Excerpt from a thoughtful commentary by Martin Hutchinson at Prudent Bear (reposting this piece, as I had some trouble with the old post):

“H.G. Wells postulated in his 1895 “Time Machine” the ultimate destination of a Latin American–style social system. In his future 800,000 years hence the human race has divided into two species, the eloi, who do no work and live only for trivial aesthetic pleasures and the morlocks, sub-men who work underground keeping the mechanical civilization running. Wells’s fantasy seemed far-fetched after 1920, as equality increased and the working classes became both educated and comfortably off. However the fantasy looks a lot closer to reality in 2007 than it did in 1957, when the movie was made.

In the United States, one would expect political activity to begin showing Latin American characteristics, including a breakdown in social cohesion, as Gini rises towards Latin American levels. This appears to be happening. One example is the doubling since 2000 of the number of Washington lobbyists, whose objective is primarily to divert public resources to private uses. A second is the growth of earmarking in legislation, up 10-fold in the decade to 2005; earmarks are generally inserted in order to benefit some private interest at the expense of the general good. U.S. politics has always been corrupt, and was especially so during the 1870-96 Gilded Age, the previous high point for inequality, but the increase in the proportion of Gross Domestic Product spent on lobbyists, the proportion of GDP spent on corrupt government spending and indeed the proportion of GDP spent on elections themselves suggests that systemic corruption is rapidly increasing.

The new immigration bill is above all an example of class legislation. The choice between a low or a moderate level of immigration depends primarily on non-economic factors — a voter’s interest or otherwise in increasing the diversity of the society, and the recognition that the global economy may work better and produce more wealth for all if there is a certain amount of migratory lubrication between different societies. However, the effect of more than modest immigration on inequality and therefore on class structure is highly significant. The Immigration Act of 1924, which largely restricted immigration to the richer countries of northwest Europe, produced the greatest social leveling the United States has ever seen, with the Gini coefficient declining by around 10 points between 1920 and 1965, the years of its salience (the 1924 Act replaced previous restrictions introduced during World War I.)

After 1965, immigration policy was reversed, to encourage a larger flow of immigrants, primarily from developing countries. Initially, this had only a modest economic effect. Then the 1986 amnesty encouraged low skill immigrants, allegedly now numbering 12 million, to try their luck with the overstretched immigration bureaucracy. Even large companies, knowing that immigration laws would not be enforced, seized the chance for some cheap labor.

Whatever the economic effect of moderate amounts of skilled immigrant labor, almost certainly positive, the economic effect of large amounts of unskilled immigrant labor is very clear: it drives wage rates down to rock bottom levels, particularly in personal service sectors where training is minimal and employment informal. That’s why a haircut costs less in real terms now than it did 30 years ago, it’s why even modest middle class households now have a cleaner and a gardener, which they usually didn’t 30 years ago and it’s why enormous numbers of dubiously constructed houses appeared when finance became available in 2002-06.”

More at the Bear’s Lair.