The Wealth Gap (continued): Back to basics

The middle class share of American wealth has gone to the very rich

                                                                                     

By Dr. Larry Fedewa (April 7, 2019)

 

For the past three weeks, The Dr. Larry Show (www.blogtalkradio.com/LA-Batchelor/ or at 646-929-0130; 7 -8 pm every Wednesday) has been discussing the “wealth gap” in 2019 America. Now, it’s time to get back to basics.

Q. What is the “wealth gap”?                                       

A. This term refers to the present and growing concentration of financial assets (cash, stock, real estate, intellectual properties such as patents, copyrights, and royalties, etc.), and all forms of passive income to the control of fewer and fewer people (1% of the population) while the middle-class controls less and less of the nation’s wealth. The word, “wealth”, is used instead of “income”, because the value of assets is frequently allowed to appreciate untouched ( e.g. to avoid taxable income). Money comes and goes in the form of income; assets are for long-term welfare.

Q.  Is there really a wealth gap in America? Surely there will always be differences in wealth.

A.  The changes in the proportion of the nation’s wealth held by individuals over time are clearly traceable statistically. This trend can and has been analyzed by experts for decades. Currently, nearly 80% of America’s wealth is held by 1% of the U.S. population.                    

Q.  Why is that important?

A.  There are two answers to this question: economic and philosophical.

  1. Economic

The economic answer is that American capitalism depends on the American consumer market, which constitutes 68% of Gross National Product (GDP). The more money Americans spend on consumer goods and services, the more prosperous the country becomes. And, the more money available to the masses of American consumers, the more they can and will buy. But there is a limit to how much any individual or family will spend on consumer items – after all how many suits or cars can one person use?

After these expenditures are made by the 1%, their remaining funds are invested in other instruments, mostly for passive income (equities, pension funds, real estate, etc.). To the extent that the super-rich control all the country’s wealth, therefore, to that extent there is a limit to the growth or even the stability of the consumer market and GDP.

When the consumer market begins to decline, other segments of the economy also react and the slow-down descends into recession. The only way out of this cycle is to get more money into the hands of the middle class. If nothing is done to accomplish this goal, the result could be a gradual descent into a modern form of feudalism, where everyone works for one of a few employers. They will be the masters and the rest of us the serfs. There will no longer be a capitalism to create opportunities and personal freedoms. Another potential outcome could be a socialist system where the everyone would depend on the government instead on a handful of employers. This would be an expansion of some present trends.

  1. Philosophical

The philosophical justification for a widening (rather than a narrowing) of wealth distribution has to do with the preservation and growth of the capitalist economy.

  • The United States of America is the most prosperous and advanced civilization in the history of the human race. This statement is not above controversy, but overall a reasonable case can be made. The major reason for the prosperity is our practice of a modified capitalism, particularly as it is relevant to our “free” market system.
  • The American experiment of capitalism has been successful because it has found an answer to the most fundamental challenge of human governance, namely, what motivation will ensure that masses of people will work hard, produce unheard-of innovations, and do so in peace without either violence or coercion? The only system of governance which has produced such a standard of living is free market capitalism, which finds the civilizing motivation to be this: Challenging every American to be responsible for the welfare of self and family. No other system has been found to accomplish this necessity – not tribalism, tyranny, religion, socialism or communism.
  • Therefore, American capitalism is worth preserving because it works. It has enabled America to become the envy of the world. But its success and preservation depends on many other factors. Chief among these is the willingness of the population to abide by the conventions of social justice which are available to each citizen. It is this reliance which transcends the need for violence and rebellion. It is thus critical to the well-being of the republic that those in the law enforcement and intelligence forces of our country who have abused the FISA court and their own authority be indicted and punished to restore confidence in our national institutions.
  • But the most fundamental requirement of capitalism is a distribution of wealth which is in truth and perception fair and appropriately rewarding to the masses of citizens who live their lives in peace and prosperity.

Q.  How do we measure “fair” and “appropriate”?

A.  The most obvious measure of the validity of the distribution of wealth is a sound currency. Financial analyst Porter Stansberry makes a convincing argument that the basis for the shift of wealth from the middle class to the 1% which has occurred since 1971 is due to the decoupling of the dollar from the gold standard which was started in the 1933 by Franklin Roosevelt and completed by Richard Nixon in 1971.

With no basis in external value, the dollar ceased to be restricted by any force at all (the proverbial basket of currencies– most of which depend on the dollar in the first place has not proven meaningful). The Federal Reserve has seen fit to print as many dollars as the time called for. This practice has resulted in a core inflation rate of 3.96% per year for a total of 502.65% between 1971 and 2018.  American wages are approximately the same today as they were in 1970 – which means a reduction of 500% purchasing power – so the 2018 dollar is now worth 20 cents’ . The 1% have been able to amass billions of these dollars at the expense of the middle class, using cheap (or interest-free) money to acquire immense accumulations of assets.

Q.  How to fix the problem?

A.  A return to the gold standard seems out of reach at present. What is needed is an effective means of increasing the wealth of the middle class without violating free market principles. Theoretically, a labor shortage should result in higher wages. This is happening already at the lower levels of employment. The average minimum wage has increased approximately 3% in the past year. This is a step in the right direction.

A much more dramatic step has been taken by the companies which have profit-sharing plans, using either cash or (more commonly) stock or options. This is an excellent use of the masses of their own stock which has been re-purchased by many public companies in the past five years, using zero interest funds. Government tax policies can be used to encourage this practice.

Another force for change could be organized Labor, enforcing demands for profit-sharing in addition to wages. This strategy is well established in some industries. Unfortunately, it has not been widespread enough to protect workers as a whole from wage stagnation and asset starvation. In all, however, providing workers with “skin in the game” is by far the best way to protect our precious heritage and secure our children’s future.

Q.  When?

A.  Today! Time is running out. The middle class is restless. Continual erosion of middle America’s standard of living is responsible for the election of Donald Trump but also of the recent upswing in support of socialism. Things could get out of control if new hopes cannot be sustained.

(c) 2019 Richfield Press LLC. All rights reserved

 


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