The biggest single structural defect facing the US
economy night now is the widening gap between rich and poor. This is forcing
the alleged reformer - Barack Obama - to reshape the U.S. economy thus
leaving it more vulnerable to recurring financial crises and less likely to
generate enduring expansions.
My business partner, Paul Gambles,
recently debated this point on CNBC with Eric Rosenkranz -
Issues like record levels of debt,
spiraling federal deficits, and chronic lack of velocity in money
circulation are all symptoms of the same disease.
“Income inequality in this country is
just getting worse and worse and worse,” James Chanos, told Bloomberg Radio
recently. “And that is not a recipe for stable economic growth when the rich
are getting richer and everybody else is being left behind.”
We have been beating this drum a while
and we would thank GMO’s Jeremy Grantham for waking us up to this.
Since 1980, about 5% of US annual
national income has shifted from the middle class to the nation’s richest
households. That means the wealthiest 5,934 households last year enjoyed an
additional $650 billion - about $109 million each - beyond what they would
have had if the economic pie had been divided as it was in 1980 (U.S. Census
Between 1993 and 2008, the top 1
percent of families captured 52 percent of total income gains, according to
a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel
Saez of the University of California, Berkeley.
Disputes over what constitutes economic
fairness are moving to center stage amid a near-stagnant U.S. economy
saddled with 8.6 percent unemployment yet boasting record corporate profits.
President Obama last month targeted, “the wealthiest tax payers and biggest
corporations” for higher taxes, saying they should pay “their fair share”
Of course Republicans, led by John
Boehner, elected on a pledge to oppose all tax hikes, whether they are good
or bad, sensible or stupid, see any suggestions of increases as being
unacceptable. They are probably hoping that the wealthiest 5,934 households
exert an influence disproportionate to the actual quantum of votes that they
themselves wield when it comes to the polls.
A lot of the anger over this banana
republic income dispersion fuels the likes of ‘Occupy Wall Street’ and
statements like, “We are the 99 percent that will no longer tolerate the
greed and corruption of the 1 percent,” - www.occupywallstreet.org.
Howard Buffett, the Berkshire Hathaway
Inc. director sympathizes with this anger. Buffett Junior recently told
Bloomberg News: “There has never been such a large gap between earnings in
this country… There has never been a time in my lifetime when the government
is going to cut an incredible amount of programs that support poor people
and feed them.”
Almost half Americans now see their
country divided between “haves” and “have-nots,” according to a Pew Research
Center poll last month.
“The large and growing gap between the
haves and have-nots will tend to undermine growth, both directly and
indirectly - including by reducing the marginal propensity to consume and by
amplifying the political polarization that has already contributed to poor
economic policymaking,” - PIMCO, CEO: Mohamed El - Erian.
To us this is the central issue right
now. It is not a specifically American problem, although much of the data
and available commentary focuses on the Banana States of America. It is also
very easy to see the evolution of the gap in America. Following WW II, the
country unified around a program of building post-war prosperity in the
1950s. This was so successful that the 1960’s saw radical social change and
moves to greater equality encapsulated by the promise of a “grand society”.
When times became tougher in the
1970’s, the focus on distribution of the spoils once again moved to the
fore, setting the stage for what we have long highlighted as Art Laffer’s
Since 1968, according to the standard
statistical measure of inequality know as the Gini coefficient, incomes in
the U.S. have become steadily distributed less equally. The U.S. Gini score
rose from .39 in 1968 to .47 in 2010, meaning that incomes were becoming
Bloomberg points out that in the
30-nation Organization for Economic Cooperation and Development, only Turkey
and Mexico have more unequal societies than the United States. In the U.S.,
the rich-poor gap has widened by 20 percent since the mid-1980s - more than
in most developed countries. “Nowhere has this trend been so stark as in the
United States,” the OECD concluded in a 2008 study.
To be continued…
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd
nor its officers can accept any liability for any errors or
omissions in the above article nor bear any responsibility for
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information please contact Stephen Tierney on