Happy Bastille Day! liberté, égalité, fraternité
Martin Wolf has a piece in the Financial Times noting the shocking statistic that 58% of all income gains in the United States in the three decades between 1976 and 2007 went to the top 1% of the income distribution (h/t Naked Capitalism). Standing alone, that fact is pretty damning, but the reason it’s really bad, lies in the supposed “solution” to the problem:
In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.
“The political response to rising inequality … was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”
In other words, the “solution” to wage stagnation among the lower and middle classes was to encourage lifestyle leverage, or borrowing so you could continue to acquire the accoutrements of a middle-class life, whether houses, cars, consumer items, or higher education. Talk about a cure that’s even worse than the disease! So it’s no surprise that starting around 1980, levels of household debt in the economy really started to take off, growing to more than 120% by 2007.
Now, I don’t mind inequality per se. Individuals that come up with great ideas, particularly those who follow-up their ideas with great execution deserve big rewards. Bill Gates, Sergey Brin, Larry Page, and Steve Jobs, for example. These guys actually create[d] useful products that enhance productivity and make us all better off. They deserve their money! But over the past three decades more and more of the profits of the economy have been funneled from real product entrepreneurs to the paper “entrepreneurs,” especially in the finance sector.
As Robert Reich noted back in April, “The Paper Entrepreneurs Are Winning Over the Product Entrepreneurs (A Thirty Year Retrospective):”
The paper entrepreneurs are winning out over the product entrepreneurs.
Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt.
Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.
Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments, legislatures, agencies, public utilities. It stimulates platoons of lawyers and financiers.
It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing. Paper entrepreneurialism also promises the best financial rewards, the highest social status.
The ratio of paper entrepreneurialism to product entrepreneurialism in our economy — measured by total earnings flowing to each, or by the amoung of news in business journals and newspapers typically devoted to each — is about 2 to 1.
That’s not how it should be. Finance has a place in the economy, but that place should be nothing more or less, than facilitating movement of capital from savers to product entrepreneurs. Once finance became the primary means for formerly middle class people to continue living like they were middle class by taking on ever escalating amounts of leverage, aka debt, finance became predatory, extractive, and destructive to the economy. And, once that happened, the returns to finance dwarfed returns to the real economy. Take a look at when financial sector profits began to diverge from profits in the real economy – just about the time the economy recovered from the 1982 recession.
Our current “Great Recession” was our best chance to rein these fuckers in. Perhaps through nationalizing the banks, or simply letting them fail en masse and taking a true shared depression. But that didn’t happen. Again, back to Reich:
Americans are keeping their jobs or finding new ones only by accepting lower wages.
Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.
We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.
It’s not inequality. It’s that the financiers are creaming off too much…from everyone. They have households over a barrel with debt, and they’re destroying the “product entrepreneurs.” As Michael Hudson puts it, “From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy.” They’re winning, perhaps they’ve already won.
Unless you want to head out and start pushing a guillotine down Wall Street (not a bad idea, BTW), the best tool you have at your disposal is to simply not play their game. They levered you up, and levered themselves on the assumption that you would make every effort to pay back those jackals.
To paraphrase William F. Buckley, the time has come to stand athwart the bankster takeover of the economy and yell “Stop!“