by Brian T. Lynch, MSW
The impact on the economy of stagnant wages is ever slower consumption of goods and services over time. There isn’t as much money to buy things. This slower rate of consumption suppresses demand. Lower demand means fewer jobs and even lower wages for the rest of us. This is the cycle were we find ourselves today.
The consumption of goods produces the profits from with owners of capital collect returns on their investments. Lower demand due to suppressed wages would normally also lower returns on capital investments but for the factors that have kept consumption afloat. Now there are no hours left in a day, fewer household members available to work, no more capacity to borrow against future earnings. Now the impact of low wages has come home to roost and lower sales means less profit to be made.
Before the 1970’s this situation would right itself when owners shared a portion of their wealth by offering productivity raises to reward their workers. Productivity wages are based on growing productivity and are separate and above cost of living increases. Productivity raises, along with cost of living adjustments, allowed the labor/consumers to increase spending and boost demand. Increased demand would spur on manufacturing and stimulate the whole economy.
But today’s billionaires have found another way to profit without sharing their wealth with wage earning consumers. They spotted the growing ownership stake of many in the middle class and created an opportunity to take it all back. It is hard for most of us to see in our lifetime, but this is the first time in history of the world that the middle class (upper-middle mostly) has accumulated a significant stake in capital ownership. Many of us have retirement accounts, money market funds, etc. People in the upper-middle class, doctors, lawyers, middle-managers etc., have become mini-investment capitalists. Prior to the vast destruction of property caused by the world wars in the last century, wealth was concentrated at the top as is happening again today. Middle class gains in the 20th Century directly correspond to capital losses by the wealthiest owners during the two world wars.
Billionaire capitalists, the “true heirs” to wealth ownership, have responded to middle-class ownership of capital by creating a massive financial investment casino filled with elaborate new investment vehicles. The object is to entice new wealth owners to play in the billionaire’s casinos. Mortgage backed securities and swaps are just two small examples that nearly bankrupted the economy in 2008.
These new and incomprehensible investment products has spawned a whole new class of hucksters, like Bernie Madoff, who use these bewildering new instruments to create slick ponzi schemes. But the bulk of these new investment opportunities are just a big casino games in which the house (billionaire owners) always wins. Billionaires are quickly siphoning away middle class ownership stakes in capital through high finance games of chance. In this way they can boost returns on investments and entertain themselves without sharing their wealth through higher wages.
Because these billionaire owners, who make up less than .01% of the population, control the investment odds, they are sure to win back all the capital they lost in the war years of the last century. Middle class gains in the 20th Century correspond to capital losses by the wealthiest owners during the two world wars. This now explains why the stock market and investment economy seem to be booming while the economy on Main Street slumps. Billionaire capitalists don’t have to share wealth to make wealth like they use to. There are enough small investors with an ownership stake willing to gamble what little they have in this new investment casino to keep billionaire fortunes growing.
If you, the reader, are still with me at this point let me assure you that the geometrically rising gains by the wealthiest owners of capital are not an inevitability. There are difficult but concrete steps we can take to bring capitalism back into balance for everyone. A discussion of these solutions does require a much deeper understanding of problems that I can provide here. I firmly believe it is in our best interest to arm ourselves with a much better understanding of the forces creating our two economies; Forces that are threatening our democratic institutions. For a fuller understanding I recommend Thomas Piketty’s excellent book, Capitalism in the 21st Century. I encourage you to strike up conversations with others and share your thoughts and questions.
Ah, but what small-stakes owner/investors want to know is how to avoid the trap when the game is rigged from the top. We’ve seen how the mortgage debacle stripped wealth — both homeownership and the loss of investments in mortgage-based securities. Now we stand, with what little is left for our retirements wondering if, between Big Banks and Wall Street, whether our mattresses are a better option.
The best advice is to keep your investment income is the broadest possible mutual fund that most closely reflects the overall market and forget about it for decades at a time. You can’t be fooled if you don’t play the odds. This was an actual study recommendation I read recently. But the scarier point is that nothing currently being proposed or even discussed in our national political dialogue even begins to address this problem. If we do nothing at all there will be little left that isn’t owned by the top 0.1% in thirty years. Even whole countries will be owned by billionaires.