Will the Meek Become the Masters?

Bloomberg reports that U.S. stocks fell, capping the worst Thanksgiving-week drop since 1932 in the Standard & Poor’s 500 Index, as S&P cut Belgium’s rating and a report said Greece is demanding private investors accept larger losses on their debt:

Financial (S5FINL) stocks in the S&P 500 rose 0.4 percent as a group, trimming an earlier gain of 2 percent. Chevron Corp. and Hewlett-Packard (HPQ) Co. slid at least 1.5 percent to pace losses in the Dow Jones Industrial Average. Sears Holdings Corp. lost 1.3 percent while Wal-Mart Stores Inc. (WMT) rose 0.4 percent on Black Friday, traditionally the biggest U.S. shopping day of the year.

The S&P 500 declined 0.3 percent to 1,158.67 at 1 p.m. New York time, falling for a seventh straight day, the longest streak since August. The Dow retreated 25.77 points, or 0.2 percent, to 11,231.78. The U.S. stock market was closed yesterday for a holiday and trading ended at 1 p.m. today. About 3 billion shares changed hands on U.S. exchanges, the lowest volume since Nov. 26, the day after Thanksgiving last year.

“The demands of Greece now totally change the game,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said in an e-mail. “The situation can no longer be called voluntary by any stretch of the imagination. The equity markets in the United States may test the lows again as there is increasing concern of a major recession in Europe.”

The S&P 500 fell 4.7 percent since Nov. 18, capping a second week (SPX) of losses, as the burden of government debt grew around the world. The cost of insuring European sovereign bonds against default rose to a record. The benchmark gauge was headed toward its worst November since 2000, dropping 7.6 percent for the month so far.

And hang on to your hats as next week will be another huge one in Europe with lots of big meetings taking place.What do I recommend investors do? Keep buying the fear because sooner or later, this bad case of eurofatigue will play itself out, the bond market will break Merkel, and a liquidity tsunami will be unleashed on global markets unlike anything you've ever seen before.

But that liquidity tsunami will only benefit the prosperous few, not the restless many. Earlier this week, Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration, wrote an op-ed piece in Bloomberg blaming the supercommittee's failure on the income gap:

The supercommittee’s failure to reach a substantial agreement this week is disappointing but unsurprising. The old model of politics, in which bipartisan agreement was the key to success, simply doesn’t work anymore. In the new model, there is almost no overlap in views across party lines, and government function requires either domination by one party (as was the case for much of President Barack Obama’s first two years in office) or more automatic decision-making (as I have suggested elsewhere).

What’s causing today’s hyper-polarization? Although political scientists still debate the issue, a growing body of evidence suggests that, as economists such as Paul Krugman and Ed Glaeser have argued, increases in income inequality may play a significant role.

It is striking that both income inequality and political polarization began to rise sharply in the U.S. in the mid- to late 1970s. Yet many pundits airily dismiss this connection, arguing that because blue states are, on average, higher-income than red states, the link between income and partisanship must be weak. Instead, they attribute increasing political polarization to the gerrymandering of legislative districts. Both of these assertions are empirically false.

Gerrymandering plays a relatively modest role in polarization trends. A more plausible driver is the sorting of the population itself into effectively two different camps. To a stunning degree, Americans are increasingly moving into neighborhoods with other people who have similar incomes and share their political views.

Bill Bishop and Robert Cushing, the authors of “The Big Sort,” and others have documented the way Americans increasingly live near people with similar political views. This residential sorting by political party has occurred despite an ongoing overall decline in housing mobility. And although this phenomenon reflects shifts among families of both parties, James Gimpel and Jason Schuknecht, the authors of “Patchwork Nation,” found that Republicans have been more likely than Democrats to move, even after adjusting for income, race and age.

Americans Sort Themselves

A new study provides a hint about one possible force behind this political segregation: Americans are increasingly choosing to live near people in their own income bracket. According to research by Sean Reardon and Kendra Bischoff of Stanford University, in 1970, almost two-thirds of American families lived in middle-income neighborhoods. By 2007, only 44 percent did. The share of those living in a poor neighborhood, in the same period, more than doubled, from 8 percent to 17 percent. So did the share living in an affluent neighborhood -- from 7 percent to 14 percent.

As Reardon and Bischoff conclude, “The increasing isolation of the affluent from low- and moderate-income families means that a significant proportion of society’s resources are concentrated in a smaller and smaller proportion of neighborhoods.” A separate study, by Tara Watson of Williams College, concluded that trends in income inequality can fully explain recent increases in economic segregation.

Does income have anything to do with voting patterns, though? Many pundits have suggested that it doesn’t, and here is where they cite that states generally voting for Democrats are, on average, higher-income than those that vote mostly for Republicans. But an important book by Andrew Gelman, a professor of statistics and political science at Columbia University, “Red State, Blue State, Rich State, Poor State,” shows why such reasoning is flawed: Within any given state, higher-income people are much more likely to vote Republican.

Gelman finds that although, in any state, higher- income people are more likely to be Republican, the link between income and party affiliation in blue states is less dramatic than it is in red ones. In other words, as you move up the income scale in a Democratic state, the proportion of Republicans rises, but not as much as it does in a Republican state. That higher-income people in red states are so much more likely to vote Republican helps explain the blue state-red state conundrum. My personal experience is consistent with this: It is rare to meet a high-income Democrat in a red state.

Nolan McCarty, Keith Poole and Howard Rosenthal reach similar conclusions in their book, “Polarized America: The Dance of Ideology and Unequal Riches.” They find that since the 1950s, a time when the U.S. experienced historically low levels of political stratification by income, “there has been a rather substantial transformation in the economic basis of the American party system. Today, income is far more important than it was in the 1950s. American politics is certainly far from purely class-based, but the divergence in partisan identification and voting between high- and low-income Americans has been striking.”

And so we come full circle. Residential segregation by income has been increasing markedly, and since income is strongly related to voting patterns, this phenomenon may help explain the rise in residential segregation by political party. As we surround ourselves with people like us, we reinforce our own views, and the result is a more polarized population.

The polarized population, in turn, feeds a more polarized political system, which makes governing difficult. Paradoxically, because polarization creates safe bases for each side, it may make the modest number of centrist swing voters ever more crucial to winning presidential elections. And yet, actually governing from the center is increasingly challenging, given the hyper- polarization reflected in Congress.

“United we stand, divided we fall” has been uttered many times in this nation’s history. As we increasingly fall into divided neighborhoods, we shouldn’t be surprised that our Congress cannot stand united.

It's striking how many intelligent Americans have recently come out to sound the alarm on income inequality and the politics of polarization. But this isn't an American problem. Last weekend, I discussed the "Global Disconnect" and followed that comment up with one on lies, damn lies and statistics.

Discussing income inequality is a sensitive topic. The rich and ultra-rich will tell you they worked hard and "earned" their wealth, but this is pure rubbish. Ask Bill Gates and Warren Buffet how they really became ultra-wealthy and you'll be surprised to hear that it has little to do with their hard work and brains. And in the financial world there are plenty of idiots who struck it rich just by being at the right place at the right time.

Income inequality will be the major political and economic issue of our time as people realize that democracy is incompatible with debt collection. While the prosperous few lobby against more tax hikes and for more austerity, the restless many will revolt. And in other nations, they are revolting against brutal regimes which consistently violate human rights, paying the ultimate price for freedom.

If you really want to know where the world is heading, brush up on your knowledge of Marx because the oppressed of the world are revolting against corrupt political systems which has concentrated wealth and power in the hands of the few. Can't tell you what the endgame of this European debt crisis will be, but can tell you what the endgame of corrupt capitalism and all corrupt "isms" will be. It will come when the restless many overthrow the wretched of the world, when the meek finally become the masters of their own lives.

Below, watch Sunny Stella Malagardi's report from Syntagma Square in late July. Do not agree with everything in the video but do agree with her main message ( h/t Sunny Stella).