U.S. Headed Toward Third-World Status


By Ron Hera

Economic data suggests the United States is slipping toward the status of a Third World nation as wealth becomes more concentrated in the hands of the richest 1%.

If fundamental changes are not made the U.S. could become a post-industrial, neo-Third-World nation as early as 2032 if the embattled middle class continues to slip into poverty.

American families are working harder than ever before, with both spouses now firmly in the workplace in most households, but real household incomes have slipped to 1996 levels. One in six Americans now lives in poverty and one in eight is dependent on food stamps.

Overall household wealth in the United States has fallen by $7.7 trillion, thanks partly to the housing crisis and current economic slowdown. Meanwhile, the rich are growing richer with the wealthiest 1% tripling their household incomes from 1979 to 2007. They’re also demonstrably over-represented in the ranks of our elected leaders – increasing the social gap between those who make policy and those who shoulder the burdens of those policies.

The defining characteristics of a Third World county include high unemployment, lack of economic opportunity, low wages, widespread poverty, extreme concentration of wealth, unsustainable government debt, control of the government by international banks and multinational corporations, weak rule of law and counterproductive government policies. All of these characteristics are evident in the U.S. today and intensifying as the beleaguered middle class struggles through the most difficult economic climate since The Great Depression.

Other factors include poor public health, nutrition and education, as well as lack of infrastructure. Public health and nutrition in the U.S., while below European standards, stand well above those of the Third World. American public education now ranks behind poorer countries, like Estonia, but remains superior to that of the Third World. Crumbling infrastructure can be seen in cities across America, but the vast infrastructure of the United States cannot be compared to a Third World nation.

All of these factors deteriorate rapidly in a declining economy.

Unemployment and Lack of Economic Opportunity

pop ratioThe U.S. labor market is in a long-term downward trend linked to globalization, which has resulted in the offshoring of manufacturing, outsourcing of jobs and deindustrialization. The U.S. workforce has declined by approximately 6.5% since its year 2000 peak to roughly 58.2% of working age adults and the now suffers chronic unemployment of 9.1%.
Unemployment is a deep, structural problem in the U.S., and a fundamental challenge to economic opportunity. The workforce grew in the 1980s and 1990s, as dual income families became the norm, but the size of the workforce is shrinking due to a lack of economic opportunity.

Officially, long-term unemployment is 16.5% and the ranks of the long-term unemployed (those jobless for 27 weeks and over) include 5.9 million, 42.4% of those unemployed. However, prior to the Clinton administration, unemployment measures included workers who are now no longer counted as part of the workforce. Using the more accurate pre-Clinton criteria, unemployment exceeds 22%, only 3% below the worst point (24.9%) of the Great Depression.

By comparison, Macedonia’s 33.8% unemployment rate is the worst in the world among nations with populations exceeding 2 million. It’s followed by Armenia at 28.6%, Algeria at 27.3% and the West Bank and the Gaza Strip at 25.7%.

Compounding the unemployment problem debtis the fact that an entire generation of young Americans is being left behind in terms of economic opportunity. Many new college graduates unable to secure a job interview, let alone a job in their career fields, despite being saddled with mmroe than $1 trillion in student loans. And unlike the corporate debt of for-profit colleges like Bridgepoint Education, student debt may not be discharged by filing for bankruptcy protection.

The labor force participation rate for those aged 16 to 29 looking for work fell to 48.8% in 2011 – the lowest level ever recorded.

Lack of economic opportunity among American youth, including millions of unemployed college graduates, is a political wildcard reminiscent of countries like Tunisia. Many have taken to the streets in recent months as protesters in The Occupy Wall Street movement against the pay-to-play political machines.

The structural decline of the U.S. labor market will continue as American workers are merged into a global labor pool with directly workers in low-wage economies like China and India. They simply cannfactoryot compete for jobs with workers in China earning $514 a month in terms of purchasing power parity, while paying first-world prices for housing, food and education. That’s 57% below the U.S. poverty line.

According to the Economic Policy Institute, the U.S. trade deficit with China alone has caused the loss of 2.8 million U.S. jobs since 2001.

Falling Real Wages and Household Incomes

Workers have less purchasing power whenever the cost of living rises faster than wages. That’s why most American families have grown significantly poorer over the past 10 years, once their household income is adjusted for inflation.

Real median household income fell 2.3% in 2010.

cpiAlthough the average wage has risen steadily in nominal terms, dwindling purchasing power is a reality for most Americans. The wages of most Americans have not kept up with the Consumer Price Index (CPI) after being adjusted for inflation.

According to famed economist Milton Friedman, “inflation is always and everywhere a monetary phenomenon.” In other words, prices rise when the money supply is increased faster than population or sustainable economic activity. And the money supply has increased dramatically the past 10 years – more than twice as rapidly as it expanded during the prior 40 years.

moneycpi sgshisppovstampsThe appearance of economic growth can be created by increasing the money supply. This has a temporary stimulative effect but also causes prices to rise. True Money Supply is an accurate measure of inflation. Although CPI is sufficient to illustrate declining real wages, CPI does not measure the cost of living in a realistic way.

According to economist John Williams of Shadow Government Statistics, CPI systematically understates inflation. The decline in real household income has set Americans back to 1996 levels, despite many households now having two incomes rather than one.

Dual income families accounted for much of the increase in real median household income during the 1980s and 1990s. However, two incomes are barely better today than one income was three decades ago.

The decline in real wages was obfuscated in the 1980s and 1990s by the expansion of the national workforce as women entered the workplace. Real median household income rose while real wages declined because more households had two incomes.

As U.S. wages and household income continue to fall in real terms, both poverty and reliance on government assistance programs will continue to rise.

Growing Poverty

The number of families living in poverty has risen sharply since 2006 and continues to climb.

According to the U.S. Census Bureau, the poverty rate in the United States rose to 15.7% in 2011, with 47.8 million Americans living in poverty – one in six Americans. The official poverty line, determined by the U.S. Department of Health and Human Services, is $22,314 for a family of four.

The U.S. Department of Agriculture’s Supplemental Nutrition Assistance Program (SNAP), commonly known as “food stamps,” serves 45.8 million households as of May 2011. The program now feeds one in eight Americans and nearly one in four children.

Based on the outlook for employment and wages, both poverty and reliance on government assistance programs will continue to grow.

Increasing Concentration of Wealth

The negative trends in employment, wages and poverty have not affected all Americans equally. In fact, the household income and wealth of the wealthiest Americans has increased sharply, despite the overall deterioration of the U.S. economy.

fore“Ultimately, we are interested in the question of relative standards of living,” said Alan Greenspan, former Chairman of the Federal Reserve. “Trends in the distribution of wealth, which, more fundamentally than earnings or income, represents a measure of the ability of households to consume.”

In other words, concentration of wealth undermines the consumer base of the economy, causing GDP to decline and resulting in unemployment, which reduces living standards.

The total wealth of society is reduced when wealth is highly concentrated because there is a lower overall level of economic activity.

Economic data from several sources, including the Congressional Budget Office, show that wealth and income in the United States have become increasingly concentrated with the wealthiest 1% of Americans owning 38.2% of stock market assets. For the wealthiest 1% of Americans, household income tripled between 1979 and 2007 and has continued to increase while household wealth in the United States has fallen by $7.7 trillion.

giniThe Gini Coefficient is an economic measure of societal disparity in income distribution. In terms of the Gini Coefficient, the United States is now on par with China and will set to fall behind Mexico even though the U.S. remains a far wealthier country overall.

If the current trend continues, however, the U.S. will resemble a Third World nation , in terms of the disparity in income distribution by 2032.

Welcome to the Third World

The U.S. government faces a historic fiscal crisis even as partisan political discord and the rise of political lobbying industry hamper its ability to engineer the reforms that are needed. The obvious challenges include worsening unemployment and lack of economic opportunity, falling real wages and household incomes, growing poverty and increasing concentration of wealth.

However, our nation’s ability to respond to these challenges has been eroded by the dominant influence of corporate America – particularly large banks – the weakening rule of law at the federal level, and destructive tax policies. Barring fundmarketamental reforms or a hyperinflationary collapse of the U.S. dollar (due to the fiscal problems of the U.S. government), the deterioration of the U.S. economy will continue and accelerate.

As the U.S. economy continues its decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate and our new Third World status will become apparent.

Ron Hera is a research analyst who helps investors profit from changing economic and market conditions. He heads Hera Research and oversees publication of The Hera Research Newsletter.