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

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.

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.