My friend Meryl sent me this and asked for comment… rather than send her 40 tweets I thought a blog post was in order. The basic thesis of the Business Insider piece is that the gap between rich and poor has widened. By the way, the world isn’t flat either…
Here’s my problem with this kind of reporting:
1) It is stating the obvioius… dumbass.
2) The issue isn’t whether or not the gap exists it is what do we do about it and more importantly is it ultimately destructive to our economy.
3) The entire notion of wealth is incredibly arcane and subject to a lot of interpretation.
4) We have shifted from a manufacturing economy to one of services, predominately of the low skill variety.
5) The attempt to link tax rates with wealth creation is hugely complicated because we are now talking about investment returns versus economic productivity.
Let’s tackle an easy one, CEO compensation. Yes it is out of whack, shareholder rights advocates have been saying that for years but it will never (ever) be the place for government to regulate compensation, it doesn’t matter whether it’s the janitor or the CEO. Shareholders own those companies and whether individuals or investment funds they are the proper regulatory authority for CEO compensation.
Let’s look at a couple of interesting facts not revealed in the Business Insider piece, namely that the 5 states ranked worst in terms of business climate also suffer from the widest gaps in wealth. Basically these are the states with the most progressive tax system and most onerous business regulatory environment, so it should not be eye opening to any rational person that these states also have high unemployment and low economic productivity.
The problem with highly progressive tax systems is that they dis-incentivize productive people from being productive. I don’t have a W-2, instead I earn income that is taxed as capital gains, which means that I take home more of my income than if I were working, but because I am not working I don’t create an economic multiplier that lifts other people with me… as in creates jobs. My accountant told me straight out that the worst thing I could do is get a job. How upside down crazy is that?
As an economy we have driven out high value manufacturing industries and with them the jobs that pay good decent wages and provide strong benefits for workers. Blame regulation or unions or high cost of housing or anything you want, but the fact remains that these jobs are gone baby gone. In California we have lost fully 25% of the manufacturing jobs the state once boasted as recently as the 1980s.
Let’s talk about wealth, specifically what is it. I look at it pretty simple, it’s my net worth and for the most part that is what most people calculate. The problem for most people is that the single largest line up on their balance sheet is their house and their mortgage and both have benefited disproportionately by a supply side driven mortgage environment and housing values that rose artificially as a result of that supply driven lending environment. We’ve seen, let’s say, a 30% correction in housing values that should persist for the next 10+ years, but the problem is that debt levels didn’t correct by that same amount so the result has been a massive erosion of wealth since 2007.
The housing issue would on it’s own be manageable were it not for one other incredibly sticky problem… unemployment. First off, when it comes to unemployment you have to ignore the number that gets quoted in the media whenever a new report comes out. That’s U-3, basically the people who have filed unemployment claims… while U-4, U-5, and U-6 captures short plus long term unemployed and people discouraged by lack of opportunity who have simply left the workforce altogether. This number is frightening and when you correlate that to average number of hours worked you get a picture featuring a lot of people who have been unemployed 27 weeks or longer and those who are working are working, and earning, less.
So basically we have allowed a system to develop that features persistently high unemployment, personal wealth erosion, inflation risk, and a low savings rate. Is that dangerous… just ask the Greeks.
The EU lesson being applied right now illustrates this point to a high degree of precision. The future of any economy begins and ends with people having jobs and when they don’t have jobs the tax system becomes imbalanced which leads to an accelerating death spiral because wealth is mobile and the people at the top simply leave their tax domicile, and this creates fiscal instability that erodes the value of money itself which then eats away at whatever savings people have, resulting is a bigger wealth gap.
I don’t have a degree in economics but this stuff is really logical and when you see the dependencies in the various parts you can start to put it together. I am also not saying anything surprising when I say the solution is not one simple thing, economies are complex machines and in order to right this ship we need to create the conditions upon which economic growth can occur which leads to jobs which leads to wealth stability. When we have a diversified landscape of economic opportunity and few barriers to movement across or up those ladders then real wealth for lower socio-economic tiers increases. More taxes and more regulation simply won’t work. In a nutshell, this Congress and this Administration don’t seem to be doing anything that will result in more jobs… well private sector jobs, the government is certainly bucking the job trend by adding them hand over fist.