's points in particular are pretty much summing up the relationship between "ideology" and "false consciousness". Whereas a thinker like Milton Friedman or Ayn Rand may suggest that capitalism-in-theory leads to less economic inequality, we seem to be seeing the results of the course of capitalism and the concentration of capital. It is nearly a contradiction: If free-market capitalism over a 500-year period grew and evolved to this point, how can more free-market capitalism be the solution? And the situation becomes more precarious with further thought.

While it is apparent that income inequality is becoming a societal issue, what remains unclear is how to resolve it. Should we let the free market resolve the issue? Should the government spend more money on education and job training? Should the government take a greater role in hiring? As I hope to explore further in a future article, what is important to acknowledge regarding the income inequality debate is that to a certain extent, this is a situation that has been building up for decades -- even going back to before the Great Depression. Per the article from Charles Hugh Smith, it is as if the course of capitalism is being slowed down and delayed by virtue of government intervention.

Given the history of capitalism for the past 500 years or so, it is highly plausible that were there no government intervention, economic crises would have resulted in a disruption of the current superstructure -- leading into perhaps barbarism or something else. Despite delays of this "inevitable" free-market crisis via phenomena including Keynesian policy, war, credit expansion, boosted consumption, and expanding the workforce, many believe that we are staring down the barrel of a very serious and catastrophic financial crisis -- and per Smith, it would appear that there are very few cards left to play.

Given that we are dealing with capitalism-in-reality and not capitalism-in-theory, the solution to income inequality (from a macro-historical perspective) may not rest in the free market. To put the matter into a realistic perspective, one has to wonder if the markets would get spooked to the point of collapse were free-market advocate Rep. Ron Paul elected president -- thereby speeding up this superstructural cycle in progress. Or perhaps if Paul were elected president, the markets would skyrocket with the hope of a renewed free-market ideology (but at this point, the underlying issues go beyond ideology). Even then though, the specters of climate change, income inequality, class warfare, and high unemployment remain. Though there may be temporary fixes to the problem of income inequality in the short-term (as Jim Cramer has said regarding Europe, "kicking the can down the road"), these do not correct the underlying problems with the free market.

Of course, one could argue that the marketplace and free enterprise is the solution, and that is a fair argument; we've been hearing that from the Republican candidates for some time now. Even so, I recently discussed the problem of limited resources and climate change; if the free market inevitably results in the planet destroying itself, then that cuts to the heart of whether the free market is sustainable after all. (As we see with SOPA and PIPA, technological developments are beginning to encroach upon property rights -- to the point of effectively compromising intellectual property, is this another symptom of inevitable superstructural change?) Whereas we see these cracks and symptoms of underlying structural issues, it appears that income inequality is merely a side-effect of the financial game. Even Alan Greenspan has conceded structural flaws with the free market model; maybe the market will not take care of everything. And interestingly enough, though Americans are concerned with income inequality, a Gallup poll from February 2010 showed that 61 percent of Americans have a positive view of capitalism. Thus, Americans seem to like capitalism and free enterprise, but are concerned about income inequality and conflicts between the rich and the poor.

Now, if we carry this discussion forward, we end up contemplating the idea of "class consciousness" (or lack thereof). As Krieger said, humanity is waking up. Even further, the emergence of the Occupy movement was significant. Are these symptoms of an emerging new consciousness? It will be interesting to see how the emerging consciousness of the marketplace will develop. And whereas many may be concerned about income inequality, the current predicament portends that there may be no easy answers to the issue of income inequality...in fact, there may be no answers at all; with Keynesian monetary policy, state intervention, and all, this may simply be the natural, macrohistorical, superstructural course of free-market capitalism -- in other words, per my previous article, capitalism gone geriatric. In this way, income inequality is but one piece of a much bigger puzzle, and as Delamaide suggested, we cannot lose sight of the big picture.