No free lunch for economyThe three decades following World War II were generous to the American middle class. The median family income in the United States rose 2 percent on average per year, nearly doubling over the span of three decades. But from mid-1970s, incomes began to plateau. Family income grew a mere 10 percent over the following 40 years until 2010.
Annual income for the superrich, or the top 1 percent on the income bracket, tripled during the same period. American chief executives earned 23 times more than the median income in 1973, but by 2010, the gap topped 300. On top of income discrepancy, generational class mobility stagnated. Two years ago, The Financial Times declared the end of the “American Dream.” In short, if you are born poor in America, you are more likely to stay poor for the rest of your life.
The middle class expanded rapidly in Korea with a steep rise in income. But Korea followed suit with the post-1970s U.S. in income inequality and stagnant mobility from the mid-1990s. The economic policy framework also evolved on par with that of the U.S.
Economists generally classify the economic model of the free-market world in the post-Industrial Revolution years up to the early 20th century as classical capitalism. The global economic and trade order was inspired and governed by British liberal economic philosophy and laissez faire principles. But liberalism theory was challenged by a series of recession, socialist ideas and, finally, the Great Depression. From the turn of the 1930s, Western Europe, the U.S. and Japan contained liberty in the financial market to instead increase the role of government and pursue a social welfare state.
Highest income tax rates hovered around 70 percent to 90 percent. From the 1970s, governments shifted toward lower taxes, liberalization and privatization. Under Prime Minister Margaret Thatcher, the British top rate of the income tax was reduced to 83 percent and under President Ronald Reagan the U.S. rate was reduced to 70 percent.
The world today is hit with a double whammy of an unstable economic system and protracted stagnation. The world managed to veer away from a second Great Depression upon the spill of a Wall Street-triggered financial meltdown in 2008 thanks to a coordinated expansionary fiscal and monetary campaign by leading economies. But the measures provided temporary relief and fell short of pulling the global economy out of a pitfall. Worse, governments around the world have run out of public finances. The world is treading on thin ice and the horizon looks bleak.
One thing is certain. There is a price to pay for everything. A steep rise eventually would lead to an equally steep and long fall. The long-running stagnation would likely build pressure and bring about major changes in the landscape of many economies.
The U.S. has been levying stricter financial regulations since the 2008 financial crisis epitomized by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Politicians and the media lashed out at Wall Street immorality and greed. But as economic hardship continues to plague the nation and American lives, Wall Street and other conservative media are blaming rigid financial regulations and anti-corporate sentiment for damping and worsening investment and spending, protracting capital and credit immobility, increasing unemployment and hindering economic recovery.
The economies in the U.S. from the mid-1970s and Korea from mid-1990s failed to run on a sustainable system. American economist Robert Reich assessed that the U.S. economy is under the same ominous pattern as before the Great Recession with a larger income going to the very top while the vast middle class continues to lose ground. In 1928, the richest 1 percent of Americans accounted for 23 percent of the nation’s total income as the economy struggled under its biggest economic downturn. The rate fell to 8 percent by the late 1970s.
The world is still struggling to find a breakthrough to its current quandary. American and European politicians sing the emotional tune of “change and hope” while local politicians drum up “economic justice.” Both are rhetorical and ambiguous. It remains questionable how the global order will evolve over the next two to three decades.
The economic framework is established through the political process. It may be difficult for capitalism to radically change from its current model under the democratic system. The power span of political leaders is relatively short and the capital can easily overpower media and politics. But at the same time, the system cannot last without transformation.
Translation by the Korea JoongAng Daily staff.
* The author is an economics professor at Songang University.
by Cho Yoon-jae