Wealth divide

META: I feel like I do my best blogging when I'm falling asleep--I recall composing more substantive commentary in my head lying in bed Sunday and Monday nights than what is below. this will have to suffice as I feel the need to generate some content! /META

On the back page of the Sunday Republic's Viewpoints section, Nicholas von Hoffman discusses the problem of wealth stratification in the US:

The collective net worth of the nation's mightiest plutocrats rose $290 billion, to $1.54 trillion. So 400 individuals, or about 0.00001 percent of the population, own the equivalent of more than 13 percent of the gross national product of the United States. This is bad news for everybody who sells anything to the American consumer because the consumers, as the figures show, have run out of money with which to buy... The rich cannot, even if they shop day and night, buy enough to keep the wheels of American and world commerce turning.

Also...

From the point of view of the big rich, getting young people into debt not only keeps the money coming in but also makes youths timid and obedient. Debt ensures that they won't turn up on the streets to demonstrate for some unwholesome cause. You could almost call it a rule that all people when put into debt pretty much do what they are told.

Talking the last point first, that runs counter in some ways to Marx's Proletariat Revolution, but I digress.

It's also interesting that the most recent other income peak mentioned was at the top of the other bubble, which may mean income through stock options/capital gains. So that can be taken to mean the rich aren't quite as rich as they think they are, since a market fall can effect their capital gain income.

Hoffman's perspective, while perhaps too dire, is compelling, not only for what it says, but the the associated issues it brings up in how our economy is structured and the problems that exist. A free market needs concentrated wealth for the necessary capital to expand. But if it is too concentrated, then consumer demand is too low because not enough people have money. Conversely, in a more egalitarian economy, everyone can spend, but the amount of accumulated capital is too low to sustain the supply side. So the issue becomes finding a ideal distribution in which savings and spending are maximized.

But what is the role of government? I'm a free marketer, so I don't see the governmental imperative to raise/have minimum wage floors, or impose salary ceilings, but the column has sparked some introspection about income disparity and its societal outcomes. The concentration of wealth is alarming because of how it can affect markets (think hedge funds). The last decade has seen huge surges of wealth due to bubbles (tech and real estate) that prompted unsustainable reactions in the market place.

What is driving the market? Institutional trading that's seeking payoffs in pennies per share (the legal equivalent of the Superman III/Office Space gambit). This makes the stock market come of as Ponzi-esque. The trading of shares doesn't create wealth or economic expansion, as the company derives no real benefit after the IPO (or sale of new shares). Shares are owned for a cut of the profits, but dividend stocks are decreasing in number and in their payout (the trend is for reinvestment of profits to strengthen market position rather than dole it out to owners. Executives are a different story, however...). This means equity investment really only pays off by their sale, which requires a similar (or better) valuation of the cost per dollar of profit (which you never see).

As for the debt explosion, how much of the real estate run up is the result of people without the means to buy a home thinking they had to do it now, or else they never could? How much spending was the resulted of home equity that no longer exists (similar to the paper wealth of the tech bubble)? This assumes, though, the negative debt/savings data that is trumpeted is accurate. I've read various accounts that savings vehicles like 401k are not counted and that home mortgage debt shouldn't be considered on the same level as other forms of debt because, basically, you have to live some where.

One thing that just occurred to me (because I'm slow sometimes) is that the Hoffman mixes wealth with income, which are different. One is savings; the other is earnings. The focus is politically/culturally seems to be so heavily focused on income/earnings that more emphasis needs to be placed on savings/wealth creation. That's a huge shift, though, battling the culture of consumerism, the Joneses, instant gratification, etc. How valuable, for example, would a required course in high schools be for personal finance? Heck, just take two weeks out of the required economics course. This is only micro-impact though. The wealth divide is a bit more systemic, so much like Hoffman, I can comment, but don't have a lot of solutions.

Like I said, my midnight stream of consciousness was a little better (although this was still fairly SOCy), but that does you little good now...