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The Wealth Gap (continued): Back to basics

Posted on April 8, 2019 at 7:15 PM Comments comments (0)

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

By Dr. Larry Fedewa (April 8, 2019)

For the past three weeks, The Dr. Larry Show

( 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.

a. 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.

B. 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.

1) 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.

2) 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.

3) 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.

4) 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.

© 2019 Richfield Press, LCC. All rights reserved.

If feudalism our future?

Posted on April 3, 2019 at 10:00 PM Comments comments (0)

If we don't close the wealth gap, capitalism will disappear

By Dr. Larry Fedewa (March 30, 2019)



"American capitalism is now in crisis because most financial assets, most ownership of stock, and most capital income from dividends and interest and capital gains are concentrated in the top 1%, 5%, and 10% of the population. As these levels of concentration approach 80%, our society could soon arrive at the level of ownership that English lords and ladies had of all English land before the American Revolution." (Blast and Freeman, FORTUNE, April 17, 2014). That system was essentially medieval feudalism, with serfs and masters.

Henry Ford understood the fundamental dynamic of capitalism, namely, that sharing profits with employees gives them more money with which to buy his products, which in turn increases profits, and that increases everyone's wealth. This simple fact has been forgotten by the American business culture. The very purpose of capitalism is to increase the wealth of the entire nation and so to give everyone a stake in diligently pursuing a peaceful, productive life.

Excessive concentration of wealth defeats this purpose at its foundation by depriving the vast majority of the population of the means to enhance their standard of living. Without this motivation, that population will eventually turn to violence and revolution to regain its hope for a better life.

So, how did this situation come about? There were at least two stimulants: inflation and digitalization. A very convincing analysis of the problem has been supplied by Porter Stansberry, a financial futurist of sorts. He traces the steadily advancing discrepancy between the 1% and the rest of us to inflation. His chart showing the rate of inflation compared to the rate of distribution of wealth from 1971 (the year Nixon took the US off the gold standard) to the present is very illustrative.

His principal thesis is that a sound (i.e. gold-backed) currency forces a wide distribution of buying power, because it reflects the advance or decline of a culture's productivity. For example, a "strong" dollar buys as much for the middle-class workman as it does for a billionaire. But it takes a much higher percentage of "weak" dollars to buy that workman's necessities. The elite buyer has in fact many more dollars to spend even though such purchases are only a small portion of his overall income. His wealth therefore provides him with an ever-higher standard of living, while the workman sinks ever closer to poverty. Since the workman made a major contribution to the production of the item which was then sold for a profit, the capitalist philosophy would dictate that he share in the resulting profits. If he doesn't, he gets angry.

Stansberry sees the violent revolution as having already begun -- citing the recent wave of violence and terrorism. But his solution is very discouraging -- he predicts an "American Jubilee" like those held every 50 years or so in the Bible. In modern terms, that is a collapse of the current economic structure and its replacement by a new normal. He expects a much more catastrophic event than 2007-8. His advice: head for the 50 or so enclaves of the rich and powerful which will be heavily armed. IOW, a new French Revolution.

In his impassioned plea for raising the minimum wage, billionaire Nick Hanauer uses the striking image of the deprived masses picking up their pitchforks to overcome the elite. ("Pitchfork Economics") He too cites the Henry Ford mantra. His solution, however correct, was originally too narrow - the minimum wage is but one factor in a much more complex economy.

An obvious temptation for undercutting the buying power of the middle class has been the digital revolution, which has contributed so monumentally to the productivity increase we have experienced in the past generation. Among its many advances has been the communications revolution, especially the internet, which has enabled workers from developing countries to participate in the US job market. Distances offer no obstacles in today's world. Competition for jobs today has become worldwide. The result has been catastrophic for America's workers.

Corporate chieftains took one look at the wage advantage of foreign workers in Asia and Latin America and fell into their arms. There was no thought of the harm they were doing to their own compatriots, and eventually to themselves, as they gleefully set about the destruction of American capitalism. It has taken one of their own, in the person of Donald J. Trump, to wage a mighty counter-offensive to this movement through his trade and tariff policies. But that also is not enough.

How can we rescue our unique American capitalist system from its current path to feudalism? The key is to institute compensation programs for middle class workers which allow them to share in the prosperity their productivity has helped to create by implementing the labor-saving technologies invented by the elite.

For the answer, we can look to companies which have structured their employee compensation to reflect the employees' contributions to profits. Three such corporations are Southwest Airlines, Federal Express, and Walmart. Each has developed a profit-sharing system which not only reflects the proportionate contributions of ownership, management and labor to the profitability of the total enterprise, but they have also avoided the potential clash between employees and shareholders by issuing part of the workers' bonuses in the form of shares or options. Thus the two groups have overlapping memberships.

A pioneer in this movement was Sam Walton, the founder of Walmart. When he took the company public, he simultaneously provided his employees with highly discounted stock options. The result over time was a company of millionaires, which also became for a time the largest retailer in the world. No matter the current labor relation problems of the company, no one can dispute the legacy of the founder.

The last piece of this puzzle is the Labor movement. The American Labor movement succeeded from the 1930's to the 1960's in winning for its members significant benefits in what might be called "lifestyle" features, such as, worker safety, pensions, health care, and wages. Since the 1970's, however, these benefits have become more or less standard at least in big companies. In other words, Labor won.

Since then Labor seems to have lost not only its way, but also its membership. I suggest that Labor adopt a new cause, "Luxury Benefits": recapturing for its members their rightful share of the immense financial rewards our country has earned. It is no secret that the captains of industry are not going to hand over significant portions of their wealth to their employees without a fight - even if it is in their long-term interest to do so. Someone is going to have to help them "see the light". Nobody is as equipped by history, organization and numbers to undertake this 21st century fight as organized Labor.

(To be continued next week.)

© 2019 Richfield Press, LCC. All rights reserved.