The Haves and the Have Nots

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by Hayden Hollingsworth

The news has been full of the travails of Egypt and no one is sure how this is going to conclude.  The possibilities of it working out badly in the post-Mubarak era are real but most agree this may be a tipping point for the one of the oldest surviving civilizations of the western world. Their current repressive regime is horrendous and the hopes they may establish a true democracy (or something like it) for the first time in their 6000 year history are offset by the possibility of radical Islamists moving into the vacuum, as they did in Iran in the 1979.

The United States obviously has a vested interest in seeing the former rather than the latter but it is a delicate balancing act to get what we want, what we think is best for the Egyptians and the rest of the world without angering them by interfering with their internal affairs.

While there are many things that played into the current crisis one important factor seems to be financial imbalance of those who have an exorbitant standard of living and those live in abject poverty.  We can scarcely comprehend how the vast majority of Egyptians survive:  In Cairo, with a population of 14.5 million, the average daily wage is the equivalent of $2, or so it has been reported.  There are millions who live, or try to, on that paltry sum.  To estimate the wealth of the richest class in Egypt is more difficult, but it is a tiny number who have great fortunes.

The economy of Egypt has been moving along at a pleasant growth rate but the problem is the massive wealth of the few has not raised the standard of living for the many.  In that disparity part of their current discontent.  The news of how violent this uprising has been is only beginning to be surface, but it could have been much worse.

The financial parallels with the United States are important.  Robert Reich in his recently released book, After Shock, makes a strong case the root causes of our Great Recession are not something new. Many of the same factors were in place in 1929 and mal-distribution of wealth among the most important, just as we find in Egypt today.

During the first three decades of the 20th century in America there was a vast redistribution of wealth.  By 1928 23.5 % of all total income was controlled by 1% of the population.  The years following the Great Depression saw that inequity gradually corrected.  From the mid 1950s to the early 1980s, the top 1% controlled only 10% of total income.  Starting in the Reagan administration, the redistribution of wealth was meteoric.  You do remember “The Trickle Down Theory,” and supply-side theory, aptly identified as “voodoo economics” by George H.W. Bush.  It was a time of jingoism into which we all bought; a rising tide lifts all boats.  Only it didn’t happen: it lifted the yachts but most were left standing on the dock   By 2007 the numbers were identical to those in 1928:  1% controlled 23.5% of total income.

Since all this wealth had not “trickled down” everyone, including the government, lived on credit, financed by inventive instruments that no one understood.  When it was discovered that we had been duped by Wall Street, derivative traders, investment bankers, and venture capitalist, the balloon burst.

We did learn something from the Depression: the banks must not be allowed to fail, hence the huge bailouts and the stimulus packages.  That saved the economy . . . at least the wealthiest portions.

Those who caused the problem have become even richer with billions paid to themselves as bonuses and deferred compensation.  But the citizen in the street hasn’t seen any of this.  With credit severely curtailed, millions of jobs lost, unemployment stuck at nearly 10%, people are asking why things are not improving for them.  That was a major factor in the recent elections.  As a result people are beginning to think the government has rigged the system to maintain the wealthy.

How can that be corrected?  How can we change almost a quarter of income being controlled by a handful?  That’s in the purview of the Dismal Science, as Thomas Carlyle called economics.

The take home point is just this: When too much wealth is concentrated in the hands of too few, then the masses can rise up in protest.  That was partly what happened in Russia in 1917; that’s a portion of the problem in Egypt today.  It could have happened in the Great Depression, but the country was unified by the New Deal and the near-dictatorial powers of President Roosevelt and Federal Reserve Chairman, Marriner Eccles. The United States today is not the homogeneous country with which they dealt.  It’s hard to imagine of current situation leading to violence, but it could happen.

If one wants to find out how financial order can be restored, read the final section of After Shock.  Reich, Secretary of Labor in the Clinton administration, may be diminutive in statue but he’s a giant in economic explanations. His solutions are draconian but one thing is obvious:  the current distribution of wealth is unsustainable for a healthy nation.