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The Independent Investor: Income Inequality: The Trend is Not Your Friend

By Bill SchmickiBerkshires Columnist

If left unchecked, the trend in income inequality in this country will continue to widen. It will lead to an increasingly dysfunctional economy, heightened political polarization, paralyses and a level of anger and mistrust that this nation has not seen since the Great Depression.

Income inequality, as I have pointed out, is a worldwide phenomenon brought about by a number of global trends that has transformed how economies do business. Globalization has put downward pressure on wages, especially those of low or unskilled workers. Technological change has favored highly skilled labor. Institutional and regulatory reforms have increased global competition while decreasing the bargaining power of labor. More and more unskilled people enter the labor force in countries like India and China applying even more pressure to wages worldwide. These trends have created distortions in economic growth and transformed economic systems and markets among developing and emerging nations.

Something similar happened during the 1930s but for different reasons. As the world's economies first faltered and then suffered massive downturns, trade embargos sounded the death knell for many economies. As a result, free markets and political systems were turned upside down. In their place, ideologies such as communism, socialism and even Nazism replaced various versions of democracy and capitalism.

Back then, Americans elected Franklin Delano Roosevelt, a scion of wealth, hoping he could deal not only with the Great Depression but the growing threat of income inequality in this country. Roosevelt, in my opinion, realized that the same trends that allowed the Nazis to rise to power and the Russian Revolution to succeed could happen here if the Great Depression and income inequality were permitted to grow.

America was already experiencing sporadic riots, labor battles and vigilante actions that were beginning to escalate. Roosevelt, against bitter opposition from what he called "organized money," instituted several social and economic reforms in an effort to reverse the extreme economic inequality of that time while attempting to jump-start the economy. He was labeled a traitor to his class and admitted that "they are unanimous in their hate for me."

Why the history lesson?

I believe this country needs something radical that goes beyond Roosevelt's New Deal, although elements of that kind of social program could contribute to a solution. But a Roosevelt-style re-distribution would be a hard sell in this country. Today, even the word "re-distribution" represents an almost un-American idea among the majority of voters.


The Independent Investor: The Incredibly Shrinking Middle Class

The Independent Investor: The Next Third World Nation

Conservatives and liberals alike extoll the principles and virtues of capitalism and a free markets system. Reaganomics remains the model and the modern-day vindication of "the economic principles of which this country was founded upon."

Free markets, if left to their own devices, so goes the American myth, can distribute wealth equitably and fairly for all. Some economists say that it is a bogus argument, pointing out that the reverse of "trickle down" is what actually happened as a result of Reaganomics over the last 30 years. The data does support that contention.

But I believe both sides are missing the point. In my opinion, the cause of income inequality today is an example of what we don't know we don't know. In this case, what we don't realize is that America's 21st century version of capitalism is far, far different from the capitalism our fathers and grandfathers enjoyed. It has vastly changed just in the last 30 years. There was a time in this country when someone willing to work hard could get ahead, finance a college education, borrow the capital to start a business and succeed. Does it still happen? Sure, but how often?

Economic and political systems change over time. Some systems, communism for example, no longer exists as a political and economic force in the world. Over the last 30 years, China's centrally-planned and run economy has been forced to drastically adjust to the new world order.  Why should we think that our concept of capitalism and free markets remains the same?

But today's capitalism may not distribute wealth as equitably as before. Next week, we will make the case that today's 21st century form of capitalism is a large contributor to our growing income inequality problem. 

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

 

     

The Independent Investor: The Next Third World Nation

By Bill SchmickiBerkshires Columnist

Here's a great cocktail party question. What do Cote d'Ivoire, Uruguay and the United States have in common? Answer: all three nations have about the same level of income inequality among its citizens. For those who didn't know it, America now ranks lowest of all developed nations in terms of income distribution.

After my last column on this subject, I realized that when it comes to measuring the wealth gap, rarely do we Americans compare ourselves to other nations. Instead, we check out what our neighbors are making and if we are in the same income ballpark then we leave it at that. And most of the time we ignore the stories of multimillion dollar salaries that others make as simply a one-off event, an exception, not the rule. But times are changing.

Beginning with the Occupy Wall Street movement, income inequality has come to the forefront in our consciousness and has now become a campaign issue. So I decided to find out just where this nation's income inequality stands in comparison to the rest of the world.

As a first step, the easiest measure of determining whether a country is rich or poor is to simply add up its cumulative wealth or gross domestic product (called GDP). If you divided the number of people in a country by its wealth you get per capita GDP. The problem is that measurement falls short in determining whether a society is truly wealthy. You could have, for example, the highest per capita GDP in the world on paper, but if all that wealth were controlled by just one or two people, the society overall would be dirt poor.

In order to discover whether a society is truly wealthy, I needed to account for the distribution of wealth. I quickly discovered that most economists and sociologists use the "Gini Index," which measures how equitable a nation is in its distribution of wealth. The Gini Index or scale begins at "0" (everyone gets the same income) to "1" (one person has all the income). 

I discovered that the U.S. ranks at 0.450 on the Gini Index, sandwiched between the two Third World nations I first mentioned at the beginning of the column. America ranks the lowest of all developed nations in the index. What is equally shameful is that not one state ranked in the normal range of income distribution anywhere within the developed world.


The Independent Investor: The Incredibly Shrinking Middle Class

The Independent Investor: Income Inequality: The Trend is Not Your Friend

The ranking of your state might shock you. For example, California, at 0.466, was comparable to income distribution in Rwanda. Connecticut was slightly worse at 0.480, the same as Venezuela. Massachusetts was about equal to Mexico at 0.461. New York came in on par with Costa Rica at 0.495. New Hampshire at 0.417 equated to Cambodia while Maine at 0.428 had the same inequality that citizens of Singapore endure.

The U.S. is a great deal wealthier than all of these nations. It boasts one of the highest GDP per capita in the world, but in terms of distributing that wealth, this nation is sucking wind. No matter how wealthy we become, if an increasing share of that wealth continues to flow to the same one percent then this country is no better off than it was before. It is, in fact, worse off.

Unfortunately, researchers expect the trend of income inequality in this country to increase and maybe accelerate. As more and more of us become disenfranchised, our stake in the country and in its political system will decline. Bottom line: income inequality undermines democracy. What can be done about it? Stay tuned for my next column.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

 

     

The Independent Investor: The Incredibly Shrinking Middle Class

By Bill SchmickiBerkshires Columnist

Income inequality in the United States should worry you. Chances are, if you are reading this column, you still consider yourself one of America's Middle Class. Just how long you remain one may be entirely out of your hands.

If you think I'm exaggerating, just take a moment to review this most recent data. You may already be aware that income inequality in America has been on the rise over the last 30 years. Last month, the Census Bureau found that the highest-earning 20 percent of households earned 51.1 percent of all income last year. That is the biggest share on record since 1967. The share earned by middle-income households fell to 14.3 percent, a record low. From 1979 to 2007, incomes of the richest one percent of Americans soared 275 percent. That same 1 percent earned 23.5 percent of all income, the largest share since 1928. At that rate, the rich are 288 times richer than you, the middle class.

At the same time poverty has deepened. Fifteen percent of Americans live below the poverty line, which comes to 46.2 million people — 46 percent more than in 2000. If it were not for unemployment benefits and Social Security payments, millions more would fall below that poverty line. And guess what, the politicians are bound and determined to reduce those benefits within the next year. Bottom line: income inequality is worse today than at any time in American history.

That's right, back in 1774 the gap between American's incomes were smaller than it is today, according to the National Bureau of Economic Research. Hold on to your seats — two historians argue that our present condition is even worse than it was during the Roman Empire! The top 1 percent of ancient Roman earners controlled 16 percent of the Empire's wealth compared to America's 1 percent, who controls 40 percent of America's riches.


The Independent Investor: The Next Third World Nation

The Independent Investor: Income Inequality: The Trend is Not Your Friend

And yet, when American voters are asked how important income inequality is to them only about 17 percent thought it was extremely important for the government to try to reduce income and wealth inequality. There could be several explanations for that willingness to witness more and more of the nation's wealth falling into fewer and fewer hands.

One reason is the belief that each of us has a chance to become one of those favored few. Back in the Fifties, for example, 87 percent of Americans thought there was plenty of opportunity to progress. After all, that's the American Dream, right? Americans may be worried that if the government attempts some kind of Robin Hood redistribution grab it could hurt their chances or their children's prospect of becoming the next Donald Trump.

Equally important is the belief that capitalism cannot work without income inequality. We have been spoon fed this myth ever since Trotsky first offered his alternative to capitalism. What incentive would the entrepreneur have to invest, to take chances, to innovate if the government's heavy hand of taxation simply appropriated his hard-won gains? It is the same argument that Ayn Rand used in her book "Atlas Shrugged." The logic is simple and erroneously simplistic: since inequality is good for capitalism, the more inequality, the better capitalism works.

Some economists contend that the phenomenon of income inequality is not confined to the United States. The rich are getting richer all over the world. One economic theory that could account for this trend stems from a study by Simon Kuznets called "Kuznets' Curve" that income inequality rises in an industrial revolution, falls as the country grows and develops and then rises again.

For some of the wealthiest nations, especially industrial exporters like America in the 1950s and 1960s, income equality was on the rise. The U.S. was one of the dominant capital goods exporters in global trade and average incomes kept pace with productivity. But as the rest of the world caught up, America began shipping much of our industrial capacity off-shore. In its place the technology and service sectors came to the forefront. Unfortunately, technology actually reduced the number of middle-income jobs in America and the service sector paid far less than factory jobs. This all happened as economic growth began to moderate.

In my next column we will see exactly where the United States now stands in relation to the rest of the world in income inequality. We will also address what this continuing trend will mean for you and your children in the years to come and what can be done to reverse this trend.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

     

The Independent Investor: Power Shift III

By Bill SchmickiBerkshires Columnist
Who's Regulating the Regulators?

In the aftermath of the financial crisis, Americans demanded a change in the regulatory system. Since the financial sector was responsible for engineering the near collapse of the global banking system, it is Wall Street that has borne the brunt of the government's expanding role in the markets.

As in everything, increasing government regulation is meaningless without the power to enforce it. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in July 2010. Hailed as the most comprehensive and far-reaching reform since the 1930s, the 848 page-long bill has far-reaching power over so many areas of American life that it requires five federal agencies just to enact portions of the rules and regulations.

Essentially the bill was supposed to re-write how Wall Street did business. Everything from predatory lending in the mortgage markets to putting an end to hidden fees and penalties on credit cards was included. New rules would end speculation in the derivatives markets and there would be no more danger of "too big to fail" institutions such as AIG dragging the rest of the financial system down with it.

A plethora of new government powers and agencies would not only have authority over the financial system  and the economy that would end up affecting veterans, students, the elderly, minorities, investor advocacy and education, whistle blowers, credit rating agencies, municipal securities, the entire commodity supply chain of industrial companies and much, much more.

In signing the bill, President Obama proclaimed that "these reforms represent the strongest consumer financial protections in history." Before the ink was dry the battle had begun. Wall Street and its cronies faced the largest power grab in its history and they were not about to go down without a fight.

For the last two years a combination of Republican, bankers and other corporate entities have done everything in their power to reverse the legislation or at the very least prevent its enactment. Using everything from lawsuits to loopholes from intimidation of the regulators and innumerable stalling tactics, the opposition is betting that if they can stall the legislation until the election, then a newly-elected Republican president and Congress can repeal the act as they plan to do with Obamacare and just about every other piece of Democratic-sponsored legislation.

Their tactics are understandable if regrettable. No one likes to relinquish power and in this case there is a lot of money at stake. Money greases the wheels of industry, but also the re-election chances of all politicians. The two are umbilically connected in this country. The wonder is that any sort of legislation to herd in the excesses of Wall Street passed in the first place.

I credit you and me for that success. The American public was so outraged by the greed and thievery of our nation's banks, brokers and insurance companies that we demanded some action. Even the politicians had to cave in to the public's demands if they wanted to have a chance at re-election. But passage and implementation are two different things. As far as criminal indictments, well that's taking the whole thing a bit too far. No one in Washington is going to bite the hands that feed them that drastically.

So while the excesses on Wall Street continue — new derivative trading scandals, mini flash crashes, interest rate rigging by the world's largest banks — the regulators avoid regulating. One wonders therefore if the power shift that has occurred in this country is really from the people to a handful of politicians and their financial handlers on Wall Street.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Power Shift Part II
The Independent Investor: Power Shifts from Wall St. to Washington

     

The Independent Investor: Power Shift Part II

By Bill SchmickiBerkshires Columnist
Big Brother is Getting Bigger

Depending on whose sound bite you are listening to, government spending has gotten bigger or smaller over the last few years. Oddly enough, both sides are correct. It all depends on what statistics you are quoting.

President Obama claims that federal spending, under his administration, has risen at the lowest pace in nearly 60 years. His statement is accurate, as long as you remember that the 2009 fiscal budget is considered part of his predecessor's legacy. As such, the $700 billion TARP bailout and the $831 billion stimulus package occurred at the end of President Bush's term, even though Barack Obama signed the stimulus bill and voted as a senator for TARP. How does that work?

Part of the confusion lies in calendar versus fiscal year accounting. Before 1842, the federal fiscal year was the same as the calendar year. Since then it has changed several times and since 1977 the government's fiscal year begins on Oct. 1 and ends on Sept. 30, so the spending in 2009 was pinned on Bush since he was president on Oct. 1, 2009. I guess that is fitting since the cause and result of the financial crisis that continues today occurred while the Republican Party was in power.

Despite the administration's double talk, the fact is that 2010, 2011 and 2012 are three of only four fiscal years since 1945 that the federal government spent more than 24 percent of GDP in a single year. The Office of Management and Budget predicts that this year federal spending will hit 24.3 percent of GDP. That is about what the government spent in fiscal 1942, when the Japanese attacked Pearl Harbor and America went to war in both Europe and the Pacific.

Before we look at spending today, readers need to understand that there are at least two measures of government spending. The one most quoted by the economic journals and politicians we'll call "G," which is how much federal, state and local governments directly contribute to economic activity measured as a share of Gross Domestic Product (GDP). It is the sum of all the goods and services they provide.

There is also a broader measure that captures all the spending in government budgets. This figure includes all of "G" plus interest payments on our debt, transfer payments through programs like food stamps, social security, Medicare and Medicaid, unemployment insurance, housing vouchers, Veterans benefits, et al. As you might imagine, when you add all this into "G," government spending, as a percentage of GDP, turns out to be closer to 37 percent. In comparison, the average spend since 1960 is about 32 percent.

Now that is down from the 39 percent that it hit in the second quarter of 2009, when the financial crisis was at its peak. If we confine our analysis of government growth since then, government spending has decreased whether you use "G" or the broader measure.

However, if you measure government growth from the beginning of the decade, when government spending totaled just 30 percent of GDP, then yes, government has grown by a whopping 6 percent in the last 12 years.

Beneath the statistics we can see that the government's economic role has clearly grown larger and with it the power it welds. Its historical role as provider of public goods and services remains but is shrinking as more and more of government's budget is spent on transferring cash and in-kind payments to taxpayers directly through programs like Social Security, Medicare and Medicaid.

This is no accident. Remember that an entire generation of Americans is close to or already in retirement. Baby Boomers are tapping Social Security while experiencing mounting health issues as they grow older. They are turning to Medicare to answer their needs. And why shouldn't they?

Throughout their working careers, these hard-working Americans, (who fought three wars for this country in their lifetime along the way), have contributed paycheck after paycheck to guarantee that when the time came, Social Security and Medicare would be there for them when they needed it. So, yes government has grown larger. It is the "why" of it that so many politicians conveniently forget.

As the government's role in the economy gains force, so does its power. But power is agnostic. It can be used for good or for evil. We have seen how Wall Street has abused power. In my opinion, government spending that is used to honor its contract with America's retiring workers is a proper use of that power. Whether this country can afford to honor its commitments is another story and a question we will answer in a forthcoming column.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
     
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