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Congressman John Campbell

“Increasing Income Disparity”

State of the Economy, Part 3 – “Increasing Income Disparity”: Last week, I laid out for you the case that “income inequality” should really be called “increasing income disparity” and suggested that it is a worldwide phenomenon. I also debunked commonly expressed “solutions” for this problem you often hear from leaders in Washington. However, I have not yet presented solutions of my own. Before I do, let’s first examine the factors at work here that I believe are causing this phenomenon.

There were a number of serious recessions during the Industrial Revolution of the late 19th and early 20th centuries. No one alive today has ever talked to anyone who experienced the beginning of the Industrial Revolution. So, with the exception of historians, it doesn’t get as much coverage in contemporary discussion as say, the Great Depression. What you may not know is that the Industrial Revolution caused a large job displacement at first. When the jobs on the farm went away, they were not immediately replaced in a factory. It took time before people figured out what to do with the extra disposable income resulting from cheaper food and the new products generated by machines. Before we could have dishwashers, someone had to imagine how the normal dishwashing process could be automated, as well as how to build and market such an invention. And then, of course, farm boys at that time really didn’t know how to do anything else except farm.

Does all this sound familiar? The emerging technologies of recent decades are having a similar effect to what occurred during the Industrial Revolution. Many jobs in factories, retail, call centers at publishers and any other number of industries have been replaced by some new technology. These new technologies bring us many new products and provide us with other products that are either cheaper or now within reach of more people. This improves living standards. But, those jobs that are being displaced have not yet been replaced. And, many of the displaced people do not know how to do anything other than whatever they spent the last part of their lives doing. The displaced jobs will eventually be replaced once someone imagines new products that fit future lifestyles and culture as was the case in the dishwasher example from the last paragraph. But, this takes time. First, a technology is created, and then some existing product becomes better and cheaper. People who worked on the old version of that product lose their jobs. A few of them land a position within the new industry. But, others become underemployed until someone takes the income or time saved by the innovation and fills it with an entirely new idea. In the past, many of those unemployed or underemployed people never attained their former economic status.

This job displacement is not limited to workers of lower income. Technology and new business practices have “flattened” the management structure such that many “middle management” jobs are gone as well.

Besides technological advancement, there are additional factors at work here. One is an age-old factor and the other one is newer. The older factor is the continual battle between capital and labor.

Capital needs labor in order to get a return. Labor needs capital in order to provide work. It has ever been thus. Even though these two economic factors are dependent on one another, there has always been perpetual conflict. Capital can make a better return by paying less for labor. Labor wants to make more and is unconcerned with returns on capital. There have been times in human history when capital has had an advantage and others when labor had more market power. This is a cyclical thing. Everything that is living or is comprised of living things has cycles. Cycles of life. Economic cycles. Climate cycles. You can’t stop them. You shouldn’t stop them. They are the process through which God created renewal. Right now, we are in a cycle where capital has the advantage. In the mid-20th century, it was labor’s turn. But today, for many reasons including the technology revolution just discussed, capital has more negotiating power than labor. This means that people with capital (higher incomes) will get more return and more income than people without it. Since this is a cyclical factor, it will eventually turn and labor will once again have the advantage. For now, though, people with capital are making relatively more than those who count only on the sweat of their brow for income.

However, the “new” factor in play here, in my opinion, is the proclivity of all central banks around the world to print money ostensibly for the purpose of reducing unemployment and creating jobs. Printing money may be doing that to some degree. But, the jobs created are not replacement jobs for the ones being lost. They are simply not the same quality and type of job. By filling the world up with cash, central banks have both created a lot more capital and moved it into riskier, shorter term assets with higher returns but little lasting job creation. Again, this is not a distinction between countries because everyone is doing it.

So, now what? We have displaced jobs, we have cheap money and there is an advantage to capital due to a secular turn in the cycle of economics. What can Congress do about it?

The first step is to start to have an adult discussion about the issue. I don’t claim to be the world’s pre-eminent economist that knows all. But, I am very sure that continuing to debate over longer unemployment insurance will not make a dent in this issue. We need to discuss these secular and long-term trends in terms of figuring out if there is a way that government policy can help to accelerate the process of creating new industries in order to create jobs. Perhaps there isn’t anything we can do that doesn’t have consequences that are more negative than positive. But, we ought to try.

My fear is that as long as we have a president who is only interested in dividing the country through vapid sound bites intended only to advance socialism and feed his own self-importance, we will not progress. And, we will not have another president until 2017. Similarly, the Republican Party must stop being so inwardly focused on our own purity. We need to be the adults in the room, but we cannot achieve that status as long as we insist on ideological absolutism in any and every discussion.

I guess you can tell I’m pretty frustrated. The point of this “Farewell Series” is to give you a glimpse of the world as I see it from my perches in Kansas, California and Washington.

“Increasing income disparity”, better known as income inequality, is real and worldwide. Solutions are hard and unclear. But, we ought to try. My kids and their kids should have more opportunities than I did and certainly not less. That should be the universal goal that drives discussion on any topic – most assuredly this one.

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