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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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