Wealth Inequality and the Middle Class

Few issues get as much press as wealth inequality. Since the dawn of civilization and days of the monarchies, this has been a hot-button issue. As we’re seeing lately, with wealth inequality increasing in America, this issue won’t go away.

Although it’s tempting to advocate decreasing wealth inequality by just raising taxes, it’s well known that successfully raising taxes free of loopholes is very difficult to do. In addition, there are other surprising variables involved with this issue.

As noted by many, the economic strength and stability of America’s middle class, has declined the past twenty years. Obviously, factors such as globalism have played a role in this. In addition, the middle class has been strongly hampered by the Great Recession of 2008.

Our tentative recovery from the Great Recession of 2008 is shown by the fact that America’s unemployment rate is high, with many skilled workers unable to get work in their fields. Although our employment situation has definitely improved, there’s still caution about it due to the fact there now appears to be an under-reporting of unemployment. Under-reporting can arise when people give up on finding work and are no longer claimed as unemployed. When these factors combine with how record low interest rates have reduced the middle class’s ability to earn interest at banks, we see frustration.

The fact that interest accrued at banks is now so low is one reason polls have shown many Americans are thinking of putting off retirement. This is because many senior citizens are known to augment their fixed income Social Security with money earned off bank CDs. For example, if a retired couple now has a $100,000 bank CD, they’re faced with making only around $1,000 interest per year. In the past, a $100,000 CD often could generate $5,000 per year or more in interest. To senior citizens living on a fixed income, America’s record low interest rates have hampered their ability to support themselves.

Another way record-low interest rates hurt senior citizens is the fact that a primary source of revenue for pension plans has been various types of bonds. America’s current public employee pension crisis has been worsened by how low interest rates weaken bond yields. A weakened bond market adds to pension funds being depleted quicker.

In terms of economic success, the main area our economic recovery from the Great Recession of 2008 has worked is with the stock market and corporate earnings. And yes…this is good news. The reason it’s good is since many Americans work for corporations, and because much retirement wealth is in 401K-type accounts, many hope their job is secure, and another downturn doesn’t occur before they cash in their retirement.

Although average Americans are grateful the economic recovery in corporate America has helped them, there’s still controversy. Why, they ask, has middle class stability stagnated while the power of the elite has grown?

Ironically, many claim the very same policies that sparked an economic revival for the stock market have resulted in a rise of inequality. Since 2009, America’s Federal Reserve Bank, with the tacit approval of most politicians, has embarked on an unprecedented run of record-low interest rates while pursuing the debt buy-back process-QE. QE, otherwise known as Quantitative easing, is accomplished best with low interest rates. Basically, since America’s buying back it’s own debt with QE, the debt we purchase from ourselves is cheaper when interest rates are low.

QE is controversial since it can be a last ditch resort used by governments to stimulate a slumping economy. Ironically, low interest rates and QE, while effective at jump-starting the stock market, can also make the elite wealthier. Therefore, while many see rising wealth inequality as just a result of the Free Market, there’s evidence that some rise in wealth inequality is actually due to government-set economic policies that run counter to Free Market theory.

The wealthy can benefit from QE and low interest rates because they own a large portion of stocks, stimulated by these policies. In addition, low interest rates make it easier for the wealthy to borrow and profit from large sums of capital now. Although middle class house, auto, and student loans are more affordable with low interest rates, the middle class often can’t embark on the lucrative capital-growing process that low interest rates offer the wealthy.

As a result of these recent economic trends, there’s now an understandable push to raise the minimum wage. In addition, there’s rebirth of the idea that government should enforce a maximum wage. Although a maximum wage is a stretch for attainability, it goes without saying a minimum wage raise may occur soon.

In light of all this, it’s now obvious that a stable and large middle class is sustained when there’s a balance, as well as a separation, of market and government interests. Although political dogma creates an either/or mindset on economics, the reality seems more complex. Just as there’s proof that some government involvement in the economy has helped the middle class, there are also recent indicators that government-mandated economic policy can hamper average Americans. To restore America’s middle class, the elusive balance of power that used to exist between the marketplace and government needs to be considered again.

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6 thoughts on “Wealth Inequality and the Middle Class

  1. Your site was recommended to me by a mutual friend, Sam Simpson. I have slogged my way through the entirety of Piketty’s book and found it very interesting. What is your opinion of that work?

    1. Hi Charlton, I’m glad to meet a fellow friend of Sam’s. Regarding Piketty’s book, I’ve read many excerpts, reviews, + interpretations of it. I commend you for reading all of it. Its obvious Piketty hit a nerve. And yes, wealth inequality seems to be increasing + the middle class is squeezed. The tricky part of the dilemma Piketty pointed out, is where do we go from here?

      Piketty’s proposal for a global tax to deal with the dilemma is fraught with political complications. However, this doesn’t obscure that he observed trends many feel need to be recognized.

      Modern economics is fraught with many contradictions. A political process that’s become more theatrical then compounds these economic contradictions. When this is combined with the almost exponential abilities of the modern finance world to produce wealth for the elite, it’s hard for many to grasp modern life.

      Ironically, government-set economic policy as shown thru record low interest rates, is claimed by many to help the rich gain wealth easier than before.

      Currently, western economies, as shown by record low interest rates, are going thru a paradigm shift. Yes, we all recognize that governments at times need to stimulate economies. However, if recent trends continue, western governments may be in the mode of constantly stimulating economies that discourage savings and have chronically high under-employment.

      Awareness + debate may be the key to dealing with these issues. Thanks a lot for your comment Charlton.

      Perry Casilio

      1. One of the things I found interesting and refreshing in Piketty’s analysis is the inevitability of wealth concentration from a historical perspective without governmental policy and practice to slow it down, that capital tends to concentrate in fewer hands simply because even a 1% return on capital will make it concentrate given a time scale of 100 years or more. Most humans, of course, cannot rationally consider things on such a time scale, but history easily encompasses it. His proposal of a tax on capital of course has a snowball’s chance of passing. After all, the legislators tend to be in the upper 10% and over, and they tend to think on short time frames just like everybody else. What Piketty implied is that, absent that tax, the other mechanism is war and revolution, which merely resets the counter to start over again.

        The other thing he described of particular interest to me is how our present views are the result of an historically atypical economic environment that followed two world wars and a great depression and is now resolving to the ancien regime that predated it that appears to be the common mode throughout history. That last is by inference, since his data only extended back some 300 years for France and somewhat less than that for the rest of Europe and the U.S., but he demonstrated that it is quite firm within that time frame.

  2. Charlton, thanks for the in-depth summary of Piketty’s historical analysis. It’s a main feature of his book + a reason why it’s hit such a strong nerve.

    Although Piketty’s work has certain inevitability to it regarding wealth concentration, there are other ways for us to deal with this issue besides hoping for a global tax that may never occur. As you point out well Charlton, once wealth becomes concentrated highly, even a 1% gain for the wealthy is profitable.

    Another part of this equation is to concentrate also on what’s become of the middle class. A good way for the middle class to thrive may be if the major countries of the western world, including America, would consider not setting interest rates so low. For about 80 years, from the early 1900’s to the 1990’s, many of the Central Banks of the western world allowed for more variability in interest rates.

    When interest rates were allowed to float higher, the savings rate for the average American was often higher. Given the fact that Social Security is facing increasing scrutiny, it’d be nice for the average American to increase their savings.

    1. I would like you to expand on your thesis of “allowing” interest rates to float higher and the effects of that on wealth concentration.

      While it seems logical that higher interest rates might benefit the small saver-investor, it would seem to me to also benefit the large investor even more. Particularly, it would seem to me, that high interest rates would be an inhibitor of the type of major investment that most people of lower income make, that of owning their home.

      Krugman, http://www.nytimes.com/2014/08/22/opinion/paul-krugman-hawks-crying-wolf.html?emc=edit_th_20140822&nl=todaysheadlines&nlid=59064325&_r=0&assetType=opinion, writes in today’s NYTimes Online about easy vs. tight money and the conservative concern about inflation as a result of low interest rates. Krugman is, of course, in the liberal camp and sees benefits to governmental management of the economy.

      Amongst Pitketty’s theses is a contention that no evidence exists historically that the market is or can be self-correcting. I think his inference was that there is no “free” market, that the market is always manipulated by the players in part through high capital holders “investing” in governmental policy makers to further their advantage and in part due to disproportionate effectiveness of large investors.

      So, while I can see some benefit in higher interest rates to small investors, I am less clear how that would in the aggregate alter the tendency for wealth to accumulate. I would appreciate your thoughts on that.

  3. Hey Charlton, good question. Basically, low interest rates can help the wealthy increase their wealth in ways that go beyond the interest they accrue simply from banks.

    This is because many of the wealthy + major finance players forego using the interest offered by banks as a main way to raise capital. Instead, due to the brilliance of the wealthy + finance institutions in dealing with today’s complex economy, they often use the profitable growth offered by the stock market as a powerful means of increasing their wealth.

    When one looks at the fact the Dow Jones has more than doubled since the 2009 recession, it’s obvious that if the wealthy periodically liquidate the tremendous growth they get in the stock market, they’ll do extremely well.

    As the link below shows, the Economist Larry Summers states that the low interest rates we’ve had have helped increase wealth inequality since low interest rates supercharge the stock market. The net effect of this is that since the wealthy own a large portion of stocks, that they benefit the most from this supercharged environment.

    Also…it’s important to note that Summers has supported the low interest rates we’ve had in general. This is because it was felt that the only way to really reduce unemployment was to stimulate the economy thru low interest rates. The fact that Summers supported this policy doesn’t obscure the fact that he felt the low interest rates can increase wealth inequality. Interestingly, as I mentioned earlier, Western economies are witnessing a paradigm shift whereby interest rates have been pushed to such low levels that it may be hard to raise them much in the near future.

    http://www.moneynews.com/Personal-Finance/Summers-Fed-interest-rates/2014/05/16/id/571750/

    Another way that major finance institutions can profit from low Interest Rates is shown in this interview of David Stockman by Bill Moyers. In the interview Stockman explains that since the basis of our nation’s interest rates, The Federal Funds Rate, is so low, that major finance institutions can borrow money now at rates as low as .10% at times. Stockman then goes on to explain that these loans at extremely low interest can then be leveraged to get large gains thru a variety of means so that a profit of say 3% gain can be made.

    http://billmoyers.com/segment/david-stockman-on-crony-capitalism/

    Finally, as you mention with Piketty, there is a school of economic thought that feels that the market doesn’t naturally self-correct. Although I agree that powerful forces have manipulated all markets thru the years, I find it hard to believe that markets never have any self-corrective measures.

    A testament to this is the fact that the Communist Soviet Union, basically turned a blind eye to the Black Markets that thrived there. They did this since the primitive Black Markets provided some goods to the citizens more efficiently than the command economy. Also, in their attempt to set prices, the Soviet Union often checked on prices of similar products in western market economies.

    In a very basic sense, all economies rely on markets. A key question that Piketty + many others have is whether the attempts at affecting market outcomes benefit the wealthy more than the middle class. Although total Free-Market economic theory has some holes that many perceive, it goes without saying that all government intervention is not the same.

    Some government intervention in the economy can help the Middle Class, while some government intervention can help the wealthy. Regarding Interest Rates, there’s ample proof that though certain aspects of low Interest Rates can benefit the Middle Class, that on the whole, low Interest rates in the long run may actually be of more benefit to the wealthy.

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