AMERICAN PERISCOPE. The great American divide

It is well known that income inequality is growing all over the world. The reasons are varied. Thomas Piketty, the French economist in his magisterial work, Capital in the Twenty-First Century (2014) argued that this has been happening because the returns on capital have been exceeding the rate of growth.

Of course, top managers of corporations have contributed to the trend, given their ability to set their own levels of compensation. Piketty’s conclusions have been supported by another recent book A Century of Wealth in America (Edward Wolff, 2017) going further to show that among the developed economies, the inequality in the US is the worst.

The poverty rates in the US are currently at their highest since the Great Depression, including those classified as being in severe poverty. The poverty rate for a family of four is placed at an annual income of about $25,000 (₹16 lakh). The Pew Research Center, in surveys conducted in August this year, found more Americans favoured raising than lowering taxes on corporations and higher income earners.

Ironically, this comes at a time when the elected representatives of those same people have agreed to a tax law that drops the corporate tax rate to 21 per cent and also cuts the highest individual tax rates.

President Trump and his advisers subscribe to the ‘trickle down’ school of economics — those who argue that reducing taxes on the rich will leave more money in their hands to invest and incentivise them to create more wealth since they can keep a bigger share of it, and this will ultimately trickle down in benefits to the poor through more employment and so on. Trickle down economists rarely tell us how long it takes to trickle down, and how much of the trickle remains. The effects of income inequality are varied. Increases in inequality have been found to cut GDP growth rates, especially in rich countries. It decreases the education opportunities for the poor, and therefore the level of human capital. It increases the possibility of financial crises, by increasing leverage. And we can go on.

The most obvious difference between the rich and poor is where they live and what kind of accommodation they can afford.

One of the richest communities in America is Bel Air, a wealthy neighbourhood in California and spread around 6.3 square miles. It is described as ‘winding streets lined with lavish mansions on large properties with lush vegetation’. Wikipedia reports the median yearly household income as over $200,000 (about ₹1.3 crore).

California is also the State with high levels of poverty, placed at about 14 per cent of the population. It is said that four out of ten residents are living in or near poverty. California also accounts for 22 per cent of the nation’s homeless population. You can see them in every major town, pushing all their belongings in shopping carts as they move from location to location, sleeping in the doorways of major corporations, and haunting the public restrooms.

Newspaper articles regularly debate the reasons why California is inflicted by this level of homelessness. Conservatives argue that the liberal welfare policies of the state attracts them from elsewhere, and of course, the wonderful weather is conducive to homelessness. The liberals would argue that not enough is being done to relieve the problem. Many of the homeless occupy empty spaces, such as underneath major highways, to make their homes in small communities using tents and packing cartons.

Which brings me to a recent connection between the rich and the poor, and how inequality affects all. The dry season has caused fires to rage in many parts of California and one particularly nasty one affected the Bel Air area early December. Over 400 acres were charred, prompting closure of schools, and destroying at least six stately homes. Investigation has now revealed that the fire was started by illegal cooking at a nearby homeless encampment.

Can you have a more direct connection between homelessness and the rich?

The writer is a professor at Suffolk University, Boston