Introduction

The reality of rising American inequality is stark. Since the late 1970s real wages for the
bottom half of the work force have stagnated or fallen, while the incomes of the top 1 percent
have nearly quadrupled (and the incomes of the top 0.1 percent have risen even more). While we can
and should have a serious debate about what to do about this situation, the simple fact American
capitalism as currently constituted is undermining the foundations of middle-class society shouldnt
be up for argument.
Starting from Krugmans statement from his article in the New York Times entitled The
Undeserving Rich I will try in the following pages to explain the issues he refers to in the above
quoted statement.
Throughout this paper I will try to explain the concepts of real wages, inequality and the
concept of the 1 percent and also if and how the American capitalism undermines or not the middleclass society.

Stagnation of real wages

Up until the 1970s the real average hourly wage rose, but from the 1970s it pretty much
stagnated, as we can see in the following chart1:

There are many factors that had and continue to have an impact on this stagnation of wages.
First, there is unemployment. If normally, employers would need to keep their employees happy with
their workplaces by raising their wages, now, given the current economic crisis, people have even less
power in bargaining their earnings. I would say that people these days are happy to even have a job,
and do not have the opportunity to seek another job, that would pay as well as their current job. Also,
another reason for employers not rising wages would be the fact that they provide healthcare, pensions
and other compensations.
Changes in demographics also affected the wages, as women began to enter the work force as
well as immigrants, and the decline in wages can be best seen in the case of men2.
Technology and globalization also have an important contribution to this stagnation. As stated
in The Economist3, the advancements in technology had and will continue to have a huge impact on the
problem of jobs and employment. With people being replaced by computers and machinery, one would
think that there are no jobs left for people to actually perform it. The first thought that comes to mind
1 Chart provided by http://inequality.org/income-inequality/
2 According to an article from The Economic Policy Institute the median workers real
hourly wage grew by less than 4% during the period between 1973-2011
http://www.epi.org/blog/real-hourly-wage-growth-last-generation/

would be to put an end to these advancements and innovations. But I believe that would be very much
wrong. It is true that in the last decades everything began to be computerized and it is a well-known
fact that people working in the IT department for example, are much more wanted, but I do not believe
that going back to a time when people, and not machines would piece together a car for example would
make any difference regarding peoples wages.
Globalization, in the sense that nowadays big companies have the opportunity and power to
move their businesses anywhere across the world, looking obviously for places with cheap labor force,
will not think twice in doing so. And the problem, I believe, is the fact that if a person that is part of the
middle-class and they work for a minimum wage of about the same as if they lived in the 1970s, who
will have the ability to consume the goods produced that are obviously more diverse than they were in
the 1970s.
But although average middle-class and also low-class Americans do not actually have the
money to consume as much as they desire, the Government and the Federal Bank did not and do not try
to stop this, but moreover they seem to encourage the spending, by allowing people to take credits
without ensuring that they can give them back. Thus, not only people do not have money to buy, but
they also gain a great amount of debt that they are not able to pay.
The problem that arises is that even though most of the people are the victims of this wage
stagnation, there are still some people, as Krugman calls them the top 1% who do not seem to suffer
any losses in their incomes, thus creating a great gap between them and the rest of the population. As
wages make up for more than three quarters of a familys household income 4 it is plain to see why that
gap exists.

3 http://www.economist.com/news/leaders/21594298-effect-todays-technologytomorrows-jobs-will-be-immenseand-no-country-ready
4 http://www.epi.org/blog/real-hourly-wage-growth-last-generation/

According to the Congressional Budget Office, and as it can be seen in the chart 5 below,
between 1979 and 2007, the income of these households that make up the top 1% grew by 273%.

Income inequality represents how wealth is distributed across certain regions and it is measured
though the Gini Coefficient6.

5 http://www.cbo.gov/publication/42729
6 According to the Gini Coefficient, a value of 0 represents total equality meaning that the
wealth is distributed equally and a value of 1 represents total inequality
http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Gini_coefficient.html

As we can see from the chart above, in the United States in matters of wealth distribution,
things have become less equal. Though it is plain to see that there is inequality, I believe many make
the wrong assumption that this inequality entirely means that because of that top 1% the other people
are poor.
Krugman as well as many others pretty much embrace the idea that the rich are getting richer
and the poor are getting poorer, and they blame this top 1% of the poverty of the rest. If we were to
give everyone in America $1 million, it would be clear that even the poor people would get richer by $1
million, but that would not change the fact that there is still the same inequality. So, I believe that the
more important aspect to insist upon would be the poverty issue, and how those people could become
less poor.
I also believe that it should be taken in consideration the issue of income mobility, meaning the
ability of a person to move from an income level to another. As Professor Sean Muholland explains it
in a YouTube video8, although at a first impression it looks like the poor are getting poorer, if we take a
closer look, things are not as they seem. He shows how people from the bottom 20% over time
managed to go up their way to a higher quintile 9 or even the other way around, from a high quintile to a
lower one. According to the same video, there is also income mobility across generations in the sense
that children born in the households that were part of the top 20% did not get richer than their parents,
but instead remained at a similar level. On the contrary, children that were part of households of the
bottom 20% managed to gain more and even double the income that they parents had. And this fact
stands to support the idea that income mobility is possible.
Krugman also raises the question whether the American capitalism is undermining the middleclass society, actually, not only raises the question, but he says that it shouldnt be up for argument.
While he talks about the undeserving rich he fails to mention that there also are deserving poor. He
attempts to destroy the idea that character has nothing to do with poverty not that I argue that
character is the only factor that has an effect on whether someone is poor or not.
7 http://tifwe.org/resources/income-inequality/part-one/
8 https://www.youtube.com/watch?v=UbueX92CKPk
9 A quintile represents a group of households arranged according to their annual
households income

Of course that those who are rich did not get where they are because they as krugman puts it
did all the right things, like get good education and stay married as there are many example of
successful and deserving rich I would say who did not follow the regular path towards achieving
their wealth but one can only go that far in saying that they, the top 1% are responsible for all thats
wrong in the world.
There is only so much to be criticized about capitalism ruining the middle class, as taking in
consideration the fact that I believe a capitalist society offers the conditions of an existence of social
classes, of course if it is applied correctly, and that is, without the governments intervention.
Of course, it is wrong for those people that represent the 1% to be flying in their own private
jets while the rest of the population is starving, but as long as their private jets are bought with the
money they gained through legal businesses I do not see where the problem is.
Although it may sound idealistic, I do believe that through education people are able to move to
a higher quintile. Of course that there are also factors such as luck, and skills, but mostly I believe
education is the key factor. So yes, character, which education help form, is a factor influencing poor
people to stay poor. Also because a poor person is so comfortably sustained by the government, there is
no reason to try and seek a workplace and eventually moving through the income quintile, and the
49.2%10 of people living on government support in America prove it.
People tend to focus on the inequality which is only the effect without searching for the actual
cause. It is impossible not to have inequality in any kind of system. Even in socialist systems, there are
the party-elites and the non-party masses. As much as anyone would like to believe in an equality of
conditions, there cannot exist such a thing, not even genetically speaking, as people are born with
different qualities which they are supposed to take advantage of throughout their lives. When trying to
solve the problem of poverty, there is a tendency to think that the solution would be the taxation of
those that are part of the top quintile, and even though, some are underserving rich, some are not, and
this would only mean punishing hard work and ambition. I believe that probably the solution would be
not to have undeserving rich. And I believe that this would happen, if there really was a free market,
without any government intervention. Because even though, in theory, there is supposed to be such a
thing, the numerous government regulations and interventions on the market prove otherwise11.

10 http://cnsnews.com/news/article/terence-p-jeffrey/census-49-americans-get-gov-tbenefits-82m-households-medicaid
11 The most visible government interventions on the market can be seen for example, in
the saving of those too big to fail companies and institutions such as Fannie Mae or
General Motors