Saturday, June 25, 2011

The wealth gap and economic stalemate

If there’s any commercial which sums up the economic trap we’re in, it would have to be the one recently released by the American Realtors’ Association.

The commercial does a pretty good job of pointing out that building homes puts people to work, and has been a major driver of our economy for some time. From there, it wants us to draw the conclusion that it’s Our Patriotic Obligation to buy new houses, to get America back to work again.

But I already have a house. It’s not twenty years old yet. I’m not moving anywhere. I don’t have the funds on hand or the income to justify a second home. Nor do I see the point in having a new home built for me when this one does me just fine; to do so is simply wasteful — consumption for consumption’s sake.

And even if I could qualify for a mortgage for this theoretical new house, the construction workers would be put to work for only a couple of months. After that, for the next thirty or so years my money would go to support people who service mortgages.

I think you get the drift: Asking people out of work to buy houses and saddle themselves with extra debt to put some people to work for a short time is a clear sign that nobody knows what the hell to do.

The problem is actually very simply stated: Too much of our national wealth is concentrated in too few hands, in the hands of people who can’t possibly return into circulation as much money as they take in save by giving it away (“Yeah, right, as if!”). In 2007, the top 1% held $43 out of every $100, the top 10% $83; in total net worth, the top 1% had $35, the top 10% $73. In 2006, the top 0.01% averaged 976 times more income than the bottom 90% (highest since 1928, which was 892%), while paying a top marginal income tax rate of 35% (down from 94% in 1944).

Since 1979, the distribution of total income has radically increased for the top 1%, as much as over 110%; by contrast, the next 4% have only increased their share by 18%, and the next 5% only 3% (down from 8% in 2004). From 1990 to 2005, the average CEO income increased by 298.2%, in a trend line that somewhat closely followed the S&P 500 index (141.4%) but which was often disproportionate to actual profit increases (106.7%); by contrast, real production workers’ pay only increased by 4.3%, and the inflation-adjusted value of the minimum wage actually dropped 9.3%.[1]

Why is this such a problem? All these figures represent purchasing power being shifted out of the classes who must consume to support the economy, into the hands of people who don’t and can’t consume as much as is necessary to support the economic cycle.

How is this happening? The profit motive demands that the employer class must drive down wages as much as possible as a part of minimizing expenses and maximizing profit. This would not be so damaging if ownership of the means of production — the engine which creates profits through supply — were spread out over the economic base as much as possible. However, the more concentrated ownership becomes, the more concentrated the wealth becomes, which has the net effect of taking wealth out of the economic cycle. As a matter of practice, then, as ownership contracts and labor expenses are kept to a minimum, the class that actually gets the benefit of profit continually saws the tree branch on which they sit.

The problem is made worse by the explosion of the lending industry. Theoretically, credit is the extension of the ownership class’ purchase power to the labor class. In fact, though, it’s the creation of claims on unearned future wages, and the substitute of debt instruments for the return of profit into the system in exchange for further profits. The ownership class actually returns nothing they possess into the system; instead, they create future drains on the labor class, and cut further into the tree limb.

So much should be obvious. It should be equally obvious as well that, to return matters to a state of health and keep them there, not only excess wealth but capital (i.e., means of production) needs to be redistributed, so that as many people as possible profit from the functioning of the system and can more efficiently return wealth back into the system.

Keep in mind that redistribution isn’t socialism per se. Pure socialism — full state ownership of all property — fell apart with the Soviet Bloc in the period 1989-1994. European-style socialism still depends on the success of large, privately-owned companies to sustain the massive government structures needed to redistribute wealth into the social services; as a result, their ability to sustain their economic systems still depends on the capitalist model, with its inherent weakness.

However, capitalist economists (especially of the Austrian school) have combined to create and maintain a guilty-secret theory of entitlement close to an economic Darwinism, driven by the claim of an absolute individual right of property use. This theory (or sense) of entitlement — “I deserve to own as much as I do because I’m better than you at this whole supply-and-demand business” — not only frustrates attempts at redistribution but also blinds the ownership class to the internal paradox of their position.

Moreover, capitalist economists tend to treat all demand as one kind, where there are at least three: demand of necessity (what I need to survive), demand of luxury (what would make my life more comfortable), and demand already satisfied (debt obligations). The increase of debt among the lower classes means that more of their income is being used to pay for demands already satisfied, which depresses consumption.

Ironically, as a rational consumer, it’s in my self-interest to pay more of my shrinking income for what I need to survive and for what I’ve already got, and less on what I don’t need. I don’t need another house. No matter how much it helps the economy.


[1] Figures from two articles representing several sources: Gus Lubin, “15 Mind-Blowing Facts About Wealth And Inequality In America”, Business Insider, 4/9/2010; and G. William Domhoff, “Power in America: Wealth, Income and Power”, Who Rules America, Sept. 2005 (updated Jan. 2010). I make no claim as to the (lack of) bias of either source.