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Wednesday, September 16, 2015

How rising inequality interferes with national greatness

by John MacBeath Watkins

It seems odd to me that we keep hearing about national greatness (this year in the form of Donald Trump's "Make America Great Again" hats) from people who support policies that make America poorer and weaker.

The political movement to create inequality has a lot to answer for. It has prevented the majority of Americans from participating in the increases in wealth driven by their own increasing productivity. It has created economic elites who seem to care more for their class than their country. And it has created an environment where we can't seem to have a good economy without risking asset bubbles.

Dr. Englebert Stockhammer of Kingston University in London, in the inimitable style of an academic, puts it this way in a 2012 paper titled Rising Inequality as a Cause of the Current Crisis:

First, rising inequality creates a downward pressure on aggregate demand, since it is poorer income groups that have high marginal propensities to consume. Second, international financial deregulation has allowed countries to run larger current account deficits and for longer time periods. Thus, in reaction to potentially stagnant demand, two growth models have emerged; a debt led model and an export led model. Third, (in the debt led growth models) higher inequality has led to higher household debt, as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages. Fourth, rising inequality has increased the propensity to speculate as richer households tend hold riskier financial assets than other groups. The ris of hedge funds and of subprime derivatives in particular has been linked to rise of the superrich.

Essentially, this means that people trying to continue as members of the middle class are having to borrow more, and the very rich have plenty of money to throw at risky investments.

In fact, it looks like we have too many investment dollars looking for places to invest in the private sector and make money, and too little money in the hands of consumers to create the needed investment opportunities.

China, which has even worse inequality than the United States, is trying to transition from an export-led economy to a consumption-led economy. It is difficult to see how they can make that transition until they are able to put more money in the hands of consumers rather than investors. With no social insurance worth the name, Chinese workers are well advised to save their income for their old age rather than spend it, and with most of the money going to a small percentage of the people, even the most spendthrift among the wealthy can't consume enough to provide a healthy basis for the transition.

In the U.S., unlike China, public investment has been starved as well, leaving us with a aging bridges, roads, and water systems, while private investment produces a series of asset bubbles.

We have long been told that letting the rich keep more of their money would cause them to invest it, making us all richer. Now we see why that is not true. According to a 2013 report by the American Society of Civil Engineers, "...the average age of the nation’s 607,380 bridges is currently 42 years."

Their report further states:

The Federal Highway Administration (FHWA) estimates that to eliminate the nation’s bridge deficient backlog by 2028, we would need to invest $20.5 billion annually, while only $12.8 billion is being spent currently. The challenge for federal, state, and local governments is to increase bridge investments by $8 billion annually to address the identified $76 billion in needs for deficient bridges across the United States.

Instead, we're keeping taxes low so that investors can keep money they use to chase whatever the most recent fad is and bid up the price of that asset.

This is not a formula for national greatness. Worse, it appears the trend reinforces the inequality that causes it.

Justin Fox,at the time the economics columnist for Time magazine, wrote in an April 15, 2009 column:

The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble. It’s not the same people raking it in every time—there’s lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades.

Fox is, as of this writing, the editorial director of the Harvard Business Review Group.

The consequences of inequality are an unhealthy private investment market, infrastructure starved for investment, and a middle class that isn't participating in the economic gains made by the nation. Inequality produces more financial shocks that slow growth. We are a less wealthy and less stable country because of it.


  1. Nice article John. Reading it, I was reminded of Peter Thiel's book, Zero to One. Here is a summary of part of one of his Stanford lectures:

    Indefinite attitudes to the future explain what is most dysfunctional in our world today. Process trumps substance: without concrete plans, people use formal rules to assemble a portfolio of various options.

    A definite person determines the one best thing to do and then does it. He/she strives to be great at something substantive – a monopoly of one.

    Indefinite optimists believe the future will be better, but do not know how, so they do not make any specific plans. Instead of creating new products, they rearrange already-invented ones.

    Finance epitomizes indefinite thinking because it's the only way to make money when you have no idea how to create wealth. In an indefinite world, people prefer unlimited options. Money itself is more valuable than anything you can do with it.

    We are more fascinated by statistical predictions of what the country will be thinking in a few weeks' time than by visionary predictions of what the country will look like 10-20 years from now.

    You can change the world through careful planning, not by listening to focus group feedback or copying others.

    The power of planning explains the difficulty of valuing private companies. Founders only sell if they have no more concrete visions for the company. Definite founders with robust plans don't sell.

  2. Most really good ideas are quite simple. For example, Eisenhower conceived of the nation as an enterprise that needed to have good logistics and good training to succeed. Now we seem to just get platitudes about what will work.