Monday, March 16, 2015

Inequality of economic opportunity

Whether analyzed over history in Thomas Picketty’s, Capital in the 21st Century (2013), in relation to the patterns of inequality in the U.S.A. today by JosephE. StiglitzThe Cost of Inequality (2012), or from the stories of those who sought to challenge exploitive systems that perpetuate inequality in Michael Lewis’ Flash Boys (2014), the message is clear – inequality of economic opportunity, and how many of those privileged with wealth protect and exaggerate it, is one of the most entrenched and volatile problems we face in the modern day. I am not an economist and so qualify my reflections by acknowledging that I am a novice and was previously uninformed about economics and its impact. However, reading these three books has allowed me to integrate a variety of perspectives and to learn enough to know that economic opportunity is a problem that we must all face.

As a backdrop to my reflections, the intent is not to criticize anyone but to face honestly a system that is inherently unfair and perpetuates itself, with those fortunate enough to enter the ranks of extreme wealth acquiring opportunity that most others have no idea even exists. Some people with great wealth use it productively, putting it to use in providing services and products that offer employment opportunity to others. This is the legendary “trickle-down” economics theory that many espouse when they say that wealthy people should not be taxed on their worth but, instead, allowed to put it to work by feeding an economic system that benefits all. The sad reality is that “trickle-down” seldom works, with the seriously wealthy of today most often holding their wealth or putting it in places that create only more money rather than active investment that builds a vibrant economy.

Picketty’s analysis included review of tax records going back 250 years to determine patterns of inequality and how they shifted as a result of world phenomenon such as the French Revolution, World Wars, and depressions. The bottom line is that those lucky enough to gain a hold of even modest wealth in the developed world are automatically destined to proportionally increase that wealth over time. His assertion is based on the simple fact that capital return has always out-paced growth in all countries and all historic periods. So, if you have it, you will keep it and add to it. Thus the lower or middle class seldom break the bonds of their socioeconomic class. His proposal is to consider a world-wide progressive tax on the very, very wealth (.001 of the population) so that they still have return on their investments but not at the extreme levels that has allowed them to emerge from the 2007/08 world recession with more money than they had going in. Why world-wide – because extremely wealthy people have ways to hide money so that it cannot be taxed. Thus, a universal tax would require all countries to report deposits that can then be traced back to their owners. The revenues would be invested in infrastructure ranging from education to highways that extremely wealthy individuals/corporations use to make more money but invest little to establish or maintain.

Stiglitz, a Nobel Laureate credited for his insights on economics and an influential leader in U.S.A. and international organizations (chair of Clinton’s Council of Economic Advisors, the World Bank, and others) is credited for challenging the concept of free market economies, indicating in a 2007 interview that "The theories that I (and others) helped develop explained why unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes. Interestingly, there has been no intellectual challenge to the refutation of Adam Smith's invisible hand: individuals and firms, in the pursuit of their self-interest, are not necessarily, or in general, led as if by an invisible hand, to economic efficiency." Picketty's book described the way economic inequality has influenced politics in the U.S.A. in recent years, indicating that allowing campaign donations at unprecedented levels has resulted in “pay for hire” politicians who no longer represent much of a constituency beyond those who economically benefit from their policy actions. And the campaign funds spin the candidates’ images, making it look as if common citizens are being protected by these politicians. One of his assertions was that high wealth individuals frequently believe that they got where they are because of superior ability or hard work when, more likely, they prospered as a result of inheritance or utilizing systems provided by the government to support their businesses. One particular group within the high wealth strata are the managers who now command astronomical salaries by historic comparison and continue to demand more under the assumption that they possess unique and therefore highly coveted talent, even when their corporate ledgers reflect otherwise.

Lewis’ Flash Boys tells the story of an individual who discovered the practice of high frequency traders, realizing that HFT added nothing to the economy other than making more money for themselves and their clients simply by getting to information about equities trading before others did and then manipulating purchases in ways that resulted in positive yield not as an investment but as a timed intervention in financial transactions.  Flash Boys had a positive ending in that a team of insightful and cunning economic and technology experts established a new market that could not be manipulated by HFT, thus leveling the playing field for all investors, regardless of how fast their trading speed was. One of Lewis’ most disturbing assertions was that analysis of financial markets and the corresponding regulation of them over time indicates that every time policy is put in place, those involved in the markets go to work to undermine or to find other ways to produce their financial gains.

These three books have informed and disturbed me in very significant ways. The implications include:
  1. Extreme wealth perpetuates itself and offers little opportunity to strive for the “American Dream” that was so much a part of the identity of many in the U.S.A. from its founding.
  2. Those with extreme wealth, whether through their own action or more likely their advisors, intervene in public policy to protect and to add to their wealth, resulting in a system that cannot be self-corrected.
  3. As those around the world enter the economic elite circles, they often do so without a real understanding of the implications for their own citizens.
  4. Extreme wealth is often acquired by those who access publicly-provided systems and infrastructure, and worse they exploit natural resources or create environmental damage, for which they do not pay.
The point for those of all socio-economic strata and nationality is how a world economy will be created that is balanced and offers the opportunity of advancement that hard-working individuals/families seek. The global economic environment in which we now live has resulted in everyone being able to see the disparity that exists, a disparity that leads to hopelessness among some and for others becomes a catalyst for resentment – potentially planting the seeds for anarchy. Whether you are rich or poor, it’s hard to avoid a conclusion that the economic systems of the world needs to be monitored, improved, and based on fairness, stewardship of resources, and contributing to the public good.

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