A subscriber sent me the link to an article about a RAND study – ‘We were shocked’: RAND study uncovers massive income shift to the top 1%. The article explains, “The median worker should be making as much as $102,000 annually—if some $2.5 trillion wasn’t being “reverse distributed” every year away from the working class.”

I had already read the report and it fits with what I have talked about and seen in research from many sources. Nothing shocks me anymore. But I did write back to the subscriber and here is what I added about how we got here.

The shift reported by RAND was engineered by tax and monetary policy. It was also caused by allowing China in the WTO in 2001 without a level playing field in terms of worker rights.  

Here is how the US slid into the “Wealth Inequality” situation.

1) They raised payroll taxes in the 1980s to allow for lower corporate taxes without running deficit spending – there has never been a real trust fund. This led to lower take home pay for workers to spend on the economy, but more money to invest in the financial markets by the wealthy.

2) More tax cuts for the rich in the 1990s helped create the bubble era of stocks because the investor class had more to invest.  The economy did not grow any faster. Tax cuts have never caused the economy to grow faster let alone ever pay for themselves – even the old Republicans admit this now.

3) The bailouts post 2008 heavily favored the connected wealthy who bought foreclosed homes in mass at fire sale prices from the people.  They also had access to easy money to invest in other fire sales. It is still going on. Look no further than Apple borrowing money today near 0% interest and credit card interest rates running over 17% to know where financial stimulus was targeted.

4) CEO compensation compared to worker pay exploded higher in the last 40 years. There has been no push back on this from government. Worse, corporate CEOs have used corporate cash to engage in trillions of stock buybacks instead of investing in future growth of their companies or saving for a rainy day.

5) Trump’s tax cuts and current bailouts are sending us beyond the gilded age in terms of inequality.  But at least we have some social programs in place thanks to the new deal which dealt with the fallout of the last gilded age.

We know working age men have had NO real income gains in 40 years. Since the BLS under-reports inflation, that “no gain” becomes a loss of probably 30% of purchasing power over the last 40 years. This would only require inflation being under-reported by half a percent annually – a conservative estimate based on quality adjustments…

What is boiling in the streets of cities and in rural America comes from these trends. But both sides think someone else is to blame.  They do not know it was the financial elite engineering this at the top, then distracting the masses by fanning the flames of blame elsewhere – immigrants being a prime target.

We had the slowest economic recovery in 100 years after the last financial crisis because we applied supply-side stimulus when we really had a demand-side constraint to growth. So all this stimulus spilled over into the financial markets since businesses did not want to invest in production and could make more money in the financial bubbles.

The next slide shows the national income earned by the top 10%. We were already back to the 1st gilded age pretax. Trump’s tax cuts moves us closer in terms of posttax incomes.

To fix the economy, we need stimulus directed at the economic constraint – the demand-side of the economy which means “We the people”. And some focused supply-side stimulus. What we do not need is to prop up insolvent business stocks and bonds. Restructure their finances and keep them operating if they have a viable business. But stop bailing out investors.

Since policy is run by the financial elite, I am not expecting our problems to be fixed. I also expect calls for austerity, the opposite of what needs to happen. If this is the path, then we will see a deep depression.

And depressions can lead to authoritarian regimes around the world who promise to fix everything. Depressions can even be welcome by authoritarian types.

Meanwhile, the stock market’s value to GDP is at an all-time record on financial stimulus… something is going to break. This last rally cost $3 trillion in money printing. The next forced rally will cost more and at some point our financial system becomes a joke. Some think it already has.

Please don’t get extracted when current policy breaks down. Know what is really driving this market higher and when and how it might fail. Or just sit on the sidelines and watch the show.

TSP Smart & Vanguard Smart Investor serves serious and reluctant investors

Categories: Perspectives