Here is a graph of income in the United States since 1979. We see the wealthiest 1% skyrocket. The wealthiest 20% grows, but much more slowly. And the bottom 20% has not grown at all, except for keeping up (barely) with inflation. (h/t New York Times)
When we think about economic inequality and the concentration of wealth in the hands of the top 1%, we almost always think first of the negative effects on the poor and the middle class. We think about poor people living in substandard housing, and receiving substandard food, education, healthcare, etc., and low income communities that are unable to provide people with the tools to move up the economic ladder. We also think of a middle class in which it is almost always required that both parents work, families taking fewer vacations, working more weekends and overtime, and still holding much larger debts that their parents did.
What we rarely think about is the negative effects of the giant pool of money that the top half of 1% have at their disposal. Beyond having enough for themselves and their children, beyond having enough to capitalize a business or a wide set of investments, they have more money besides, and sometimes do not know what to do with it. I am not talking about John McCain-style, 10 houses and 13 cars money.
The super wealthy have far more money than they can consume. How many more cars can John and Cindy buy?
So the vast majority of the assets of the very wealthy are invested (as opposed to the poor and middle class, who spend their money). Once the obvious good buys on the stock and bond market were all bought up, the wealthy still had money to invest. Real estate comes next. Capital funds looked for start-ups to invest in. Other funds invested abroad. But there was still money to invest. So hedge fund managers and investment advisers went looking for new and novel things to do with the giant pool of money. (To a large extent, the same is true for the enormous wealth of oil states like the Saudis).
To help the wealthy find places to put their money, Federal Reserve Chairman Alan Greenspan, with the support of both Democratic and Republican Treasury Secretaries, smiled on increasingly complex financial instruments: derivatives, futures, options, and mortgage-backed securities. The easy money policies of the Fed encouraged a feeding frenzy in these obscure markets, creating huge pressure on local banks to write and sell more and more mortgages through the last decade.
And here we are. As we move forward, it is essential that tax writers in Congress determine ways to grow our nation back together, and decrease inequality. Taxation will be absolutley required to rebuild America’s infrastructure and create jobs to help us out of the recession — and the top 1/2 of a 1% can and should take the vast majority of the burden, since they have been so privileged for so long. Besides, wealth inqueality is not reduced, if the excess wealthy of the top 1/2 of 1% of Americans will continue to create speculative bubbles in the future, and we will all be the worse for it.
Maybe what we need, is some enormous correction that reduces inequality. You know, takes value, like say stocks and real estate, from only the wealthy folks hands and not the lower class, so the lower class is unaffected and the rich made less rich.
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p>Nah. That could never happen.
I wonder if Democrats really see that happening. The truth is that all the poor people and middle class are going to go down the tubes years before the rich people.
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p>Certainly couldn’t happen in a way that will be limited to inequality recalibration: most americans derive some of their valuation from stocks in the form of IRA’s and 401K’s and most of the rest from real estate. Nor does this address what is meant by ‘inequality’.
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p>There are two issues here:
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p>– How can anyone possibly ‘earn’ that much money? The sweat of your brow and the strength of your character along with the intellect and diligence to get things done is only so much work. A man who is worth a million times my salary does not, can not, be performing a million times more work. There is only so many hours in the day and only so many calories you can burn. How much is too much? Where is the inequality? In the work? Or in the remuneration? Doctors, scientists and engineers are probably the hardest working people out there: when you account up all the sweat, brainpower, insight and training they undergo, you reach an upper limit to the amount of money one can possibly ‘earn’. And so, anything beyond ‘earning’ ought not be backed up with attempts at the ‘fairness’ argument (i.e., the whine goes: it’s not ‘fair’ for for the government to take my money…. well, if you didn’t ‘earn’ it, then it’s likewise not fair for you to keep it…)
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p>– How can anyone possibly spend that much money? What happens to that money? It sits in a bank and the bank uses it make more money for the banks shareholders. It gathers dust and interest and exerts a gravitational pull on other moneys all around it. It is adipose and moribund. Money blubber. It would generate interest and cash if it were a lump sum ‘owned’ by one person but it would do it better if it were a buncha littler sums owned by more people…It’d be more efficient and better for the economy if it were the smaller sums. That it is a large sum under control from one source is also an inequality.
It’s the combination of labor and capital risk that make growth. The people who make money off their investments are taking a risk that the investment will fail.
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p>Everyone who works with any type of capital equipment is using that capital to improve their productivity.
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p>The effect of Obama’s proposals to tax capital gains and dividends at a higher rate will be less capital investment and lower productivity.
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p>There’s really no way to get away from this. There’s no way to use money without involving the rich people. Jesus said “the rich jerks you will always have with you.”
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p>At some point, the risks they take begins to involve other people and other peoples money. (and if you’re going to argue that point… you’ve not been paying attention lately…) Surely that, too, is not ‘fair’? (under just about any definition of ‘fair’…) And we get back to the argument: just what’s the upper limit? How much is too much? What I’m hearing from you is that the risk multiplier makes productivity, theoretically, infinite in potential. Why? How? What benefit is that (if true, which I doubt…)?
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p>And John Fuld, one of the few with the greatest pull on the levers of investment in the past few years… one of the ‘risk takers’ you so adore… Who, under the details of you scheme you layout, is one of the ‘most productive’, no? He’s not facing penury. Where’s the risk he took? He gained and lost billions on behalf of clients of Lehman Bros. What ‘risk’ did he take?
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p>How will you be able to tell? For what reason does an investor decide 900 million is not as good as a round billion? And why is one investor playing with a billion dollars somehow better than 200 or 300 investors play with smaller sums whose total = 1B?? And is it growth if the money isn’t doing anything? Obesity is growth, is it not? Progeria is growth, no?
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p>yes, surely, but that’s not the question here is it? At what point does ‘riches’ and ‘wealth’ provide, in themselves, diminishing returns? At what point does effort and productivity plus risk make no more sense? At what point is ‘growth’ just overheated money shuffling to no good purpose or end?
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p>Although I can’t answer your question, in the near future, the Commonwealth will seek $3.5 billion for roads and bridges and the state won’t seek to borrow that money from poor people.
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p>… and isn’t that the very definition of “poor people”?
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The point is that riches and wealth is ‘borrowed’ by towns, cities, businesses, and certainly there appears to be no end to the good works that towns and cities seek to do.
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p>They get their money by taxing or borrowing, predominantly, respectively, from the middle class and the rich. So long as that’s true, it’s hard to imagine that accumulated wealth simply lies around unused.
I think you know the answers to most of those questions. Investors will act according to the same economic impulses they always have.
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p>I agree with you that most of this is shuffling money, because most finance is making money off the gyrations of the currency, not making new products. It’s this way because the dollar is unhooked from gold or any physical base.
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p>You are much safer betting on the dollar going up or down than making a product for a certain number of dollars now, and hoping your price estimate will be right four years from now.
Annual rates of employment growth, by president:
They have been stealing from the masses for years.
Then we can go after all of the actors, producers and directors in Hollywood. Next: The Annenberg Foundation. Time to take it all back!
They make more money than they can spend. How many houses and can Kerry and Kennedy live in. Pelosi uses huge USAF jets to travel back and forth to CA on weekends.
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p>As soon as Barack is elected his first order of business will be seizure of all assetts of anyone worth more than 500K. Then we can start with giving every illegal alien a house and a stipend. After all, they are just fleeing poverty.
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p>Oh—-by the way. The Dow is down $650 today. Closing at approx 8500. Almost half my 401K is gone. Thanks Barney and Chris, Nancy and Harry, And last but not least the democratic congress—and oh yes: George. Yep. Everyone in Washington has about wiped me out financially. And—-when Barack is elected, he will take the rest to give it to Luis and the folks in Kenya. They deserve it far more than I do. After all. I had to work forty years for it.
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p>…you’re 401(k) may be off, but at least your tax dollars backstop the state’s employees so they won’t suffer for the market’s woes.
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p>[ducking]
One unfortunate point: in a few months there ain’t gonna be any “rich” remaining. We’re all gonna be poor—then what?
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p>Didn’t a guy named Vladimir Putin try this? No wait—-it wasn’t Putin. It was Stalin! Nope—. Lenin? Ya, maybe Lenin.
How did that turn out? Good ? Great ? Ok—we’ll do what Lenin did. Worked for them.
The super rich use their extra money to game the system so that their children stay at the top of the pyramid. Karl Marx said this.
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p>The problem for you is that the super rich liberals do the same thing. They game the system so that the new rich don’t get access to capital, because the new rich might upend the social structure.
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p>What you’re going to do by limiting investment is block all the $1 and $2 millionaires at the service of the $300 millionaires like Kerry and Bush.
if the marginal tax rate on income over $1,000,000 per year was increased to 32%?
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p>I have no idea — but I suspect that it’d be enough to do some pretty amazing things with respect to energy independence or health care IT infrastructure.
The marginal rate is presently 35% over 1M
That’s a main thesis of This American Life episode 355: The Giant Pool of Money, from May 2008, which was one of the most listened-to and written-about commentaries on this crisis.