The gap between the "haves" and the "have-nots" has increased over the last 35 years and some argue that having too much income inequality is not healthy from a public policy perspective. The argument is that the greater the inequality the greater the odds become for political and economic risk in a capitalistic representative government like the United States.
The 2016 election is evidence of that. Whether you agree with Donald Trump or not, I think everyone has to agree that he was not elected to continue the status quo. He was also elected because many working class Democrats, who had seen their wages stagnate for many years due to illegal immigration and unfair trade practices, voted for Trump
Trump's policies are intended to affect change. Immigration. Foreign Trade. NATO. These are all areas where Trump is pursuing policies differently than we have seen from either Republican or Democrat administrations in the last 50 years.
Any change also carries inherent risk. We are in the midst of some of that political and economic risk right now. We will have to see where that path leads.
We are also seeing the rise of the Socialist movement in the U.S. as a reaction to income inequality. Of course, their prescription is to do away with capitalism altogether. Abolish profits. Enact more government control and regulation of business. Impose confiscatory taxation on the rich. Start handing out guaranteed income to everyone. If you want to talk about political and economic risk, consider that potential path.
There is a lot of talk about income equality but there is not much talk about why the gap has widened.
I have written about some of the underlying issues before.
Education is a big factor. Those with higher educations have prospered in the new economy. Those with limited education and skills have suffered.
Immigration has also hurt Americans with lower education and skills. The influx of immigrants (especially illegal immigrants) has depressed wages at lower income levels.
Technology and trade has also contributed to the problem. Ten people sitting around a computer can produce a billion dollar company today. That used to require a manufacturing plant that would employ thousands of workers making a good wage. Our economy has favored the technologists and we let our manufacturing base (along with the good paying jobs) go to China, Mexico and other places.
A factor that is not discussed often, but I think has had an enormous impact on income inequality, is the era of ever lower interest rates that began in the early 1980's. Interest rates reached levels of absolute insanity in the aftermath of the Great Recession of 2008 when central banks poured liquidity into the financial markets.
For example, here is a graph of the federal funds rate from 1955 to the present.
Income inequality started to accelerate as interest rates declined beginning in the early 1980's.
Declining interest rates increase the value of financial assets (stocks and bonds).
Who owns most of the financial assets? The wealthy. Low interest rates have simply allowed the rich to get much richer.
If you don't think this is a major factor consider this chart that compares the value of financial assets with those of real assets that I came across recently. It shows that real assets (commodities, real estate, collectibles, precious metals, etc) are at all-time lows compared to financial assets.
When did that trend begin? In the early 1980's when interest rates started their downward slide.
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| Credit: MacroMusingsFrom10000Feetwordpress.com |
The other side of coin is that the rich also bear most all of the wealth risk in the economy. They certainly bear most of the risk in the values of those financial assets. Those at the bottom of the wealth scale have little to lose in wealth but invariably a loss of wealth to the rich translates into loss of work for everyone else.
What happened in the aftermath of the stock market crash of 1929? What happened when the financial markets tanked in 2008? The rich lost lots of wealth. The rest lost lots of jobs.
This is why I don't understand why more people don't comprehend how our fortunes are inextricably linked together in our economy. Everyone is interdependent on each other.
The rich supply the risk capital that fund the businesses that create the jobs. The rich need laborers and workers. They also need people with money in their pockets to consume the products and services of those businesses. The poor need people with generous hearts and they need taxpayers to fund welfare programs. The government needs taxpayers to fund government spending.
Yes, there is risk if we lose balance between all of these factors. However, the biggest risk is when those who supply the risk capital do not have the ability, or simply refuse, to fuel the economy. We have seen the effects of this before in our economy in the early 1930's and in 2008-2009. It is even clearer in a socialist economy when the rewards are taken away from the risk takers. Look no further than Venezuela on that score.
This is how Calvin Coolidge put it almost a hundred years ago.
"Don't expect to build up the weak by pulling down the strong."
I also like what Warren Buffett said about the subject of risk.
“It is insane to risk what you have and need in order to obtain what you do not need.”
The fact is that if you are rich your first priority is to remain rich. Yes, if you are rich, it is nice to think about becoming richer. However, when the risk is too great you simply fold your cards and hunker down. You don't spend your money. You don't risk your capital. You don't expand. You don't fund new businesses. You don't hire help.
For those in the top .1% or 1%, if they lose half of what they have, they will still be rich.
If you are are not rich, you simply cannot afford to lose anything---most particularly your job. Most have no savings, no assets, no cushion. If their wages stop, their life stops.
Keep all of this in mind when you hear that we have to do something about income inequality by trying to penalize the rich.
In addition, keep the Buffett quote in mind when you also think about all of the media and other abuse that Donald J.Trump has taken since he decided to run for President. Did he really need to be President?
Think about it
Barack Obama did not have anything to lose when he became President. However, he had much to gain. He is now part of the 1%.
Donald Trump had little to gain and much to lose when he became President.
Trump's critics say he is insane. They might be right. What did he need? Why take the risk at this state of his life? If you are one that questions Trump, think about those questions.
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