Economic Apartheid Kills

Dec 13, 2006

By Joel S. Hirschhorn

To be successful in overturning our elitist plutocratic system we should add economic apartheid to our semantic arsenal. Better than economic inequality, economic injustice and class warfare, because apartheid is loaded with richly deserved negative emotions. Sadly, in South Africa, economic apartheid has taken over from racial apartheid.

How ironic that the Bush administration successfully talked up the global threat from terrorism while it pursued domestic and foreign policies promoting economic apartheid, a far greater and more pervasive threat to national and global stability.

The human race on planet Earth, taken as an aggregate mass abstraction, may be getting richer. But a new report from the World Institute for Development Economics Research of the United Nations University shows that wealth creation is remarkably – one might say criminally – unequal. Follow this hierarchy at the top of the wealth pyramid: The richest 1 percent of adults alone owned 40 percent of global assets in the year 2000; the richest 2 percent owned more than half of global household wealth; and the richest 10 percent of adults accounted for 85% of the world total. That leaves very little for the remaining 90 percent of the global population. Could it be any worse? Yes, the rich are still getting richer, more millionaires are becoming billionaires.

As to the world’s lower class: the bottom half of the world adult population owned barely 1 percent of global wealth, defined as net worth: the value of physical and financial assets less debts. Over a billion poor people subsist on less than one dollar a day. Every day, according to UNICEF, 30,000 children die due to poverty – that’s over 10 million children killed by poverty every year! Global economic apartheid is killing people.

Here are data showing some of the variations among nations. Average wealth amounted to $144,000 per person in the U.S. in 2000, not as good as the $181,000 in Japan, but better than most others: $127,000 for the U.K., $70,000 for Denmark, $37,000 for New Zealand, $1,400 in Indonesia and $1,100and in India. Averages, of course, are very deceiving.

As to wealth inequality, the richest 10 percent of people in the U.S. have 70 percent of the wealth, compared to 40 percent in China. In other words, China has much more economic equality, though that is changing quickly.

To be among the richest 10 percent of adults in the world required $61,000 in net wealth, and more than $500,000 was needed to belong to the richest 1 percent, a group with 37 million members worldwide according to the study. Recall, all these data are for 2000, and would be much higher now, because of the steady trend of the rich becoming richer.

The statistical measure of inequality is the Gini value, which measures inequality on a scale from zero (total equality) to one (complete inequality). For income, it ranges from .35 to .45 in most countries. Wealth inequality is usually much greater, typically between .65 and .75. This reflects the greater difficulty in accumulating wealth (capital) than increasing income. Two high wealth economies, Japan and the United States, show very different patterns of wealth inequality, with Japan having a low wealth Gini of .55 and the U.S. having around .80. The incomes of the top fifth of the Japanese population are only about three times that of the bottom fifth, compared to more than nine times in the U.S. Japan has little economic apartheid compared to the U.S. Yet both countries have a huge number of wealthy people. Of the wealthiest 10 percent in the world, 25 percent are Americans and 20 percent are Japanese. These two countries are even stronger among the richest 1 percent of individuals in the world, with 37 percent residing in the U.S. and 27 percent in Japan. The point is that despite high numbers of very wealthy people, economic apartheid is absent in Japan and abysmal in the U.S.

We can explain the difference between Japan and the U.S. People can save and accumulate wealth for future economic security, or can borrow and spend like mad to accumulate possessions. According to a 2006 report, only 41 percent of American families save regularly, making wealth creation difficult. America’s national savings rate -- which includes corporate savings and government budget deficits -- is only about 13.6% of gross domestic product, compared to 25 percent in Japan.

Global wealth inequality is higher still. The study estimates that the global wealth Gini for adults is .89. The same degree of inequality would be obtained if one person in a group of ten takes 99 percent of the total pie and the other nine share the remaining 1 percent. To a limited degree, elitist powers can engineer modest improvements in income among the global poor, but stark wealth inequality will probably worsen, considering the political power of the rich. As worldwide communications increasingly make the obnoxious wealth of the upper class more visible, even modest increases in income are unlikely to satisfy the vast majority of the global population without wealth.

U.S. economic apartheid shows that a self-proclaimed great democracy with considerable personal freedoms can risk deep social instability from class warfare as it approaches a two-class system. We need to see economic apartheid as lethal and repulsive as racial apartheid.

How much proof do you need? Here are some recent examples of economic obscenities:

The Tucson-based Miraval Life in Balance Resort is now completing a 41-story wellness tower community on Manhattan’s Upper East Side. Three-bedrooms in the new luxury development will run from $1.4 million to $3.65 million, with monthly maintenance charges almost twice the Manhattan high-rise average.

If Goldman Sachs, the Wall Street financial giant, distributed all its compensation dollars equally among the company’s 25,647 workers, every employee in the firm would have received just about $500,000 so far this year. But compensation at Wall Street’s biggest firms gets divided anything but equally. A new federal report says the top-heavy income distribution is squeezing out the middle class. Wall Street’s top 1,000 investment bankers will average somewhere between $2 million and $3 million in bonuses this year, more than 10 times their $100,000 to $250,000 salaries.

Is overpaying CEOs a crime? A five-judge panel in Germany punted on that question by accepting a settlement in the first case ever to bring criminal charges against corporate directors for lavishing excessive pay on company executives. Deutsche Bank CEO Josef Ackermann, Germany’s most powerful banker, will pay out of his own pocket a $4.2 million fine, without having to plead guilty to charges that he helped engineer a $31 million bonus six years ago for Klaus Esser, the top executive at Mannesmann, a German mobile phone company. Ackermann and other directors at Mannesmann, prosecutors charged, had violated their fiduciary duty to watch out for shareholders. If convicted, Ackermann could have faced 10 years in jail.

An impressive new study by IRS and Ernst and Young researchers has produced reliable new data on how things have changed for the worse in recent years. Back in 1979, a mere $233,539 placed an American taxpayer in the rarified air of the top 0.1 percent. By 2004, things had changed considerably – it took a whopping $1,639,047 to rate in the top 0.1 percent, an over 600 percent increase above the 1979 threshold. Wealth shifted. The share of nation’s income going to the top 0.1 percent more than tripled, from 3.28 percent in 1979 to 10.49 percent in 2004. Disgraceful!

In 2004, another analysis of IRS data found the 130,500 U.S. taxpaying households that made up the top 0.1 percent averaged about $4.9 million each in income. The 300,000 Americans in these top 0.1 percent households took home significantly more pretax income combined than the poorest 120 million Americans. In 1979, by contrast, the 120 million Americans at the bottom took home three times more than the 300,000 at the top. Economic apartheid is really all about economic slavery, even if the slaves don’t quite comprehend their terrible situation. After all, that’s why the elites gave them Wal-Mart to pacify them.

Though the United States economy has seen GDP growth averaging 3.1 percent annually from 1980 to 2005, the benefits of this growth have gone overwhelmingly to the richest 10 percent of families, and among this group, disproportionately to the richest 1 percent.

And let’ set the record straight about upward economic mobility. The United States has the lowest share of low-income workers that exit their low-income status from one year to the next (29.5 percent). This perpetuates economic apartheid. The corresponding rates in several European countries are greater than 50 percent: Ireland (54.6), the Netherlands (55.7), the United Kingdom (58.8), and Denmark (60.4).

We should be asking: Why are Americans at the top of America’s income distribution raking in so much more income today than they did a generation ago? The American Bar Association reports that “fewer law school graduates are going into public-interest law or government jobs.” In medicine, where doctors can now make millions evaluating drugs for bio-tech start-ups, the Medical Group Management Association “says the nation lacks enough doctors in family practice, where the median income last year was $161,000.” “The bigger the prize, the greater the effort that people are making to get it,” sums up New York University economist Edward Wolff. “That effort is draining people away from more useful work.”

The December 1, 2006 New York Times editorial, When the Joneses Can't Keep Up noted:

“…the very richest earners are increasing their earnings at twice the rate of their onetime peers, and the average-rich are taking resentful note. Investment bankers are jealous of hedge-fund wunderkinds and, from the sound of it, almost every last person in Silicon Valley is envious of the founders of YouTube (with the likely exception of the Google billionaires who bought their company). …Neither policymakers nor society at large need sympathize with the longing of millionaires to become billionaires. But we do need to worry about the effects on society as a whole when members of the educated elite think they are grossly underpaid. The more they feel as if they are losing ground against their peers, the more likely they are to ditch professions in which the pay is only good — like delivering babies — in favor of less useful careers in which the compensation is off the charts — like eliminating lines from wealthy people’s foreheads.”

The Education Trust charges in a new study that the nation’s top public universities are rapidly becoming “enclaves for the most privileged of their state’s young people.” These flagship universities’ spending on financial aid for students from families that make over $100,000 a year jumped 400 percent between 1995 and 2003. Over that same period, spending for students from families making less than $40,000 increased just 20 percent. The financial aid grants that major state universities are now handing students from $100,00-and-up families — $3,823 on average — larger than the grants given to students from low- or middle-income families. How’s that for economic apartheid?

Families with over $1 million in nonresidential assets — make up a tiny fraction of the world’s population, less than a hundredth of 1 percent, but hold 28.6 percent of global wealth. Thank you globalization.

How long will the vast majority of people stay submissive and peaceful as American and global economic apartheid keep worsening? Here in affluent America there are 37 million people living in poverty, 35 million could not put food on their table at least part of the year, and over 45 million lack health insurance. Dr. Gar Alperovitz says that top 1 percent of our population now own 98 percent of the nation’s wealth. There is a war on the middle class, and it is going well.

Dr. John David wisely observed recently: “Without an internal economic restructuring, the nation now at war in Iraq will evolve into a nation at war within itself. Economic apartheid will not create a sustainable society. Violence will increase and democracy will fail unless this issue of increased wealth inequality is addressed.” What is wrong has been known for a long time. Plutarch wrote almost 2000 years ago, "An imbalance between rich and poor is the oldest and most fatal ailment of all republics."

Is anyone listening? Can we learn from the Japanese? Or is the Second American Revolution being nucleated now?

As compulsive consumers, Americans are spending their way deeper into economic apartheid. The more that Americans spend, rather than save, they make the rich richer and themselves poorer. How smart is that? Freedom to spend is not the same as political freedom; not with two-party control of our elitist, non-populist political system and democracy.

If Americans take back their government and economy and end their economic apartheid, then they can work on erasing global economic apartheid. That’s a big IF.