Thursday, July 7, 2011

Wake-up call #3: The Wealth Gap

This is the third in a series that asks whether we are headed for a dark age, after decades of prosperity and progress.

So far, I have looked at the possible consequences of the end of the Oil Age, and what may happen as the world runs out of fresh water.

Future posts will look at climate change, and national indebtedness, but this week I'm considering that old proverb, "The rich get richer, and the poor get poorer."

Of course, there are exceptions. Plenty of entrepreneurs will be happy to tell you how they overcame poverty and hardship to climb the ladder of success. But, inspirational as those tales may be, most poor people just stay poor, there are more of them, and they are falling farther behind.
What's the Problem?

A disproportionate share of private wealth is owned by a small segment of the population in many rich countries. In the U.S. and Sweden, according to a 2010 Credit Suisse report, 10% of families own about 72% of private assets. In Canada, 69% of such assets are owned by 20% of families. Such gaps are universal, but perhaps most sharply drawn in affluent societies. Show me a country that has a narrow income gap, and I will show you a country where EVERYONE is poor (with the exception of a governing elite that is usually corrupt).

In North America, it has been blamed on the decline of the union movement, stubbornly high student dropout rates, tax policy that favours the wealthy, the entrenchment of a multi-generational underclass, an overly generous welfare system, an insufficiently generous welfare system, teenage pregnancies, immigration policy, racial and gender bias in hiring and promotion, abuse of credit cards, payday loan operators, a too-low minimum wage, a too-high minimum wage, declining industries, offshoring of jobs, widespread gambling, drug and alcohol addiction, inflation, government spending cutbacks that eliminate social programs, etc., etc.

Even in rapidly developing economies, the middle and upper classes enjoy most of the goodies while the masses struggle to make ends meet. China now has this problem. Hundreds of millions of Chinese are not sharing in rising affluence, and the rural poor have a very low standard of living. Angry protests have been seen in Hong Kong, Xintang, and elsewhere.

Whatever the causes, it is difficult in every country for individuals to escape poverty's grip. Most poor people are running hard just to pay their monthly bills, and therefore have little hope of saving or borrowing sufficient capital to buy their own truck or taxicab, get an advanced education, start a business, or make investments, whereas an individual who accumulates a nest egg will tend to become more affluent because he/she can do these things. This is described as wealth condensation.

Why does it matter?

There are many countries, in Africa and elsewhere, with populations locked in grinding poverty, and with no visible route to meaningful participation in the global marketplace. All developed countries fear waves of immigrants landing on their shores from this impoverished world, and the possibility that illegal immigration will become uncontrollable.

On a domestic level, there is potential for civil unrest and terrorism. Unemployed, disaffected youth are easy targets for those who would destabilize society, or profit from illicit actviity. Some will become part of gang culture and organized crime. Others will be recruited into quasi-religious or anarchic terrorist organizations sponsored by networks bent on destruction of western societies, regime change, etc.

Will average folk, faced with the loss of their homes, businesses, and livelihoods, rebel in frustration with an economic order that defeats their hopes and dreams? There is much talk about the shrinking middle class, that formerly huge segment of society with which most people identified, and whose aspirations and spending fuelled 20th century growth and prosperity.

Will charismatic ideologues manipulate and exploit the public mood to achieve high office, then implement a destructive agenda? The populist, isolationist, libertarian, Tea Party in the U.S. has largely sprung from widespread loss of confidence in the ability of government and the financial sector to effectively manage the country out of its problems. In Greece, looming austerity has given a boost to extremist parties on both right and left. These kinds of movements have the potential to be very disruptive.

Today's young people in North America may be the first generation to enjoy a lower standard of living than their parents. On the other end of the age spectrum, many boomers are awakening to the realization that they have insufficient funds to support their retirement.

As the social safety net, now believed to be unsupportable in its entirety, unravels, life will become even harder for those who need help to survive, driving some to crime and others to physical and/or mental collapse.

All of these things impact economies negatively.

Meanwhile, Vancouver and Toronto condo prices reach new highs, luxury goods are in high demand, university tuitions continue to rise, and reservations for cruises and exotic vacations must be made months in advance.

Two separate worlds.

Surely this can't continue without sacrifices and compromises.

Next: Debt and Deficits

1 comment:

  1. Another great post, Doug!

    I'm feeling pessimistic today and I can't imagine changes being made voluntarily unless some charismatic saint surfaces who can get and hold the attention of millions of people.

    We're like lemmings rushing to the cliff of extinction I guess.

    (Wasn't that a song? We're on the Cliff of Extinction? LOL)