If there had been an actual recovery delivered as it was intended, promised and offered, the idea of inequality would be an afterthought in an otherwise prosperous age. Inequality, however defined, is a necessary feature of a dynamic economic system. We want inequality because that defines opportunity. A healthy economic system produces disparities due to prices, risk and value.
Such is nature of productivity – the opposite is sclerosis. Productive inequality is mobility, the fluid nature of income and opportunity, or as Nathaniel Hawthorne put it, “families are always rising and falling in America.” What we do not want is inequality produced by the fact that no prominent family ever falls, because such is the case where no one can rise. It is in the rising from nothing (or something like it) that is the beneficial aftereffects of innovation; those that innovate and bring society generous benefit “deserve” wealth and prominence.
The reason for so much focus now on the subject is both that the recovery’s infirmity and the apparent rise and ossification of cronyism seem very much related. It is, again, the opposite case, where inequality is not being driven by productive innovation and mobility, but rather the intentional antithesis of all that, starting with the NYC-DC corridor. Nobody really begrudges Bill Gates (other than Xerox shareholders), Steve Jobs or Elon Musk their wealth, but they wonder about all these politicians (of both parties) that seemingly and somehow grow rich after only a few years of “public” service. That “pay” is not in the service of anything other than maintaining the status quo.
The reason for that is nothing but the size of the federal government and its reach. The more the economy flounders, the more the government involves itself. That includes its monetary agent, which, in defiance of its assumed independence, has meant more than a generation of aiding and abetting this through systemically altering the price of risk.
The great wealthy of this generation are bankers and hedge fund managers, owing to the endpoint of any intentional appeal of inflation. Maybe that was inevitable, and this is how it is supposed to be, but many people are extremely skeptical of that not the least of which due to the diametrically opposite directions of the economy and “markets.” One is supposed to support the other.
Competition, which is another element of what we are really talking about here, necessarily means failure. For example, Warren Buffet in the heady days of September 2008 (the 23rd, to be exact) invested $5 billion in Goldman Sachs. Such preferred shares were in dire jeopardy only a week later, until Goldman was suddenly converted into a depository institution despite never having created a deposit liability in its existence, to be followed in close succession by an immense mobilization of government financialism (including TARP).
Whether or not Buffet knew or lobbied on behalf of his new “investment” really isn’t the point, but rather the perception is that the rules are different for the financiers (which creates a “false” or inorganic opportunity; one that has been shepherding risk and wealth in the “wrong” direction for a long time now). Risk is not accustomed to such preference, and it makes for highly quiet destitution everywhere else.
The Fed encouraged risk-taking in all its endeavors, particularly after the dot-com bubble collapsed. That meant a whole lot of individual folks “invested” in property that might not have otherwise (if we are being honest, despite the counterfactual situation, we know that to be the case). So many are now worse off for the experience, because they received the “wrong” end of risk, if not outright losing and defaulting, then being upside down with destroyed credit. Make no mistake, there are no victims here in the purest sense, only that said investors were playing a rigged game of asymmetric information where orthodoxists “encouraged” it.
After the bubble, intentional policy disruptions created an opening whereby financial institutions, almost exclusively, could benefit enormously by transferring such property at highly depressed prices. Those foreclosures that served to decrease the paper wealth of mostly individuals without much other “wealth” were transferred to financial institutions filled with new programs of Federal Reserve “money.” Individual losses were thus realized, animating all the negative consequences of that, and handed over to the financiers once again.
It has been no different in the stock market, either. The “little guy” retail investor was encouraged by everyone in position to do so to maintain the stock price illusion. It was a matter of intentional policy, to appeal to such a “wealth effect” in order to attempt to manage economic activity toward the insidious idea of “aggregate demand.” That was the case all the way up to days before outright panic, the assurances of calm and that bubbles did not exist. And so the retail investor got clobbered in stocks as well as housing.
The problem of such “bubbles” is not just that they are actively encouraged, it is that they are deceptively destructive. Sure, we know about the loss of market value on the way down, the jokes about the 201(k)’s and all that, but it is the impairment that follows that “institutionalizes” such wealth destruction, and thus inequality. The individual investor that loses out big in bubble bursts does not have the flexibility to take advantage of the inevitable rise and rebound – the price of risk may be skewed but the perception is ingrained in the opposite.
The problem as it turns out with all these rolling bubbles is that failure, and thus loss, is subjected in somewhat permanence on the “lower” ends without creating the churn of families falling that already “made it.” This is especially true of those in financial positions as they have been deemed “systemically important.” That means risk does not apply in the traditional sense (risk is thus political more than anything, which is why the revolving door between Wall Street and policy positions is seemingly ubiquitous).
A recent study by released by the University of Michigan’s Institute for Social Research clarifies the reach of such stratification. Households in the top 5th percentile of paper wealth held 13 times more than the median in 2003; but 24 times as much by 2013 despite all the carnage.
After the Great Recession, wealth decreased at all points in the distribution. But by 2013, wealth among households at or above the 95th percentile was still higher than it was in 2003. In contrast, at all lower points of the wealth distribution, net worth was lower than in 2003. In fact, by 2013, the net worth of the typical U.S. household was 20 percent below where it was in the mid-1980s. And the net worth at the 25th percentile fell by more than 60 percent.
It’s another way of saying that the “wealth effect” is in fact impoverishment. All forms of inflation, whether asset or consumer, is a means of redistribution that inevitably concentrates such paper in fewer hands. Those that are clouded by the intervention and intrusion of monetary policy into pricing, especially risk, end up poorer for the effort. As a result, we all do. And monetary policy is neutral in the long run?
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