This, the 6th article in a lengthy mini-series on the American ideological spectrum --- its unique nature on both the left and right, and how, in turn, that uniqueness has helped shaped the US economy's institutional structures and government policies --- is a direct follow-up of the previous article. That article looked at economic equality and inequality. So too does the current article.

Up to now, the mini-series has dealt with the left-side of the American spectrum: in particular the reasons why it alone, in all the industrial countries, has never been attracted to Marxism or any other socialist variants. So far, come to that, we've looked only at economic explanations --- such as the extraordinarily high wages of American labor in the 19th and 20th centuries (always comparative viewed), our unusually high standard of living, and the uncommonly wide diffusion of property ownership. The previous article moved on to probe the distribution of income in American life since the early 19th century. It showed that right down to 1970, Americans also enjoyed the most equitable distribution among industrial countries. It also showed, in a fast, top-skimming way, nothing more, how this has markedly changed since then.

The Big Change

Specifically, the US now ranks at the bottom in income equality among industrial countries. Interestingly, too, Britain --- which was 2nd to the US in limiting income inequality in 1970 --- now ranks 2nd from the bottom, slightly ahead of the US. Is this just a coincidence? No, not really. As you'll eventually see, Britain is the most dynamic of the big countries in the EU, just as the US is by far among all industrial countries.

Hence, in brief, the need for this follow-up argument, which will strive to deepen the analysis of the previous article and make more sense of the big turnabout in the US's income-distribution over the last three decades.

More Specifically, A Trio of Aims Here

The argument that unfolds in this article has three specific aims, each delved into carefully. Specifically, we want to know . . .

1. How serious the big changes in the distribution of income have been, and whether they're worth worrying about much . . . at any rate, as much as numerous left-leaning sociologists and economists happen to, not to forget the dominant thrust in media reports. As we'll see, the impact of those changes on the well-being of low-income American people turns out to be noticeably exaggerated, and for several reasons --- all carefully spelled out.

2. What the various causes of the turnabout in the income-distribution actually are. It turns out that most scholars who specialize in analyzing the distribution of income, never mind the media journalists who report on its changes, either skirt or outrightly fail to delve into some of the most significant causes at work here . . . mainly, it seems, because these causes conflict with their ideological or moral propensities.

The outcome is largely a flight from reality. As you'll see, these skirted causes include striking demographic shifts, a startling decline in two-parent families among poorer Americans, and finally the impact of high-voltage immigration flows into this country since 1965. . . . roughly 35-40 million, depending on the actual number of illegal ones . . . and possibly even 45 million or more according to the latest survey of illegals that will be looked at later on here. When economists --- usually others not specializing in distributional matters --- do discuss the recent changes in income-distribution, they too tend to skirt these latter, non-economic causes and instead focus mainly on shifts in technology that favor educated workers and the growing globalization of the US economy . . . influential in both cases, to be sure, but far from an adequate explanation.

3. What the trade-offs have been for Japan and EU Continental countries whose governments have striven, by a variety of policies, to offset the other, more universal causes of growing income inequality in their countries: by ever high minimum wages; by growing regulations of their labor markets that have made them increasingly rigid; by a huge leap in government spending since 1970 and very high taxes; and until recently, by ever higher levels of welfare transfers.

The wider outcome? With two or three exceptions --- Sweden and Denmark and Finland, all tiny, fairly homogenous countries --- the rest of the Continent EU members and Japan have experienced slow or stagnant growth and increasingly high levels of long-term unemployment.

 

PART ONE:
SOME ESSENTIAL BACKGROUND PERSPECTIVE ON THE DYNAMIC CHANGES IN THE US ECONOMY SINCE 1970

(i). The Changes In The Distribution of Income Are Complex,
And The Conventional View of Growing Inequality Is Misleading



First off, as you'll see when you read through the argument, things aren't as simple as the latest Lou Dobbs CNN report or New York Times article --- or even the more sophisticated works of American or European scholars specializing in the topic of income-distribution that now number several hundred and end up being posted at the Luxembourg Income Study site . . . a whole cottage industry, it seems, of excessively narrow mental work compiled in just a few years. Few --- hardly any, to be more exact --- seem to grapple with the more controversial causes just mentioned, or the tradeoffs in economic growth and job-creation that have entangled those countries whose economies in West Europe or Japan seek to block what Joseph Schumpeter, the great Harvard the great Harvard economist of the 1930s and 1940s, called the recurring forces of creative destruction.

Meaning?

Well, that brings us to a second point that allows us to dig deeper than the usual stick-to-the-surface analyses found nearly everywhere else . . . .

 

(ii.) Creative Destruction Clarified

For Schumpeter and his followers, capitalism is never incremental in its changes, never inclined to equilibrium as in neo-classical economics. Instead, at its core, it's always inherently dynamic and prone to change suddenly in abrupt, tumultuous ways, thanks to the interaction of two kinetic forces: 1) recurring breakthroughs in revolutionary technologies and 2) driven men and women, consumed by dreams of wealth and glory, as the bold entrepreneurs who bring them successfully to the market-place.



Ever since the start of the industrial revolution, these radically restructuring technologies have erupted every few decades in clustered waves; and as they break forth over the economic landscape, they challenge the economic status quo within and across countries relentlessly, with jarring shock-force. Dislocations are inevitable. Whole industries and firms using older, standardized technologies --- however revolutionary they once were in earlier decades --- are suddenly threatened with obsolescence, the owners, managers, and work-forces left behind as increasingly outmoded relics of the past. Think of the horse-and-buggy trade and the new internal combustion engine at the start of the 20th century. Or the whaling industry, the lantern and candle industries faced with electrification at roughly the same time. Both revolutionary technologies altered our lives --- the way we work, spend our leisure, move from place to place, communicate with one another --- in core, hyperkinetic ways. More recently, thanks to globalizing forces --- especially the rapid rise of Asian manufacturing --- the challenges to old-line industries and the spin-off dislocations to national economies have accelerated with rippling force.

 

Note Quickly:

Not all old-line industries will disappear when the dislocations shoot up and multiply within a national economy.

Many of these industries --- think of the automobile, steel, and textile industries in the US during the 1980s --- will survive and remain competitive, but only if they restructure painfully, cut their labor forces, and find ways to improve productivity and maybe even the quality of their products. Again, these three industries are a good example. Generally competitive and with productivity equal to the Japanese and others now, their labor forces have had to be trimmed by a good 50% on the average.

None of these changes were easy to absorb. Overall, to emerge a more updated, far more competitive economy based on the new radically restructuring technologies, the US economy had to shed a good 10 million manufacturing jobs in the 1980s and early 1990s. The shedding, for that matter, is continuing today, with 4 million more jobs lost to overseas competition the last four years; and it will no doubt continue way into the future . . . especially since the combined shocks of breakthrough technologies and fast-paced shifts in manufacturing prowess across countries will not likely ease any time soon, let alone die off.

 

Old-Guard Backlashes Inevitable

Needless to add, the forces of the status quo --- capital, labor, and management --- will not accept decline gladly.

They will almost always fight back. At first, only a few bold, risk-taking entrepreneurs --- obsessed with dreams of wealth and glory like the Carnegies, Rockefellers, Fords, Bill Gates, the Walmart family, or the giants who created the Hollywood motion picture industry from scratch --- are there to challenge the powerfully entrenched, diehard forces. Enter a key Schumpeterian concept --- creative destruction. Only if the old, increasingly uncompetitive industries --- agrarian, mining, manufacturing, or service, it doesn't matter --- are allowed to run down or disappear will there be enough capital and managerial talents and scientists and engineers freed up in any national economy to let the new, more promising industries that embody these revolutionary technologies come into existence.

That's what creative destruction means. And it never unfolds without creating winners and losers, though eventually the great masses of people living in the advanced countries will all be winners once the initial dislocations and turbulence are absorbed and a more productive, competitive economy is solidified. That's what a newer, more competitive economy with ever higher levels of productivity entails.

 

(iii.) Enter The Next Point: Countries Vary Markedly Here

Some countries, as it happens, have more flexible economic institutions and policies to deal with the rippling dislocations of radical economic change and creative destruction. Those that do --- the USA pre-eminently, plus a handful of smaller economies --- will generally allow the innovative changes to occur without prolonged resistance by the old order.

In that case, the forces of creative destruction will play out in the market-place fairly quickly, and the shock-power of the initial economic and social dislocations will be more easily absorbed.

As old industries decline and shift their location elsewhere to more dynamic but lower-wage developing countries --- or just disappear in the home-country --- then investment capital, managerial talent, and scientists, engineers, and other skilled workers will be freed to allow the most competitive of the new start-up firms to expand and replace them. Whole new industries will emerge. Big spillover effects of a positive sort will radiate across other industries and sooner or later --- sooner in this instance --- throughout the entire national economy. By the later 1990s, a good 75% of the Fortune 500 Companies didn't even exist three decades earlier: Microsoft, Intel, Cisco, Amazon, Walmart, what have you. In short order, the ways we live, work, and spend our leisure will be altered almost beyond recognition, once and for all.

(Whether the great entrepreneurs were all decent people is another matter. Henry Ford was a notorious racist, who had to apologize publicly for his blatant anti-Semitic views. The Walmart family's giant store-chain, which has revolutionized merchandising in this country --- the retail industry logging the biggest jump in productivity during the 1990s, not least in response to Walmart's challenges --- may be engaged in squeezing some of its workers. And so on. And yet, in time, these innovative giants also built great universities --- Stanford, Chicago (Rockefeller), Vanderbilt --- or created the American public library system (Carnegie) or have spent a billion dollars on trying to improve American public education (the Bill Gates Foundation).