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Economic Stew: Great Divergence of Wealth and Income Inequality

April 9, 2011

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Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent.

– Economist Joseph Stiglitz

Unless you are part of the 1% of the 1%, we all know we have less money these days. We know why – there was a financial collapse. But do we understand the underlying causes and trends? Probably not.

Let’s start with Tim Noah in CBS News giving a quick primer on Paul Krugman’s, The Great Divergence. Sorry about the commercial. Stick with it. Then continue reading the post below.

Economist Paul Krugman: The Great Divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent.

What’s interesting is Krugman wrote this in September 2007, one year before the 2008 global financial collapse. I am sure he was aware of the risky behavior going on in the $62 trillion credit default swaps market and in related mortgage backed securities and credit debt obligations. As with all socio-economic issues, it is NEVER ONE THING, and it is not always a series of events. But it is a confluence of events, influences, and elements that create a situation. Think of the world economy as a stew with many ingredients in it. It is tempting for the person who eats the stew and benefits from the stew to simply say — this is good stew, or not so good. BUT, it is the ingredients, the preparation, the recipe itself (which is a series of actions), that will determine its outcome. Americans need to sharpen their thinking about our economic stew. The financial collapse indeed led to our financial crisis, but it was a whole host of things that conspired together to bring us to where we are today.

If you are looking for answers to what happened, or if you are looking for solutions to what happened, the one thing I can clearly state is: DO NOT BELIEVE POLITICIANS. The reason why is THEY ALL advance a particular point of view and rarely, if ever, does it represent the common man. If you do not like the stew, you must either get another recipe (policy and legislation), fresher ingredients (ideas and approaches), become better at making the stew (experience and expertise), OR get rid of the cook! Ah! elections!

A critical approach to problem solving is to deconstruct the problem at hand without bias. Once you know how things fit together, you can start on devising a real solution. Politics is about as far away from that approach as you can get. This is why you will hear me saying again and again, the two party system has outlived its usefulness. It is inadequate to solve our 21st century problems. It has devolved instead of evolved.

The other problem with party-politicians is they are part of the 2% of the wealthiest in America. How can we possibly expect them to relate to everyday American problems? We want to believe they do, but let’s LOOK AT THE RESULTS.

Wealth Apportionment
In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent – economist, Joseph Stiglitz.

Income Decline
While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top – economist, Joseph Stiglitz.

If you look deeper into why this has happened, you will get a better sense of WHAT NEEDS TO HAPPEN to correct things. As Joseph Stiglitz’s states in his recent article in Vanity Fair, Of the 1%, by the 1%, for the 1%:

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

Stiglitz points out: economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

So, this week economists from all over the world have gathered in Bretton Woods for a major summit on the global economy. The sponsor is George Soros, who is so concerned with the issues of income inequality and its affect on open societies and democracies, that he has ponied up $40 million to sponsor the event.

The global economy mess is so severe that even billionaires are concerned. The rational ones know they made, and will continue to make, their money when the majority of people who can work, are working. The theory that wealth can be easily made by investing and trading only, is flawed. For the companies investors choose to invest in have to be a going concern making goods and services that other people buy. When the majority of people are not buying because they are unemployed or underemployed, the going concerns become anemic, crippled and stock values suffer – and then markets suffer, and then investors lose out, and then you have a depression or devaluation.

We did not have a depression – but very close to it. We have not seen a devaluation of our currency – though that is of great concern. It is important to understand that since last year the Federal Reserve has been pumping money into the economy, called QE2, quantitative easing. This was done because trillions had been lost in the collapse. The Fed has been loaning cheap money to central banks and corporations at zero to 2% to pump them back up. This is all about monetary policy and cash flow. Any business person will tell you, cash flow is essential to the health of their business, and so it is with economies. We need the free flow of capital to make things work. But because the hit was so
enormous to our economy and the global economy, the recovery is a slow process.

Trillions were lost and to regain the vibrancy of our economy will take more than QE2. It will eventually take massive investment from companies. Investment will lead to job creation. For whatever reason, the Obama administration chose not to go the route of FDR in the 1930s after the 1929 crash. There are no large WPA or big job training programs. It is no surprise to me, as he clearly stated during his campaign he was aligned with Reagan, a Republican. And, we are seeing Reagan style economic policy trend since Obama was elected.

My concern is what Bernanke has stated: it will take 250,000 new jobs per month to get us back to 2007 employment levels else this will go on until 2020, or possibly beyond. Stiglitz says in his VF article:

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride.

With Goldwater-Libertarian-Billionaire-Koch-backed Tea Partyists having their foot on the ideological gas pedal, they want to accelerate their agenda to strip unions of their influence and power which will further weaken the Democrat party, privatize education, eliminate what they see as big government — which is code for eliminating regulatory departments and agencies like the EPA and covert “public welfare” like Medicare, Medicaid, and Social Security into privately run programs by corporations. Tax policy is already at the forefront of their agenda with talk of further tax reduction for corporations. What we are seeing is a fundamental shift not only in policy but ideology that will have long term consequences. Job creation, regardless of what Republicans said in the 2010 mid-terms, is way, way down on the list as evidenced by their behavior this week regarding the budget.

Sources:
Paul Krugman – Conscience of a Liberal – click here

Joseph Stiglitz – Of the 1%, by the 1%, for the 1%, click here

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