The Origins of Wealth and Opportunity Gaps, and a Possible Way Out

Wealth and opportunity gap

1) If you grew up in late 1980s and early 1990s like me, you certainly remember ALF—the furry irreverent extraterrestrial featured in the NBC sitcom of the same name. At the beginning of the show, ALF crash-lands in the garage of the suburban middle-class Tanner family, who lives in the San Fernando Valley and gives him shelter for the next four years.

One of the most interesting things about the sitcom, apart from its lighthearted humor and hilarious gags, is the way in which it shows American suburbia. Coming from another planet, ALF soon learns to appreciate the charm of the late eighties consumer society, where almost everything can be ordered on the phone and delivered right away.

Even more important, the series allowed an unusual glimpse of the everyday life of the American middle-class that was increasingly getting squeezed during the Reagan and Bush Senior years.

There was less money and less security, and when ALF accumulated $6000 gambling debt, the Tanners had to struggle quite a bit to pay it off. In the series, loss of social status didn’t come across as a real danger, but it was looming on the horizon. Thirty years later the horizon has been reached.

2) Wealth and opportunity gaps in the present-day world is a real issue. In his book about the changing world order, Ray Dalio, like many other astute observers, argues that large differences in wealth distribution tend to lead to internal political divisions, oftentimes causing major social and political conflicts.

On a very general level, there’s little you can object to that. Unfortunately, Ray Dalio remains pretty vague on this subject. As opposed to the analysis of money and debt cycle and the factors responsible for the success of great powers he refers to the wealth and opportunity gap rather fleetingly (though it’s true that he has written somewhere else about why and how capitalism needs to be reformed).

At any rate, social policy and equal opportunity seem to be important enough to have a closer look at it.

3) When talking about wealth, opportunity and values, Ray Dalio contrasts what happened in the US and the UK during the 1930s with what was going on in Germany and Japan at the same time. However, he largely fails to do the same for the time after 1945.

If you want to understand what is happening now, a close comparative look at the last thirty years of the 20th century might be helpful. This period is widely referred to as the Age of Neoliberalism. The history of the idea itself is extremely insightful, but for our purposes here we’ll focus on how it found its way into politics and what kind of impact it made there.

To cut the long story short: in the 1970s, when many Western countries were in deep economic distress, several free-market scholars suggested that the socially-minded economic policies applied for forty years in the wake of Roosevelt’s New Deal were responsible for the problems governments were increasingly facing. They also offered a solution, which basically consisted in deregulation and tax cuts.

Whether their analysis and the measures proposed were accurate is debatable. The point is that these guys had a clear idea about what to do, and were successful in convincing politicians to listen to them.

But here comes the surprise: in some countries neoliberal politics were extreme, in others they were moderate. Sure enough, the outcomes were not the same.

4) While Ronald Reagan in the US and Margaret Thatcher in the UK interpreted neoliberal prescriptions in a radical manner, politicians in capitalist West Germany made rather careful adjustments that allowed to refloat the economy without compromising social security, union power and domestic manufacturing.

Present-day debates about the legacy of Reagonomics and Thatcherism tend to be lopsided. While Marxist-inspired scholars like David Harvey consider economic egoism fostered by neoliberalism as absolutely pernicious for public interest, free-market radicals from organizations like the Cato Institute and Mercatus Center praise this policy highly for creating economic growth.

If you look at it in a less passionate manner, you’ll realize that it’s difficult to come to a definite conclusion about the value of neoliberal prescriptions. The comparison between the UK and West Germany suggests, however, that many decisions made by Margaret Thatcher were not predicated on their economic effectiveness, but rather ideologically motivated.

5) The same goes for the politics of the Reagan administration. Now, it is true that in the face of the Soviet Union, which seemed still very powerful in the early 1980s, the US had to come up with an effective solution for its economic problems. It is also true that neoliberalism allowed to reach this goal and to shoulder significant increases in military spending, which arguably contributed to the demise of the Soviet Union.

In other words, reinforcing an economic and social climate where moneymaking was easy and laudable might have been justified at that point. You could see it as the price that had to be paid for winning the Cold War.

But once this goal had been accomplished, nobody thought about rebalancing the economy and society. And why should they? After all, communism was gone. The unravelling of the Soviet Union seemed to prove the case for an approach in which profit seeking was considered the single most important factor in human relations, and everything else was thought to be a derivative of it.

6) In the long run, the hidden costs of that approach have proven to be immense. A part of them is six feet two inches (188 cm) tall and is called Donald Trump. The rise of populism is, as the economic historian Barry Eichengreen has argued, a pretty common political response to economic hardship and social turmoil.

It is then no wonder that in an increasingly chaotic world with growing wealth and opportunity gaps, populist leaders have been winning elections and putting their ideas into practice. Their political activity spans the globe, and is unlikely to come to an end any time soon, even though occasional electoral defeats show that the populist surge isn’t invincible.

Ray Dalio is well aware of this particular dynamic. But the way he puts it, you might think that economic policies swing between different extremes in a cyclical and basically uncontrollable manner, like “the width of ties and the lengths of skirts.” It is, however, difficult to argue that there are apparel companies, designers and trendsetters who have a strong influence on what becomes fashionable, even though they don’t control it fully. This is also true for large-scale economic and social policies.

Neoliberalism was not a coincidence or a cyclical phenomenon, but a conscious choice of policymakers, which means that they are at least partially responsible for the rift in wealth distribution, political polarization and the lack of equal opportunity.

The huge debt the US government incurred in the 1980s, its massive tax cuts and loosening control over financial markets are elements of a deliberate policy that put up with paying a high price to achieve its goals.

To be sure, deregulation started before Reagan was elected, and went on long after he was out of office. A part of Ray Dalio’s success as an investor is closely connected to this lax legislation. And while it would be too easy to decry unrestrained speculation with financial assets as the root of all evil, it makes sense to ask to what extent the current wealth and opportunity gaps result from calculated decisions to leave the markets largely unregulated.

7) Add to that the digital revolution, the lack of a rival communist superpower that would make you pay more attention to your poor, and the increasing competition from the developing countries where people are willing to work hard for little money—and you’ve got the perfect storm.

Smart observers have long realized the self-destructive potential of unrestrained markets. The problem is that there’s no quick fix for the wealth, opportunity, value and political gaps of the last years. Neither is there an easy solution for reducing the immense load of public and private liabilities accumulated over decades. Unlike ALF, the US government has no spaceship it can lease to a set decorator of a science-fiction movie in order to repay its debt.

As a shipwrecked entrepreneur, you have of course the option to move to your Mom’s basement, eat rice and beans, and work your way back to sound economic condition. But what would happen to a country that would have to do exactly that?

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