Social critics aren't wrong: The system is rigged.
The system is rigged in favor of White people, males, healthy people, physically attractive people, Boomers, and the wealthy.
Especially wealthy people: Money makes money faster than work makes money.
Bruce Van Zee is a retired physician who, like me, lives in Medford, Oregon. I was about to write a blog post on income inequality. Our economic and tax systems treat capital better than they treat work and earned income. Capital compounds, so the rich get richer. I read Bruce's post this week in his Subtack blog. He said about what I was going to say. Like mine, his blog is free. Check it out and subscribe.
Guest Post by Bruce Van Zee
America has an aristocracy.The evolution of a two-class society
I was raised in a small town in the 50-60’s. My father was a minister and my mother a homemaker. We were not at all wealthy, I remember my mother reusing aluminum foil, cooking from scratch. We never went out to restaurants. Clothes were hand-me-downs from brother to brother. But I never felt ostracized or embarrassed by lack of wealth nor did I ever feel deprived. We went to the same public school as all the other kids in town, and the schools were good. Our home was modest (owned by the church) and, at least to my young eyes, all the neighborhoods looked more or less alike. The middle class was most of us, though we were aware of smaller numbers of the rich and, conversely, poor.
This was a time when the top marginal income tax rates were approaching 90%, it is now 37%. And how the landscape has changed! I have written previously (here) of the remarkable wealth inequity that has occurred since the 1980’s (Reagan revolution). Over the last two decades, the average annual stock market return has been 9.8%. 62% of Americans own stock, but considerably less of them have sufficient investment holdings to avoid working. The percentage owning stock is highest among adults in households earning $100,000 or more (87%), college graduates (84%) and married adults (77%). By contrast, the rate is 49% among unmarried adults, 42% among those with a high school education or less, and 28% among those in households earning less than $50,000. Stock ownership also varies significantly by race/ethnicity, with 70% of White adults owning stock, compared with 53% of Black adults and 38% of Hispanic adults (here).
In contrast, W2 income growth is considerably less than investment income growth, probably less than 1% inflation-adjusted annual growth.The inevitable result has been a relative lowering of the standard of living for the majority of workers, particularly those whose incomes do not allow investment in the stock market. The graph below shows that the bottom 50% of the population own just 0.4% of the nation’s wealth. The top 1% own as much as the lower 90% of the population. It is unconscionable to allow this to continue. The Buffet rule would be a good start to reverse this trend and help ameliorate our debt problem, “No one of wealth should pay a lower tax rate on their income than a middle-class family.” But of course, many do because of our tax system.
Given Trump’s OBBB which further harms the economics of the very demographic groups that voted for him, one begins to see the Great Con Job that the GOP has pulled off. And then there is the SNAP and Health Care hits to the economically disadvantaged, especially the working poor.
The emerging aristocracy is not one of intellectual or cultural achievement. It is one of wealth, much of it generated in the digital tech boom. And it has been amplified by a decrease in the marginal tax rates of higher income groups and lowering of capital gain taxes. It goes without saying, that the vast array of tax avoidance rules and regulations are available only to those with wealth and business, investment income. Perhaps that’s why Donald Trump pays little or no taxes and even Warren Buffet admits his secretary pays a higher rate than he does. But of course, another thing wealth can buy is lobbying and monied influence over our law makers, which the underprivileged cannot afford. And SCOTUS made it even easier and more covert with Citizens United for monied interests to craft tax laws to their liking.
I don’t know about you, but I get an uncomfortable feeling of societal instability when I imagine this trend continuing. You get the sense that there is too much money chasing even more returns. I guess that’s the definition of a bubble. Somehow, I don’t think society will collapse if a few financial managers, bank exec’s, or hedge fund billionaires went away or, better yet, got taxed at a higher rate. But if our essential workers – teachers, electricians, construction worker, janitors, policemen, fire fighters, waiters, etc—disappeared, went on strike, or started a rebellion, society would collapse. So, why do we treat them so poorly? We are discounting the value of work and production for the lure of easy money. Somehow, we’ve got our values wrong.
In my career as a physician and now in retirement, I experienced both the world of W2 income and now investment income. It is so much easier to be relaxing at home or on vacation doing what you want while your money works for you than the sweat equity grind of daily work. So why not tax work at a lower rate and investment income at a higher rate? We’ve got it turned around. Thanks again to the monied class that has the wherewithal to write the rules.
This two-class society also has insidious ramifications for a major issue in our country today – affordability. Because the wealthy have excess investment monies, they are buying up resources (homes, businesses, whatever) and making those resources scarcer and more expensive for the masses. Young people today are putting off marriage and family because they cannot afford to buy a home. A recent source suggested that most young couples will not achieve home ownership until their 40’s.
Maybe the economy and taxing strategies will swing back in the direction of the 1950’s and 60’s, but I’m skeptical because of the hold monied interests have on the levers of power. And we haven’t even talked about how greed and lack of fiscal responsibility are allowing the National debt to skyrocket. Time for another cup of coffee, or maybe something stronger.
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8 comments:
And to add to this- even those individuals who have their nest egg in equities and fixed income have fewer options to invest than before as companies increasingly “go private”. According to McKinsey, the number of publicly traded companies has dropped from 8,000 in the mid-90’s to 4,000 today and private equity has tripled since 2013.
Then there’s private home ownership which has always been seen as a reliable way to At least preserve and even grow net worth. In the late 1970s and early 80’s, a mortgage for a modest 3 bedroom home in Sacramento was 18% my electrician’s pretax wages. Today that same house requires 40% for the same worker, which would explain the decline in home ownership and the economic stability that comes with it.
Great, so whatya gonna do about it?
How about this? Trump is going to give every child born in the next three years $1k to invest. That's about 12 billion tax dollars or borrowed money going into Wall Street brokerages. The cool part is parents can put up to 5K a year into the account, which of course is a direct benefit to wealthier families, then at 18 the child can do whatever they want with it.
Sound good?
Sigh, no mention of anyone that started poor, and got rich.
The owner of this blog, Peter Sage, was a financial advisor. He certainly has some knowledge of how he has helped people get financially secure, and perhaps even rich. He might even be rich, as well as the guest poster today.
Me too. Many would consider me rich, and perhaps even wealthy.
I'm certainly not a billionaire, but at my age, it isn't even likely in my future unless I win one of those big lottery offerings or one of those many SPAM emails turns out to be real. I am however a millionaire, who started with nothing.
But back to my point. I was born into a family of steel workers; my uncles all were laborers in the mills. One of my grandfathers worked in the coal mines; my other one also was a laborer in the steel mills.
Heck, when I attended college, I too worked in the steel mill as an electrician as a summer job. It was in the electrical shop that I first learned about the stock market. A fellow worker got me interested. We read the WSJ during our breaks.
All that said, my career choice was to be an electrical engineer. As a teenager, I was the oldest in my generation, and was interested in electronics. I learned about building electronic gadgets - radios, transmitters, an oscilloscope, meters, etc. I was also a ham radio operator. I even built one of the first radios that used a synthesizer rather than crystals to set a channel. I tested prototypes that a Sylvania friend had designed. No one else in my extended family was int those things.
I learned about computers in college, and knew about the new thing, a microprocessor; that got me my first job. I designed one of the first devices that was used to calibrate devices used by industry and the military. I served on several committees that led to the development of GPIB, Firewire, USB, and Thunderbolt technologies. I worked with companies around the world that depended on these technologies.
While in college, I was also an ROTC cadet, and got commissioned as a 2LT in the US Army when I graduated in 1975 at the end of the Viet Nam war. I entered the Reserves.
That said, I got married soon after I graduated in 1975. My spouse was an Art History major. I convinced her to get a real job, and earn her MBA. She did and got a job with Intel after working as an accountant at a book bindery business.
We saved.
A friend in the Army Reserves was a stock broker, and he taught me how to purchase stocks. My first purchase was Weyerhaeuser.
Over the next 50 years after graduating, getting married, and raising a family, we saved, invested, and volunteered in the public and private schools. We also hired future employees after we got into management. We both also recruited at top universities when we looked for new graduates.
During those years, I learned how to buy and sell stocks. I have been a trader as a hobby. Learning how to trade is different than investing.
We started with nothing, but we learned, and eventually we got rich; we retired rich. All we got from others were exposure to opportunities; we also learned the value of working, and experiencing success and failure.
So...we started with nothing, but figured out enough to retire with something.
I just wish that others could take advantage of the opportunities they have before them, and do better. Focus on successes, and learn from failures.
Finally, I do pay my fair share of taxes. I've also arranged some of my financial affairs and investments so that part will never be taxed. Each of us has had the opportunity to budget, save for the future, and hopefully do well.
I ignore the billionaires.
I just wish more people would look inward, rather than blame others for their life outcomes. Don't forget that many of the rich do help others, as do I.
Good comment. I agree that there are lots of opportunities for someone willing to be prudent and work hard. I believe it. I see it. But the game has evolved some. It is harder for a young person today than it was for people born when I was, in 1949 -- a baby boomer. The relationship between asset prices for key items (housing, education, and healthcare) have shifted enormously. My first home cost $20,000. I earned $27,000 a year. I was 27. It was affordable. That home still exists, now on Zillow at $300,000. Very few 27 year olds earn 130 percent of the current purchase price of that house, which was my ratio. I could work my way through Harvard in 1967-71 more easily than a young man could work his way through Southern Oregon University today because the ratio between education and the kind of work an 18 year old can get has shifted. Medicare for 65 year olds, but not for 20 year olds is a policy choice. So is taxing capital gains at a lower rate than earned income. We boomers vote and we took pretty good care of ourselves politically. One school of thought is that if young people don't bother to vote then they deserve the bad political outcome they are getting. The trouble with that is that the overall social contract is fraying. Young people and working people are nihilistic. Burn it all down, they say. It leads to young people applauding the murder of the CEO of UnitedHealthcare. The democracy works better when there is buy-in.
You're saying that the house was worth $20,000 in 1976. If it's worth $300,000 now, then its value has appreciated at an annual rate of approximately 6 percent. That's the "rule of 72"--at 6 percent, the value of an asset doubles in 12 years. A 6 percent rate of appreciation isn't all that great. For middle income earners, wages haven't increased since the 1970s at this same 6 percent pace; so one cause of the problem you describe is that wage levels haven't kept up with asset values. Raising the minimum wage makes more sense than going back to a 90 percent marginal rate for federal income taxation.
When the scale between rich and poor is too lopsided the revolution happens. The French revolution fits that pattern well.
Isn’t the crux of the matter whether or not wealth is a zero-sum game, i.e. whether increases in the depth and breadth of riches cause corresponding increases in the depth and breadth of poverty or hardship?
If indeed wealth creates poverty, then income inequality itself is an ill to be ameliorated. Billionaires arguably are villains. If not, aren’t we really talking about class envy, perhaps collectivist moralizing?
It’s axiomatic that money begets money. The rules can be and are set to be advantageous to the well-off. Nonetheless, that doesn’t mean others are affirmatively harmed by the same token, does it?
Say the highest rung averages 25 and the lowest 5, versus the highest 100 and the lowest 10. Income inequality is twice as “bad” in the second instance. Necessarily an ill upon arrival, then?
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