However, October 29th 1929, tragedy struck the United States – the Great Depression. This tragic event shook society up. The New Deal, headed by F.D.R, gave a complex package of economic programs that helped stimulate the economy and input restrictions or precautionary measures on the economy for the future; for example, the Securities and Exchange Commission. The New Deal and the Great Depression together changed societal norms. F.D.R used government control over wages to compress the wage gaps. Out of this event, emerged a huge middle class and egalitarian values. Economic historians, Claudia Goldin and Robert Margo have deemed these years the Great Compression. This period of relative equality persisted for several decades. However, beginning in the 1970’s, ideals began to deteriorate.
Krugman points out this transformation with extreme fervent. Initially, the collapse of equality and emergence of extravagance was contributed to three main theories. Firstly, the globalization hypothesis, which argued that the changing income distribution was due to the growth of world trade and growing imports of manufactured goods. Secondly, the “skill-biased technological change” theory, argues that the cause of growing inequality is grounded in domestic innovation, the increase demand for highly skilled and educated workers. Finally, the “superstar” theory, debates that modern technological change in communication has turned competition into a tournament in which the winner wins hugely and the others are rewarded to a small extent.
However, according to Krugman, these three theories do not suffice in explaining the current level of inequality. For example, there has been a 2,500 % increase in CEO incomes and these theories cannot justify such statistics. Instead, Krugman attributes it all to a significant shift in social norms.
The status quo is quite surprising. Just looking at the average salary increase of different social classes, a lot can be discovered. The average American annual salary rose 10% over the past 29 years. However, the average pay of the top 100 CEO’s rose almost 3,000%!
Furthermore Krugman looks to the consequences of such polarization of wealth. Firstly, he argues that large inequalities are establishing an American Plutocracy. The rich are evolving and organizing themselves into strong political forces. They are able to fund their own interest groups and pundits to support and bolster themselves. Congressional parties can now predict their members’ votes on bills much more accurately than before because the parties are more polarized than previously on in history. McCarty, Roesnthal and Poole argue that American politics are organized around the growing inequality of American incomes. Also, recent American political policies hint to the growing power of Republicans and the wealthy. For example, the Bush tax cuts and attempts to repeal the estate tax.
Moreover, this vast inequality yields misperceptions. For example, although the United States may have the highest GDP per capita in the Western World, its standard of living and life expectancy are not the highest. A rich individual will try and defend his wealth and the status quo with two arguments. One, that although it may look as if elite get a lot of money, it’s a very small percentage of the total. And two, anything done to try and reverse incomes at the top with hurt people further down the distribution by damaging incentives.
Krugman further attributes a decrease in economic efficiency to this inequality. He uses the support that the U.S economic system no longer distributes wealth based on performance and efficiency. For example, he looks at corporate executives pay and the fact that some CEO’s are not paid for their performance but merely charisma and billboard qualities. Moreover, all of this is much more camouflaged that ever before and this to an extent pulls the wool over many citizens’ eyes. This practice diverts resources away from productive uses and is inefficient.
In conclusion, the facts and theories are on the table. The American ethos of individualism has emerged stronger and disparity is back. Is it just a matter of time before the repeal of the estate tax passes and vast amounts of wealth are allowed to be passed down and permanent classes will exist? The wealthy have found clever ways to by pass the present restrictions and so evidently new regulations must be enforced in order to devolve. Furthermore, the Unions and special interest groups organized against the rich must unite in order to join powers to attempt to counteract the influence of the rich. However, in the end, perhaps something will come along that will shake up society to the extent of the Great Depression and our resilient democracy will be saved from plutocracy.