America and the great stagnation
January 28th, 2014
08:00 AM ET

America and the great stagnation

By Fareed Zakaria

USA Today has a new poll out that shows that the American public is increasingly concerned about inequality and wants the government to do something about it. So what to do?

There’s little doubt that inequality has risen dramatically. The most eye catching number might be this one – the world’s 85 richest people own as much as do the poorest 3.5 billion put together. If you put this in American terms alone, the six heirs to the Wal-Mart fortune have a net worth that is larger than the poorest 48.8 million American families put together. These are staggering numbers and it does make for some envy. But envy is not a good basis for public policy.

As I have argued before, inequality is made up of three different factors: the rise of the super rich, the rise of a larger group of poor people, and the stagnation of the great middle class.

We're actually beginning to see a healthy discussion about the first two factors, especially about the poor. This is the area where we could make the biggest difference relatively easily. Smart government policies could easily and effectively reduce poverty in most countries. The Earned Income Tax Credit should be expanded, we should fund more early education and day care, and provide more and better nutrition for poor kids. Investing in poor children’s health and education will give them a better chance of escaping poverty. And there really are few perverse incentives in this area. Poor kids are not going to “slack off” because they get vitamin fortified cereal at school!

Less clear is what to do about the problem that gets the most attention – the super rich. Former Treasury Secretary Lawrence Summers has pointed out that if America had another twenty people like Steve Jobs – and another twenty companies like Apple – it would probably be a more dynamic and productive place, even though inequality would be worse as a result. If we could help the poor move up, in my own view it is less important whether the super rich move up even faster.

The biggest problem relating to inequality – the largest one involving the most people – is what could be called the great stagnation. Middle class people have seen their incomes stagnate for decades now. And with technology taking away work and globalization outsourcing jobs, these trends have actually intensified in recent years.

A new book, The Second Machine Age, argues that in the first machine age, around the Industrial Revolution and all through the information revolution, technology was used to create power systems to work with and enhance human muscle power and human control. Human control was a crucial process every step of the way. Think of a factory where thousands of workers, foreman and managers all played a large role in manufacturing a product.

In the second machine age, the authors argue, we are starting to automate cognitive tasks, control, judgment, calibration. The machines are replacing human control and cognition. They can make more consistent decisions than can humans. And the effect is massively compounded because of new information technologies like big data. The result: you don't need many people.

You can see it in the numbers.

General Motors, when it was one of the world's biggest companies, employed around 600,000 Americans. Apple today, one of the world's very largest companies in terms of revenue, employs around 50,000 Americans.

There is lots of technological progress and economic dynamism in the world today, and there is lots of good news about poverty alleviation and better health care. There just aren’t a lot of jobs for the great American – or Western – middle class.

And unfortunately, during my time in Davos for the World Economic Forum last week, I didn’t hear any new ideas about addressing that central issue.

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Topics: Economy

soundoff (102 Responses)
  1. Richard

    I'm not to sure if their is a American party. But someone needs to create one to represent the American people to solve these problems. You'd have my vote.

    January 29, 2014 at 8:19 pm | Reply
    • LiveFree

      Maybe, you can start one. Richard for President.

      February 1, 2014 at 2:24 pm | Reply
  2. minnie mouse

    "the rise" of the super rich?? That is a passive term used to describe a condition that, in reality, has taken a great deal of intent, political bribery, collusion and human greed / narcissism / indifference to other's suffering.

    January 29, 2014 at 9:34 pm | Reply
    • LiveFree

      Right on.

      February 1, 2014 at 3:25 pm | Reply
  3. minnie mouse

    And why would Davos attendees be concerned with someone else's poverty? I assume the meals served were excellent and the rooms had adequate air-conditioning, authentic down pillows, and other life necessities.

    January 29, 2014 at 9:39 pm | Reply
  4. Muin

    Everyone understands why inequality exists. In american colleges, american professors would try to teach students that employers often play employees against each other. Many also understands that walmart and mcdonald take advantage of american safety nets. Many understands that employers take advantage of bad governance Facts are known to people but people are not in power to do anything about these issues because they don't have spin masters, media and government's back. Rich people have those back ups.

    January 30, 2014 at 1:56 pm | Reply
  5. Fred Bosick

    Those who are invited to Davos *depend* on the growing inequality to confirm their status as the ultra elite. Of course you won't find an answer there. They make reassuring noises in a futile attempt to stem the growing unrest.

    Ironically, the originally well represented profession(economics) there, knows the answer. The world is smaller, not an infinite source or sink, and it's a zero sum game in a modern timescale. Governments only viable role here is to enforce a balance between labor and capital. Consequently, until there is absolute freedom of movement for populations across the world, outsourcing, offshoring, and industry specific immigration exceptions *must* be eliminated!

    CEOs of modern multinational corporations make many multiples of the regular worker's pay. This ratio is rising far faster than any conceivable evolutionary process can justify. They aren't smarter than the business leader of old. They are merely exploiting the living standard/pay differential between the First World and the 3rd. India is 3rd World, guaranteed.

    Rather like a thermodynamic heat engine, but at least someone is feeding fuel to the hot side. No such thing is happening in the global economy. The Middle Class' economic potential is being dissipated at a greater rate than the 3rd World fortunes are rising. And who is getting the vigorish?

    January 31, 2014 at 1:09 pm | Reply
    • LiveFree

      The Riches.

      February 1, 2014 at 3:28 pm | Reply
  6. Mark/ Bellingham

    c

    February 2, 2014 at 3:14 pm | Reply
  7. Mark/ Bellingham

    Return tax rates to tradional levels on high income, 70-90% under Eisenhower. Reverse bad trade policies that outrsource manufacturing (if it cost $3 to make shoes in NC and $1 to make the shoe in Mexico put a $2 tax on Mexican shoe imports so there in no competative advantge to import..supports domestic manufacturing.(this is what Brazil does today to great success) Fine employers who hire illegal aliens severely. Use new revenue for a European style education system that allows access to higher education to all citizens. Take the profit out of Health care (as all other advanced industrial nations have done)and that will increase our competative advantage

    February 2, 2014 at 3:26 pm | Reply
  8. Rick McDaniel

    Who made the poll? The Dems?

    They are the only ones who could possibly have created such a misleadingly false poll.

    February 2, 2014 at 4:49 pm | Reply
  9. Larry Hass

    Oh my, the rich have stopped paying decent wages to their workers so they could increase profits for themselves. What can we do? The job of government is to provide for the defense of the people and to re-allocate wealth. Do your job congress and tax the rich to take care of the poor. Stop talking about cutting food stamps, unemployment benefits, social security, medicare and every other program to help those who need it so you can line the pockets of the rich with even more money they don't need and don't deserve to have. If you don't greed will lead to your downfall – this congress is the most corrupt ever so let's start putting them in jail.

    February 2, 2014 at 6:34 pm | Reply
  10. Shawn Irwin

    As much as some complain about a welfare state, as described, technology is taking over . . . and the result is that more and more people are without a job . . . . do away with their incomes, and you will have worse than a welfare state . . . . you will have a revolution that targets the rich.

    February 2, 2014 at 9:34 pm | Reply
  11. John Tonra

    Not a complete solution buyt an example of the stupidity of our politicians on this issue. Fracking and natural gas will bring many manufacturing jobs back to the US – but Obama is now just mentioning it in his speeches – versus actually encouraging the rapid spead of it (e.g. sending more lines into New England for home heating oil). It also reduces out of pocket costs for all (especially the poor) with cheaper electricity and heating costs. But instead they initiate new gov't programs that will never have any significant impact on inequality.

    February 2, 2014 at 9:34 pm | Reply
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