Too Much Money

US_productivity_and_real_wagesI’m afraid our country has too much money – or, at least, too much money in the wrong places.

America had a wonderful run after World War II when the middle class blossomed, but over the past thirty years or so there has been a gradual redistribution of wealth upwards.

Over the decades, the wealthy and powerful have tweaked the tax code and financial regulations to make it easier for them to make and keep money. When rising workforce productivity does not lead to rising wages, something seems unfair.

This trend has been documented in many places, for example:

“Unequal wealth distribution is hardly a new or uniquely American problem. In fact, it’s been prevalent throughout society since humans first built civilizations: A small minority of aristocrats has always wielded the most power throughout history.

“The [top] 1 percent [executives, doctors, lawyers and politicians, among other professions] are worth about 70 times the worth of the lower classes.

“It’s historically common for a powerful minority to control a majority of finances, but Americans haven’t seen a disparity this wide since before the Great Depression — and it keeps growing.” forbes.com

Ideally, the wealth at the top would be used to capitalize increased production and an expanding economy, but America today doesn’t need more production. Wealthy people, quite reasonably, want to invest money in a safe place that earns a decent return, which fueled the 2008 recession debacle – the financial industry decided to meet the demand through fraud.

Are we in the same place again?

I fear we will see increases in corporate corruption and more frequent bubbles. If more of this wealth (and the income that precedes it) belonged to the middle and lower classes, they would spend it on products and services which would grow the economy. That would be good for everyone, but I doubt many wealthy Americans (despite Warren Buffet) see their own enlightened self-interest here.

By the way – it may not be just the wealthy driving the problem. If Wall Street can count on a certain amount of money flowing into the stock market through 401k’s every month, but that money is not needed to increase production, will it just feed corruption and bubbles? More money to Wall Street could have negative consequences. This leads me to deep skepticism about, for example, privatizing Social Security Insurance.

The obvious solution many liberals jump to is to tax the wealthy and use that money for services to the rest of the country – to build roads and bridges perhaps, or provide direct subsidies. It would be better, in my opinion, to reverse the many tweaks to our economy that have lead to this imbalance, but that would involve a huge amount of work. With such polarization in our legislatures today, the problem is overwhelming. But returning the middle and lowers classes’ wealth seems imperative to our future.

2 thoughts on “Too Much Money

  1. The fact of income inequality is simple to point out and much more complicated to explain with any certainty or to quantify as an economic problem. Like the level at which the increasing accumulation of Federal debt becomes untenable, the critical level of income inequality is unknown. Which of these spiraling metrics is actually the more worrisome? Our representatives in Washington certainly seem more concerned about the 1% having too much black ink on its ledger than they are about the barrels of red ink on their own books. How much of the current rhetoric on the subject originates from class warfare and how much is based in solid economic theory? Not easily answered. But my suspicion of populism demands that I bring up a couple of points.

    A primary reason for the inequality of income GROWTH, at least on paper, is the Fed’s interest rate policy. Low interest rates drive capital into securities as it searches for returns on investment. As more cash comes in, stock prices are driven higher, increasing the value of holdings of the wealthy, who were in the market already. At the same time, low interest rates penalize the middle class savers who can’t or won’t risk their modest nest eggs in a stock market that becomes more inscrutable and volatile by the day. The excuse for this policy is inflation control, but it has continued for years in spite of historically low inflation rates, and so the zero rate’s most visible effect is to make the rich richer and the not-so-rich, well, not so much.

    So while the Fed keeps the brakes on consumer prices, inflation of the stock market bubble continues apace. Fear of a bursting would normally introduce an element of caution among euphoric investors, but the Fed also has a policy of using trillions in borrowed money to bail out the criminally huge banks and investment houses under the guise of saving the economy. This policy was not in evidence during the 1930s. Had it been, the huge losses suffered by the wealthy might have been avoided and the closing of the income gap to a more socially acceptable level might not have occurred. The poor, after all, can only get so much poorer. I doubt they took much comfort from seeing their “betters” joining them in the breadlines.

    My contention boils down to this: Are the lower and middle classes worse off because the 1% are taking home a bigger piece of an expanding pie, and even if they are, can the same Federal government that helped create the problem be expected to solve it?

    You use the term, “corruption” several times to describe corporate behavior as if the Federal government, through sheer, unfathomable size, were not at least equally corrupt. Wall St. could never undermine the financial health of the country to the extent that our own government has, to the tune of $18 trillion worth of paper.

  2. Hi Zep – thanks for the thoughtful comment. Here are a few thoughts:

    I see many in Congress (including my own Rep) who seem more concerned with maintaining the advantage of the 1%, but it shouldn’t be ‘either/or’ – we should be able to address more than one problem at a time. If there is class warfare, the steady drop in middle class (relative) wealth and income tells me the 1% won.

    The current low interest rates are certainly a factor since the Great Recession – that hits me personally. But interest rates were higher in past decades when the trend started. I’d add real estate as a factor – if my house goes up by 5% but a mega-mansion goes up by 100%, we both still own the same house we did before, but have different wealth.

    At the start of the Great Recession, the financial sector may have nearly dumped us all into those 1930-style breadlines and worldwide depression. Since you can’t perform a controlled experiment on your life, we may never know “what if.” That’s a lot of power – when Congress seemed ready to default on American obligations they got a dose of public scrutiny. I don’t discount corruption in government (the movements back and forth between government and lobbying and industry is distressing). My post was aimed at the flow of money into the private sector to places where it cannot be used productively. The money has to go somewhere, Boards of Directors are often dominated by CEOs, and stockholders have no power – the money almost demands corruption.

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