Rich Man, Poor Man

Posted on Aug 11, 2010 | 19 Comments

“The less productive an economy, the greater the inequality of incomes. The more productive, the less the inequality.”

—Peter Drucker, The New Realities

Earlier this summer, the Center on Budget and Policy Priorities issued a study showing that the income gap between the richest 1% of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007—the latest confirmation of a trend that would have surely concerned Peter Drucker.

When the gulf between rich and poor gets too wide, Drucker cautioned, “it destroys mutual trust between groups that have to live together and work together.”

With the ranks of well-paying manufacturing jobs steadily dwindling, Drucker was particularly worried about the fortunes of service workers—the poor cousins of today’s knowledge workers. But in his 1993 book Post-Capitalist Society, he also offered a ray of hope: Gains in productivity by service workers, he suggested, could eventually lift their incomes.

“It takes a generation or two before a society and its population catch up with radical changes in the composition of the work force,” Drucker wrote. “It takes some time—the best part of a generation, judging by historical experience—before the productivity of service workers can be raised sufficiently to provide them with a ‘middle-class’ standard of living.”

In this edition of Drucker Apps, we invite you to join our conversation about income inequality. Weighing in will be former White House and congressional advisor Ron Haskins, who co-directs the Brookings Center on Children and Families; Sam Pizzigati, editor of Too Much, a “commentary on excess and inequality” from the Institute for Policy Studies; and Reihan Salam, policy advisor at e21 and a fellow at the New America Foundation.

We open things up with this question: Will a rise in service-sector productivity ultimately shrink the income gap? Or will tackling this problem require other steps—and, if so, what?

19 Comments

  1. Salvatore
    August 3, 2010

    In my opinion, a rise in the service sector can be supportive in closing the income gap but it will be meaningless for Americans unless we first raise the bar and close the gap on education. Our work force needs to come to work with 12st century skills. A rise in the service sector without a coordinated educational systemic response will end in sending more jobs over-seas where there are better educational systems and cheaper labor. Automation is another competitor when it comes to increased productivity. An increase in the productivity of any operation that can be automated will not contribute to reducing the income gap but rather contribute to the profitability of organizational stakeholders.

    Reply
  2. Cynthia
    August 3, 2010

    I wonder if outsourcing service-sector jobs were taken into account in the statistic? Either way, with diminishing service-sector jobs staying within boarders, the demand on education must increase to keep up with shift of jobs available. But with ever-increasing tuition costs and a loss of well-paying service-sector jobs, both factors will increase the gap.

    We need to find a way to shift workers whose jobs have been lost, whether it be due to cheaper labor elsewhere, immigrated cheap labor, or plants that are no longer efficient (i.e. Detroit auto workers), to become skilled workers where they can find work locally, and tuition assistance is the first place to start. An better-educated population helps us all.

    Reply
  3. Ted Radamaker
    August 3, 2010

    The New-New Realities

    “The less productive an economy, the greater the inequality of incomes. The more productive, the less the inequality.”
    —Peter Drucker, The New Realities

    This is the way things are supposed to work in a capitalist system. but we already know the answer for our current economy. All of the profits from gains in productivity have gone to the corporations and nothing to the workers. My friends, this is called GREED.

    Reply
  4. Dr. Marilyn L. Ditty
    August 3, 2010

    The unfortunate situation we are in today is due to the imbalance of the three legged stool, public sector, (government), non-profit sector, and the private sector. The government sector settled for less money in exchange for incredible benefits for life. The private sector just got very greedy and wanted it all now, and the third sector, the nonprofits are left with the burden of carrying for the poor and no money. The Drucker image of the “three legged stool” showed a balance. We have loss that balance. How do we get it back, it will take new governmental policies that create a balance and puts a cap on profits in the private sector for those in management. It will take more governmental benefits going to the nonprofit sector to take care of the poor and the workers who are providing the services. The government sector has to realize that enormous pensions are not feasible just like the private sector has to expect less. This isn’t easy to do but it will take another ten years at least.

    Reply
  5. Deborah Hagar
    August 3, 2010

    This is a shocking statistic on where our aimless efforts are leading. The reality is that the freedom we enjoy is designed to benefit the middle class and our society at large, not the upper class.

    I fear that without thoughtful leadership and efforts to rekindle the flame in the American dream we can become two Americas. The one built on an endless struggle to make ends meet or living off dwindlying public support. The other with a closing door on opportunities for the exclusive few who have the means to pursue their dream with an increasingly inner circle.

    The tragedy would be the disincentive that we have built this country on in everyone being able to work and benefit in living the American dream.

    It is essential that we focus on developing the human capital and the knowledge of all workers.

    Reply
  6. jbrrd18
    August 4, 2010

    Will a rise in service-sector productivity ultimately shrink the income gap? Or will tackling this problem require other steps—and, if so, what?

    No. to close the income gap will require the bottom 20% of the economic scale to do something …different. We need to reign in all welfare programs as they disincentivise the bottom 20% to do anything different. if we scale back the saftey net and redeploy those funds into vocational training then we give the bottom 20% a shot at earning a real income. the war on poverty has done nothing but to enslave the impoverished even further, where in the worst of some public housing the average age of a grandmother is 33 years old. its the old adage, give a man a fish you feed him for a day, teach them how to fish ect. Here is a proven model that works http://www.eastlakefoundation.org/sites/courses/printPage.asp?id=346&page=8807

    Reply
  7. willigl.george
    August 4, 2010

    If “service worker” includes farm labor, I disagree with the finding. Corporate farming and food processers have shown the lengths to which they will go to protect their margins. (Farming in Mexico, and leaving California, for example). Hotel workers are another case, perhaps because of stronger unions?? I noticed that Haitian hotel workers in Florida are thriving (slowly).

    Reply
  8. Joe H
    August 4, 2010

    The Bush administration inherited budget surpluses from the Clinton
    administration. What turned these into deficits, even before the recession?
    There were three fundamental new costs: the tax cuts, the Medicare
    prescription-drug bill and post-9/11 security spending (including the wars
    in Iraq and Afghanistan). Of these the tax cuts were by far the largest,
    adding up to $2.3 trillion over 10 years. The wealthy only “pretend” to pay taxes while looking for new ways to develop slave labor.
    see http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073006293_pf.html

    Reply
  9. Rob P
    August 4, 2010

    “The less productive an economy, the greater the inequality of incomes. The more productive, the less the inequality.” —Peter Drucker, The New Realities

    Drucker was concerned with improving the productivity of higher income, knowledge worker categories of the service sector, like government, health care, financial and education services. While wages have increased in these categories of the service sector, productivity has not. Regarding health care, Drucker was interested in being well, rather than being overly diagnosed.

    Regarding higher education, Drucker said, “30 years from now the big university campuses will be relics. Universities won’t survive. It’s as large a change as when we first got the printed book. Do you realize that the cost of higher education has risen as fast as the cost of health care? And for the middle-class family, college education for their children is as much of a necessity as is medical care—without it the kids have no future. Such totally uncontrollable expenditures, without any visible improvement in either the content or the quality of education, means that the system is rapidly becoming untenable. Higher education is in deep crisis.” Seeing things as they really are, Forbes (March 10, 1997)” #Books – Reading [-]

    I was hoping to confirm Drucker’s productivity/income equality relationship, by showing how productivity improvements in Agriculture and Manufacturing resulted in greater income equality. If I could show how productivity improvements in Ag and MFG resulted in less inequality, I could argue in favor of Drucker’s statement. For productivity, I used the % of the population that worked in that sector. Unfortunately, using Emmanuel Saez’s 100 years of data on wealth distribution, there was no direct relationship between productivity and income equality. As an interesting aside, however, I did notice that income inequality increased, when the top marginal tax rates decreased. Inequality increased after a tax cut in 1925 until the Depression, and began to climb in the 1980′s with the Reagan cuts and spiked upward again with the Bush 2002 tax cuts(a political hot potato of the day.)

    The percentage of the population engaged in Agriculture dropped from 90% to 2% over some 150 years. The percentage of the population that worked in manufacturing dropped from ~35% of the population to less than 10% between 1946 and 2010. Wage inequality increased and decreased independently from these productivity improvements. Of course, much of the productivity improvements in these sectors were the result of outsourcing. Outsourcing is also growing in the higher income brackets of the service sector as well. For example, medical tourism and either expatriate higher education(or advanced group video-chat classes) are emerging(I’m doing this now, just for kicks). Have you seen the commercial, where a patient talks to her doctor(who is in Europe) through a flat-screen? Or the tutor who shows the child how to determine the area of a triangle using webcams? Of course, with technology, outsourcing of anything digital can occur much faster than it took for capital intensive agriculture or manufacturing sectors. Remember when people bought paper newspapers, or had a CD collection, or took pictures with film? A decade ago, Peter was experimenting with webcast lectures, where he could potentially communicate with 1000′s of students located all over the world. This might be considered a disruptive productivity improvement in the higher education services sector. Wouldn’t it be great if students from around the world could interactively participate in a CGU class, with the best teachers and be able to interact with other high quality students from anyplace? Would this reduce the cost of education, improve the quality and increase the productivity of the education service sector? I suspect Drucker was headed in that direction. In my life of 53 years, I have seen employment in both Ag and MFG disappear. Neither the Farm Bill nor ” Made in America” chants stopped the invisible hand. What will we all do, when the employment in the services sector vaporizes from rapid improvements in productivity and outsourcing? Productivity improvements in the services sector will reduce the income gap- we will all be equally poor and once again, Drucker was right!

    Reply
    • admin
      August 5, 2010

      Very thoughtful comment, Rob. We’ve featured part of it in today’s post.
      Thanks.

      Reply
    • Marcos Boschi
      August 20, 2011

      America is governed by the “Queen” . Mr. Buffet – representing dignity and ashamed with the inequaty – can not do anything about it.

      The USA picture – The action – The beneficiaries – The people
      The country – and where the jobs and Quality of Life goes..

      The picture
      Presidents run the countries dealing with politicians, getting what they can “to show, as president how capable they are, and will be as long as they stay as Mr. Presidet. Politicians take project and decisions dealing with big companies, rich people, showing that they will protect the interets, objectives, their pockets, as long as they give money for them to stay in the Congress, and make as much as they can – business for thenselves, and for those which have financed their campains and victories. The main foccus is to get the majority in voting, so the Congress aprove and the executive power will do all what they can do by themselves – companies, rich people included – as the judiciary keep dribling the laws, adjusting the justificatios for special decisions under “big umbrelas” of people’s interest such as “terrorism”.

      Where the action goes?
      For getting each time more money, funds, from the government. The numbers must grow, each time more people come to share this particular benefit, and there is no other way or recurses better and more powerfull than this one “representing the american people, for the american people, in name of american people (never for their interest).

      The beneficiares
      Politicians, big companies, rich people. As always have being happening since man exists. It is a game were “people’s interest, jobs, salaries, quality of life of the citizens, health, education, and safety” are used as “huny in the point of arrows” to keep getting votes, keeping the chairs, desks, and pens signing and doing whatever they (politicians, companies, and rich people) want. Like always have being happening. No news.

      The people and The country
      Nice images to be explored. For “america (their America) and our American people”, as doll of a cake they make and present in their “parties” distributing funds, and pleviledges, getting and giving “presents” to their business peer. Nothing yet real truthfull for people benefits. Or do you think that is normal after more than 500 years, USA still not have funds, and money to have a decent “health care, health government support program for better health and people’s quality of life?”. Europe and Japan – just to mention two examples – with money USA gave to them to rebuit their destroyed countries, already hava a long time ago a health program, supported by government. And we could see how hard it was to get some money for health in the recent “politicians combat, not letting go money they want for another objectives of their own”. A shame. Clear and no human respect at all for “great American people”. Of course rich people can pay health high costs with no problems. Companies never help or are socially responsible for the health care, so there is no bill for them to pay. And “lets make war, or create wars wherever we can…there is the good business”. Funds from the government, profits for the companies, and a big party for politicians to “share and devide the big cake”.
      All in name of “dearest american citizens” of course. Here also, unfortunaly… no change at all.

      Jobs and Quality of Life (for the Americans and America)
      These are not the purpose of politicians, companies, and rich people. As a matter of fact these are exactly the wrong and oposite direction of what they want. The same huge amount of funds disputed here, can go smaller if divided with “american people’s interests”, and bigger as they wish or even growing each year bigger… for their own interests. And for sure will keep the USA debts worse, bigger, and with catastrofic consequences. But not for them, not for the companies – that can make profits, as bees can colect and make hunny – all over the world, wherever they invest, take the profits, and run away for the next “business atractive flower”.
      Not for creditors, which continue to control the Amercian Economy as they wish, printing money and fixing the inflation rates, and getting each time more power in the American Economy, and in the world. Very small business bankers, very rich, and powerfull, working for their own benefits, about a century, as “simbiose money succers”. Also that “sovereighn” american people is not notice. People and the world still believes that the “Mr. President” has the power, or the companies has it. But less than 0,5% knows it is not the truth. Bankers, small group with power and previledge – because the American Treasure could not honor the USA commitments, the Presidents could not stop, and nobody cares or attack the “debth crises dependency”. Still the same. For about 100 years private companies succing the people’s economy. No change till now, and the worse: will get bigger, worse, and each time with less chances to be changed.

      Conclusion: Authority does not mean anything in decision making, and getting “things done in benefit to the people, the country, or the world peace at all”. The real “USA drivers are the politicians, transporting funds and benefits for their own”. The President is a “figurative representative of American people, as que Queen Elisabeth is in England”. The real power and control of American Economy is not either with the politicians, companies, or rich people, but with a small private bankers who lending money builded-up an “USA dependence and their creditor’s power – with the american debth each time getting bigger – keeping letting them do each time more whatever is good for thenselves, and their power position.

      So, here we are american people, with the final question: who is interested, or moving any feather in the interest of american people, their health, their safety, their better quality of life?
      Yes, jobs and salaries are the most important base – which already existed and desapered – farming and manufacturing was and still is – all over the world – like show us Germany, Japan, Corea (cars), and another “small power countries sudenly getting their presence in the world cenary”. But not for America. They don’t need these kind of economy recurses anymore. So the politicians, companies (building and investing in another countries for better profits) also don’t see, and the “flying bees, the rich people” need these jobs, people’s interests even less than anyone above mentioned. Mr. Buffet is a decent man. Honest man. With Rare quality as human being when few days ago said: We (rich people) must pay more interest. I pay 17% what is less than what a midle class worker pays.
      The “Queen style of running American government and Mr. Buffet’s honesty does not make any difference in whatever the future of America can be”. It’s time for people to wake and do their job, as history have towsend of times proved. “Each people has the government it deserves!”. I believe the American people don’t deserve this. It is time to get out ot tvs whatching funny idiots stories, stop eating potatoes, and getting to save and get back the country tha once upon a time…were from them – the people.

      Reply
  10. Jean Seymour
    August 8, 2010

    Will a rise in service-sector productivity ultimately shrink the income gap? Or will tackling this problem require other steps—and, if so, what?

    A rise in any sector that exhibit productivity helps to shrink the income gap if and only if it is sustained for a substantial period of time. As the economic gap separates the haves and have not(s), positive progress often serves as the bridge that supports the transition of education and empowerment. Therefore, tackling the problem of the income gap shrinkage must include the productivity of the service sector as well as other steps. However, outsourcing jobs should not be an option if it does not incorporate education and training for the American people. If family in America is loosing their home and livelihood to outsourcing, then that family should be sent to the area where the job is being outsourced for training so that the knowledge can be brought back home for empowering Americans. Some of the different steps that CAN be taken to reduce the income gap barriers with out outsourcing are: education, empowerment and training.
    First, once given an opportunity to return to school for skills or trade up grade, people are more receptive to making life adjustments because it offers an option beyond a simple loss of job. Properly educating workers enables them to recognize that the opportunity to move forward is made available to them through education; but the responsibility to MOVE FORWARD is a personal decision.
    The next step to bridging this gap would be by empowerment: As the service sector of productivity shrinks empowering employees to accomplish new skills requires tools to prepare and empower the worker.
    Education scholarships by employer is empowerment.
    Living allowance for education is empowerment.
    Promoting and implementing a program of giving back is empowerment.
    Job placement assistance is empowerment.
    If you give a person a book but do not teach them how to recognize the alphabets then the prospect of learning to read becomes more of an obstacle that an opportunity.
    Finally training allows for hands on, in the field, experiences that gives ownership to the learner. Any worker who has lost a job can gain a greater sense of accomplishment through proper training and experimentation. The most common requirement needed for practically any position is experience and education. To educate a person is to enable them to gain experience through doing. How can one be expected to do a job and be good at it if they have never been trained in the position. For that reason alone, it is imperative for that the rise in service sector productivity be used as a means to shrink the income gap for a more economic balance overall.

    Reply
  11. Scott Foster
    August 11, 2010

    I’m 70 and was a follower of Mr. Drucker when he was still with us. As much as I revere him and his sage writings, I fear that the America he wrote about is no more and will never return. The high standard of living created after WW II is unsustainable by any measurement. The US population has doubled, yes doubled, in my lifetime, the majority of our workforce is obese due to the proliferation of “easy” fast and junk food, civics and art are no longer taught in the schools, both political partys are held captive by the American Corporate State, the unions are controlled by a handful of elite leaders who have not a clue as to the real situation, and the rest of us are frightened to death about a looming inflation further decreasing what’s left of our savings and Social Security. Mr. Drucker would be appalled by the lack of courageous business and government leadership in the year 2010.

    Reply
  12. P
    August 20, 2010

    What would Peter’s response be to the news piece by Johann Hari on Management consultants? You can find the article at http://www.johannhari.com/ and it was published within the last few days.

    Reply
  13. Hugo Laxton
    September 9, 2010

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    Reply
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  16. garrett lynch
    April 29, 2011

    so is he saying that population is diminishing? im sorry i am a high school freshman so i do not understand

    Reply
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